Should you convert a dedicated team into employees?
If the reason is to save the supplier's margin, the numbers rarely survive contact with the full cost of employment, and the attempt tends to damage a relationship that was working. Conversion is worth doing for a different reason: when the work has become permanent, core and identity-shaped, and you want people who think of themselves as yours. That is a strategic argument rather than a financial one, and it is the only one that reliably holds.
When is conversion actually justified?
When the work has stopped being a project and become part of what the company is. Systems that will exist for a decade, that encode how the business operates, and whose maintainers make judgement calls requiring commercial context deserve people who are staying. That case is about continuity and identification, not about hourly cost.
There is a second legitimate case: when your engineering organisation has grown enough to need internal career paths. People who want to progress into architecture or management need an organisation to progress inside, and a supplier's engineer has that career at the supplier rather than with you. Losing good people because you have nowhere for them to go is a real cost.
The case that does not hold up is margin. Remove the supplier's margin and you inherit recruitment, payroll, benefits, holiday cover, HR, equipment, the cost of an unfilled seat, and the management overhead of employing people in a country you may not operate in. Frequently the total is close to what you were paying, with the risk moved onto your side.
What does a conversion clause typically say?
Most dedicated team contracts contain a non-solicitation clause and a conversion or buyout fee, expressed as a multiple of monthly cost or a percentage of first-year salary, often reducing the longer the engagement has run. Read it before you get attached to a plan, because discovering it after an informal conversation with an engineer is an awkward position to be in.
The fee is not purely defensive. The supplier carried the recruitment cost, the bench risk and the training, and expected to recover it over a longer tenure than you are proposing. A fee that declines with engagement length reflects that recovery honestly, and a clause structured that way is a sign of a reasonable counterparty.
What to negotiate is the shape rather than the existence. A fee that tapers to nothing after a stated period, a cap in absolute terms, and clarity on whether it applies to people who left the supplier independently some months earlier. That last point causes more disputes than the number itself.
| Route | Setup time | Ongoing burden | Best when |
|---|---|---|---|
| Keep the supplier arrangement | None | Lowest | Work is important but the location is not strategic |
| Employer of record | Weeks | Low, at a per-person fee | One to a handful of people, testing the market |
| Contractor engaged directly | Days | Low, with classification risk | Rarely, and only with proper advice |
| Own legal entity | Months | High: payroll, tax, HR, filings | A permanent team of meaningful size in one country |
| Relocate to your own country | Months, visa dependent | Medium, plus relocation cost | A small number of genuinely key people |
How do you employ someone in a country you have no entity in?
Three routes, with different break-even points. An employer of record employs the person legally on your behalf and charges a fee per head, which gets you a properly employed person in weeks without incorporating anywhere. It is the sensible default for small numbers.
Your own entity is the endgame for a team of meaningful size in a single country. It means payroll, tax registration, statutory filings, local employment law compliance and someone to administer all of it. The economics improve with headcount and the administrative burden does not disappear at any size.
Engaging someone directly as a contractor looks simplest and carries the risk that matters most. Many jurisdictions will treat a full-time, directed, exclusive engagement as employment regardless of the paperwork, and the consequences of that reclassification fall on you, including back taxes and contributions. Anyone recommending this route without qualifying it is not the person to take advice from.
What do you lose by converting?
The supplier's absorption of turnover, which is easy to undervalue until the first resignation. Under the team arrangement a departure is the supplier's problem and comes with a replacement obligation. As an employer, a departure is your recruitment process, your notice period, your empty seat and your ramp, in a labour market you have never hired in.
You also lose the surrounding organisation the engineer was part of: peers to ask, a technical lead who was not on your payroll, and an HR function that handled the local specifics. Employees converted individually often become isolated, particularly if they are the only person in their country, and isolation is the leading cause of them leaving within the year.
There is a relationship cost too. Converting a large share of a team is functionally the end of the supplier relationship, and it is better to say so than to discover the remaining engagement has quietly become deprioritised.
Does the engineer want it?
Frequently less than expected, and this is the step most conversion plans skip. A supplier's engineer may have a career path, a peer group, statutory protections and a benefits package that a foreign employer offers no equivalent of. Being the sole employee of a company with no local presence is a genuinely worse deal for some people, whatever the salary.
The specifics vary enough by country that assuming is dangerous. Notice periods, severance entitlements, pension arrangements and healthcare are all things a local employer handles as a matter of course and a remote employer may handle badly or not at all.
So ask early, informally, and honour the non-solicitation clause while doing it, which usually means talking to the supplier first. Handled openly this often goes better than expected: a supplier who knows a client wants to hire long-term is in a position to structure something, and one who finds out afterwards is in a position to enforce a clause.
Is there a middle option?
Yes, and it is underused. Many suppliers will agree a long-term arrangement with named individuals, guaranteed continuity, a declining conversion fee and a right of first refusal if that person leaves the supplier. That gets you most of the stability of employment without the entity, the payroll or the risk.
A staged approach also works: convert one or two people whose continuity matters most, keep the rest with the supplier, and see how the employer of record arrangement performs before extending it. Converting an entire team in one step is a large, irreversible move made on assumptions you have not tested.
Whichever way you go, the deciding question is whether you want to be an employer in that country. Everything else, including the rate comparison, is downstream of that answer, and organisations that convert without deciding it deliberately end up running a small foreign HR operation nobody wanted.
Common questions
- Can you hire developers directly from an outsourcing partner?
- Usually yes, subject to a non-solicitation clause and a conversion fee set out in the contract, often expressed as a multiple of monthly cost or a share of first-year salary and frequently reducing the longer the engagement has run. Read that clause before approaching anyone, because an informal conversation with an engineer before checking it puts you in a weak position.
- Is it cheaper to employ developers than to use a dedicated team?
- Less often than expected. Removing the supplier's margin means taking on recruitment, payroll, benefits, holiday and sickness cover, HR, equipment, the cost of an unfilled seat and the overhead of employing people in a country you may not operate in. The totals frequently land close together, with the delivery and turnover risk moved onto your side. Conversion is better justified by continuity than by cost.
- What is a conversion or buyout fee for?
- It compensates the supplier for recruitment cost, training and bench risk they expected to recover over a longer tenure than the conversion allows. A fee that declines with engagement length reflects that recovery honestly. Worth negotiating are the taper, an absolute cap, and whether the clause applies to someone who left the supplier independently several months before you approached them.
- How do you employ someone in a country where you have no entity?
- An employer of record employs the person legally on your behalf for a per-head fee and works within weeks, which suits small numbers. Your own legal entity is the endgame for a sizeable permanent team but brings payroll, tax registration, filings and local employment law compliance. Engaging someone directly as a contractor is the riskiest route, because many jurisdictions treat a full-time exclusive engagement as employment regardless of the paperwork.
- Do developers want to be converted to direct employment?
- Not always. A supplier's engineer may have a career path, a peer group, statutory protections and benefits that a foreign employer cannot match, and being the sole employee of a company with no local presence can be a worse arrangement whatever the salary. Notice periods, severance, pension and healthcare all vary by country. Ask early and informally, and speak to the supplier first rather than after.
- Is there an alternative to converting the whole team?
- Several suppliers will agree long-term arrangements with named individuals, guaranteed continuity, a declining conversion fee and a right of first refusal if that person leaves them. That delivers most of the stability of employment without the entity or the payroll risk. Converting one or two key people while keeping the rest with the supplier also tests the arrangement before committing to it irreversibly.
