Table of Contents
- The State of the Outsourcing Market
Software Development Outsourcing: Pros and Cons
- When to Use Outsourced Development
- Checklist For Outsourcing Development
- In-house Software Development: Pros and Cons
- Checklist For In-House Development
- In-house Development vs Outsourcing: Comparison
- Successful Outsourced Projects
- Successful In-house Projects
When you have an idea or a clear vision for a product, it is difficult to resist starting to assemble an in-house software development team. But what you should start with instead is asking if doing so is worth it at the initial stage.
Finding talented technical specialists is not easy, especially if you have limited time and money. This is why more and more companies are choosing outsourced development to reduce administrative costs, taxes, and lower the development costs for the product itself. Not to mention the access to the rich talent pool of many different countries.
In this article, we are going to help you understand the pros and cons of two software development approaches – in-house development vs outsourcing.
The State of the Outsourcing Market
To understand the topic better, it is worth looking at some statistics.
- In 2022, companies spent more than $700 billion on outsourcing. And in 2023, global outsourcing spending could reach $731 billion (Deloitte). When broken down by segment, IT outsourcing spending is expected to hit $519 billion in 2023, a 22% increase over 2019. Spending on business process outsourcing is expected to reach $212 billion in 2023, a 19% rise over 2019.
- IT services account for 94% of total worldwide outsourcing contract values (IDC). Information technology (IT) services accounted for $44.16 billion of the $48 billion in contracts generated by global outsourcing companies in 1H22. The remaining $3.84 billion in overall contract values came from business outsourcing deals. Main focus of IT outsourcing contracts was on digital transformation, cloud migration, and technology modernization.
- 83% of IT executives are thinking about outsourcing their security efforts (Syntax). A combination of funding cuts, staff reductions, and increased cyber threats is driving IT teams to pursue outside cybersecurity solutions. While 91% of IT workers have in-house security teams, 83% are considering outsourcing security in the future.
- Accounting and information technology services are the most commonly outsourced processes for small companies (Clutch). Accounting and IT functions are outsourced by 37% of small businesses. Digital marketing (34%), development (28%), human resources (24%), and customer support (24%) are other common business tasks that small companies outsource.
Software Development Outsourcing: Pros and Cons
It is generally cheaper to choose outsourced development than to find and hire a full-time in-house development team. In particular, if you live in the USA or Western Europe, the prices for developing quality software are quite high. So it is much cheaper and more efficient to hire contractors from Eastern Europe. The hourly rates of developers from the US are almost 2.5 times higher than those from Eastern Europe. Average hourly rates for senior developers in the US are $ 78-125 versus $ 30-59 in Eastern Europe. Moreover, Eastern European developers are just as good as Americans in terms of service quality and qualifications.
Our blog has an article about the cost of Android developers for hire. Feel free to read it here.
Less effort spent finding, hiring, and managing employees
Since the client does not need to lead the outsourced development team, there is no need to delve into the technical specifics of the process. Moreover, the contractor will take care of finding the most suitable candidates, which means the headache of hiring workers will also become a thing of the past. The only challenge there may lie in having to constantly communicate with the project manager on the side of the developer.
Quick start of work
Due to the fact that companies that offer outsourced development have a large variety of human resources, their specialists can start working immediately after the contract is signed. If you’re short on time, finding an outsourced development team will be easier and faster than having in-house developed software.
No resource “drawdowns” for the project
Outsourced development is a more flexible approach in terms of team composition. For example, a team lead, a backend dev, a frontend dev, and a QA engineer worked on a project for 3 months. After the release, such a large team is no longer needed. For instance, you don’t need to have backend and frontend devs working as much as they did during in-house development. If you hire these engineers in-house, you will have to look for additional tasks to occupy them with or pay them in full for an incomplete workload. Outsourced development allows you to avoid the problem of bloated teams by letting clients hire specialists like that on an hourly basis.
Go beyond your local talent pool
Let’s say you need a good Ruby on Rails developer. It is a lot more difficult to find one in a small town rather than in a large city. If you are located in a small country, sometimes the whole national talent pool won’t have the exact specialist you require. It can be easier to find an outsourced development team or certain specialists in another country than hiring people and having in-house developed software. But it is illogical to transport an already assembled team of 20 people just to close a couple of positions. Outsourced development allows you to go beyond what the market of a single location offers.
Individual processes can be delegated
It is not necessary to outsource all development. You can have in-house developed software and delegate only part of the functionality and tasks to an offshore developer, for example, mobile app development or backend development.
With remote collaboration, especially when you’re dealing with a large time difference, misunderstandings can occur, and they are bound to affect work. But this is all solvable. For an effective outsourced development process, all appropriate communication channels and methods of collaboration must be established in a way that will guarantee a minimal number of potential inconveniences.
The risk of leaking important data
By transferring data to a third party, you run the risk of data leakage. Therefore, it is very important to look for bona fide and reliable contractors with a good reputation and many positive reviews. One more important thing is to make an NDA and a contract with clear rules about inner data and leakage risks for outsourced development. Having in-house developed software helps you to worry less about this issue.
Low price doesn’t equal high quality
Quality doesn’t come for free: when choosing an outsourced development specialist at a rate of $ 20 per hour, it is naive to expect a result of $ 50. You have to pay for a quality product. In order not to get spaghetti code at the output, you need to contact companies starting from the middle of the price range or a little higher.
The stack may not be the best fit
An outsourced development specialist may not offer the most suitable tools, but those they have the most experience with. And it is important for such developers to be able to give an objective estimation of whether they can really help or not. For example, the core company’s expertise is React, React Native, and Electron. When a project arrives for estimation, they look for implementation options of the current stack. But if they see that the stack does not mesh well with the required functionality, it’s good practice to talk about it on the shore and look for compromises.
The contractor does not understand the complexity of the task
Young outsourced development companies often do not have enough experience to properly judge the complexity of the project. They want to close the deal as soon as possible, following the logic of “sell now, figure it out later”. This is an inefficient approach, as it is difficult to predict deadlines and create customer expectations without a full understanding of the task at hand. That is why it’s important to get analytics and prototyping services on complex projects, when the initial information is still lacking and the business requirements for the application are unclear. These will help the client see how the application will work and whether they need such a product in the first place. The process will also help to make an accurate estimate for the outsourced development.
Barriers: language, time zones
You are very lucky if the outsourced development specialist speaks the same language as you and operates in the same time zone. But often the situation is the opposite. Unlike in the in-house developed software, you have to communicate in a different language while working with a time difference. And no matter how good the project manager’s language is, there is still room for misunderstandings that would be much easier to clarify or avoid completely in your native language. And in the case of time zones, the time difference can turn out to be as big as 11 hours, which leads to late calls and does not play into the hands of productivity.
When to Use Outsourced Development
Outsourced development is the better choice in the following situations.
- There is a financial limitation. You’re on a tight budget and, like many startups, can’t afford a full-time staff. Outsourcing allows you to be more flexible with your financial flow. Furthermore, the promise of monthly salaries does not bind you.
- There is a scarcity of available specialists. You can’t seem to locate the right talent in your city. Rather than spending months training someone, you’re better off hiring an IT vendor to do the work.
- Launch dates are tight. If you have no previous experience in software development, you may be caught off guard by common stumbling blocks. When you have a deadline to make, you cannot afford to have delays that can be avoided by working with an experienced IT vendor.
- There is a lack of precision. Even with an in-house team, developing a complex IT solution will be a monumental job. There can often be a mismatch between business needs and technical specifications, which is a difficult problem to solve without expert help. An outsourced vendor will frequently have a business manager who can liaise between you and the developers and devise precise requirements for your project.
Checklist For Outsourcing DevelopmentUnderstand the reasons for outsourcing
Determine the type of development that you require (mobile app, custom enterprise software, website design and development, etc.)
Define project goals
Define the scope of work
Determine the project budget
Identify required skills
Research potential software developers
Find a partner with suitable technology expertise
Find a partner familiar with your business sector
Find a partner that matches your company culture
Define everyone’s roles and responsibilities
Create a plan of communications
Agree on milestones and timelines
Require weekly reports
Determine the level of supervision (you may start with more supervision and then slowly back off as you become more comfortable)
Define payment requirements and method
Be clear about intellectual property rights
Define the termination clause
Sign a non-disclosure agreement (NDA) if needed
Conduct a trial period with outsourcing partner
In-house Software Development: Pros and Cons
Over the course of creating in-house developed software, the team members are left to fend for themselves and, as a result, make many mistakes. At the same time, they learn from those mistakes and develop their expertise. It works on the flywheel principle. It takes a tremendous amount of effort at first to get the flywheel moving. But after it starts, it keeps building up speed and potential, providing continuous growth. The first 3 months will likely be spent on the in-house development team getting used to each other and the product. And then, by the time the product is launched, the team is already “in the know”, and it takes them much less time to improve the solution than before.
Quick bug fixes after release
A month after the release, when around 1000 users will have joined the app, bugs may become apparent. By that time, the outsourced development team can already be busy with another project. And even taking the flexibility of outsourced development into account, it will not be possible to connect a new outsourcing developer to a project in less than 2-3 days. Of course, everything depends on the form of communication, but the risk that the application or the site will be idle for all this time is still high. When you already have an in-house development team after the software’s release, it is much easier to come running to them with the words “our site is down” and have the developers immediately get down to work.
Regardless of what some may say, there are more personal points of contact in an in-house team: corporate events, team building, etc. This improves corporate culture and team cohesion, which directly affects the mood of the teammates and their involvement in their work.
Unlike in the process of creating in-house developed software, an outsourced development team will just see your startup as one of the many clients that need to have their product delivered on time, and the team won’t have as much personal engagement in the project. As a rule, an outsourced development contractor follows a pre-agreed plan and there is little room for initiative.
Offline communication within an in-house software development team speaking your native language is simple and straightforward. If necessary, you can approach a colleague and quickly discuss any working points. No need to waste time matching schedules or performing any dark communication magic.
Flywheel acceleration is a matter of time
The term for bringing an end product to the market becomes longer. It takes time to collect and assign roles in an in-house development team. From the start of the team’s work on the project, it takes at least 1-2 months to get the flywheel moving. To assemble a team of 5-7 people, you need to spend another 2-3 months on that alone. During the “acceleration period”, employees still need to be paid a salary – that’s one fixed cost added to your budget. And there’s no guarantee that you’ll get any useful results from that. Many stars should converge: developer experience, competent project management, and team cohesion.
Your team is not only salaries, but also sick leaves, vacations, insurance, pension contributions, and taxes. The search for an in-house development team will take, at best, 1.5 months. Moreover, it is not always possible to find IT specialists to fill all the roles in the team on your own. Sometimes, you just can’t do without a recruiting agency. Each employee should be given a laptop, a monitor, a desk, and a chair. Don’t forget about the office space where all of this can be comfortably placed, too.
Offline communication for an in-house development team is smoother and more accessible, but it can be detrimental to productivity. Non-business conversations often take place near the coffee machine. More distractions constantly appear in the form of colleagues talking all around the office. In this case, you alone are responsible for the result of the team’s work, and not the outsourcer.
Responsibility for the team
At the start of a project, the key risk lies in the product itself. Does the world need a social network for artists? Or a new aggregator of taxi orders? You don’t know until you make the product and try it. In the case of outsourced development, if it does not work out, the team will simply switch to another project. But by assembling an in-house development team, you partly take responsibility for the future of your teammates. Therefore, when the project does not hit the mark, not only do you suffer, but also the team members that have lost their jobs.
Difficulties in finding a team
Finding a team is the main challenge that appears during the process of creating an in-house development department. The first concern is team structure. Having little to no experience in software development can lead to a wrong team structure: there is a high risk of losing some important members. The second concern is time. It can be very hard to find certain specialists in a limited period of time, especially if the deadlines are very close. And don’t forget about hidden costs that were already described.
When to Use In-house Development
Despite the apparent high cost, there are compelling reasons to create your own team.
- You do not have a financial restriction. If you are not operating a bootstrapped startup and have plenty of capital at your disposal, hiring an in-house team will provide you with all of the benefits and none of the drawbacks.
- You must have complete control. You cannot tolerate having no control over the risks and problems arising during development. Having an in-house team allows you to make all decisions that influence the development of the product with zero delay. So all the issues are handled as soon as they arise.
Checklist For In-House DevelopmentUnderstand the business needs
Understand the user needs
Find a project idea
Create an outline
Identify project restrictions
Define project requirements
Determine the required technologies and expertise level
Create a prototype or MVP
Conduct product development
Conduct QA and testing
Conduct maintenance and support for the project
In-house Development vs Outsourcing: Comparison
Now that you know the pros and cons of both approaches, it’s essential to make some kind of comparison between the two. Let’s make it a table.
Successful Outsourced Projects
This Chinese e-commerce, retail, Internet, Artificial Intelligence (AI), and technology conglomerate is well-known around the globe.
According to the book Alibaba: The Inside Story Behind Jack Ma and the Creation of the World’s Biggest Online Marketplace, the company chose to create a website that would appeal to both the domestic audience and the English-speaking world when it was in its infancy as a small Internet business.
However, at the time (1999), human resources capable of handling such a job were scarce not only in China, but also in many other countries. To address this issue, Alibaba chose to outsource its web development. And the remote developers they hired possessed the necessary skills and expertise to create the world’s largest online marketplace.
Alibaba is now one of the most important players in the field of e-Commerce, and it is expanding its reach to many other industries. Since its contracting days, the website has grown tremendously. Furthermore, this method of web development enabled Alibaba to circumvent many government restrictions and innovate with high-quality technologies.
Slack is presently one of the most popular remote communication tools, bridging the gap between in-house and offshore teams.
In its early days, Slack was composed of a small crew of four talented individuals. It was just a private team collaboration tool at the time, similar to an IRC inside a browser. So when the team chose to take their creation to the next level, they encountered difficulties with the tool’s visual aspects, among other issues.
To address these challenges, the Slack team engaged a design firm to redesign the company’s website and app, as well as its logo. The majority of what consumers see when they interact with the messaging service today is the result of that.
By outsourcing web design and beta testing, Slack was able to obtain critical input and objective opinion on the project, which helped them improve it and stand out from the competition. The app presently has over 3 million paying customers and 8 million total users.
GitHub, which was founded in San Francisco, grew out from the foundation of the Ruby on Rails framework. As the solution evolved, the founders realised they would need the assistance of someone who was highly knowledgeable about Git.
Then, GitHub CEO Chris Wanstrath met Scott Chacon at a Ruby event, and the latter had a thorough grasp of Gits at the time. Chacon joined the GitHub team as an outsourced consultant and went on to build the backend of their website. He later rose through the ranks to become the company’s CIO.
The tool itself has evolved into a must-have for any software specialist on the planet. Every day, 40 million people use GitHub for version control, source code management, bug monitoring, and other purposes.
Successful In-house Projects
When working with essential data or corporate secrets, business owners may want complete control over product development. In this case, in-house development is the best option because it allows them to monitor progress on a daily basis, quickly resolve problems, and ensure that no information leaks outside the business.
Perhaps this is why the creator of the world-class CRM system Salesforcechose in-house software development over outsourced software development for its initiatives.
If the software is directly related to the main purpose of the company, it should most likely be developed in-house. Netflix is an excellent example of this approach.
Netflix distinguishes itself from the competition by significantly investing in machine learning and data analysis programmes for its user interfaces. And, because it is the company’s primary platform for delivering movies and shows, Netflix requires complete control over it.
Despite this dedication to in-house development, Netflix never shied away from outsourcing and successfully survived the 2004 recession thanks to it.
As was said in a previous example, the internal development team has a greater understanding of the company’s processes, systems, and culture, which is important for large players like Amazon.
However, due to being home-bound, the business was forced to invest $700 million in developing the staff’s technical acumen and skills (which were frequently lacking among in-house workers).
As you can see, there are a lot of aspects to think about when choosing between in-house software development and outsourcing. Here we’ve shown you the pros and cons of both approaches, but we can’t make that choice for you. In case you choose not in-house developed software but outsourced one, it’s time for another difficult decision: the choice of a reliable contractor. One of the most important criteria here is the company’s expertise. Bamboo Agile has extensive experience in various industries and custom software development projects. In case you want to know more about it, contact us to get a free consultation and discuss your dream project.
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