Your Complete Guide to Software Development Outsourcing
Software development outsourcing has a long history of evolving into what it is today. Throughout its development, the market of IT outsourcers has expanded enough to become a hotbed of many a heated discussion. However, despite all the controversy and widespread misconceptions, farming out software needs remains one of the go-to services for small and large-scale businesses from different industries around the globe.
In this article, we will debunk all the prevailing software development outsourcing myths that have calcified in peoples consciousness and walk you through the ins and outs of this highly relevant and widely discussed topic.
A Note from History
Companies were outsourcing certain business functions as far back as the 1950s. However, it’s the 1980s that are the commonly accepted period for the beginning of IT outsourcing as an efficient business strategy.
"The world's biggest computer company will run a large part of the data-processing operations of the world's biggest photography company under a deal announced today (July 25, 1989)."
This is how The Washington Post described the first official outsourcing contract signed between IBM and Kodak. According to the contract, IBM took charge of a large part of Kodak's data processing operations by building a data center at Kodak's Rochester headquarters. Through this arrangement, Kodak ended up improving its bottom line by outsourcing part of its tech to an industry expert and focusing instead on its core competencies.
This case set a precedent for the future of software development outsourcing. If prior to that corporations viewed outsourcing as a risky undertaking, the Kodak example gave them something to think about. As a result, IBM gradually became a leading IT services provider of the time.
Another prominent name that has played a significant role in the development of software outsourcing services is Electronic Data Systems or EDS. In 1967, Morton H. Meyerson, a computer industry executive and an EDS employee, proposed a business model that was later termed as “outsourcing.” This new business policy proved to be very favorable for the company’s growth. Years later, in the 1980s, IT outsourcing started to gain traction and became a part of business strategy for companies all over the world.
The rise of software outsourcing resulted in the appearance of application service providers or ASPs. The latter deliver computer-based services through a network, in most cases it is a local area network (LAN) or an LAN with internet access. ASPs introduced applications (payroll service, credit card processing, etc.) that highly simplified a number of different business processes.
With time, ASPs were replaced by MSPs (managed service providers), which now offer the full spectrum of tech services: fully integrated systems, computer security, cloud functionality, maintenance and monitoring, off-site backup, etc.
Tech Outsourcing in Our Days
Before we get to exploring the multiple layers of modern-day tech outsourcing, let’s first define the term proper.
Outsourcing, sometimes referred to as farming out, is a business practice where a business contracts out some of its tasks and operations which are outside its core competencies to a third-party service provider. Nowadays companies outsource a number of different tasks to leverage their key resources and improve business processes. In the sphere of information technology there is a wide range of operations that business owners commonly farm out to technology providers:
- Programming and application development
- Technical support
- Disaster recovery
- Network services
- QA testing
- Database development and management
- Data storage
Outsourcing is a partnership, not a one-time purchase, which is why the focus should be on building successful relationships with your provider based on trust and common goals. To be successful, you need to be clear on why your business needs outsourcing, which type of outsourcing would work best for your goals, what outsourcing model you should go for, etc. Let’s take a look at all of these aspects of outsourcing one by one.
Types of Tech Outsourcing
You can choose to outsource your tech tasks to companies located in different parts of the world. Based on geographical proximity, there are several types of software development IT outsourcing:
Offshore outsourcing means hiring a software development provider that is based overseas. If, for example, you’re based in the US, offshoring to you would mean outsourcing your tech development to companies in India, China, Philippines, or somewhere in Eastern Europe (Ukraine, Armenia, Georgia, etc).
Advantages of offshore development:
Lower costs: Offshore outsourcing companies offer services at significantly lower rates than onshore outsourcers. This helps businesses save money and cut down taxes.
Continuous maintenance options: In-house software maintenance can be costly and hard to handle for many business owners, especially if there is a need to constantly scale your development team up and down depending on your project needs. An offshore outsourcing company will make your application maintenance process much easier. Having access to a large number of software developers of varying experience, these companies can find the right people for the job at hand.
Larger talent pool: Offshore outsourcing opens the doors to a large talent pool, larger than you could find in your country alone. This way you get access to better resources and more experienced software developers with a wider range of skills.
Shorter turnaround time: Offshore companies have larger teams ready to work on your project. The reason for this is that the salaries of software engineers in the countries listed above are typically lower than the salaries in developed countries. Thus, companies are able to afford to hire a larger team to work on their projects and shorten the turnaround time.
Downsides of offshoring:
Miscommunication: Collaboration with offshore companies can create communication issues if they don’t speak the same language as you. Make sure to choose a company where decision makers speak good English (trustworthy offshore outsource providers are good at English) so that important requirements don’t get lost in translation.
Time zone and cultural differences: A collaboration between people from different cultures can also cause miscommunication. For example, your outsourcing partner might have a completely different take on the design and requirements of your software development project or on the solution based on the fact that they’re used to dealing with users who radically differ from yours. Add to that time zone differences, and you have a brewing disaster on your hands. To avoid or mitigate this type of situation, you can opt for an outsourcing company based in a country that shares many of your values and ethos.
Onshore outsourcing refers to the collaboration between business owners and local technology providers that are based in the same country.
For a long time, onshoring used to be the only outsourcing option, that is until the world became more connected and new possibilities emerged. Despite the fact that onshore outsourcing has declined in popularity after the rise of offshoring, many companies still very much prefer this option depending on the criteria they prioritize when selecting a tech partner.
Advantages of onshore outsourcing:
Lower risk of miscommunication: Speaking the same language and sharing the same culture make for a clearer communication between business partners. Fewer misunderstandings will, in turn, result in increased productivity and a shorter project development time.
Fewer iterations: As a result of clear communication, onshore outsourcing can essentially reduce the number of iterations. When you and your outsourcing partner speak the same language and have similar working hours which means that questions and concerns will get faster resolutions.
Close collaboration: If your IT provider is close by or even in the same country as you, the possibility to meet in person and discuss your business goals and needs is much higher. No visa- and passport-related hassles and a much shorter travel time which increase the chance of more frequent meetings. Sometimes face-to-face meetings foster and speed up the relationship/trust building process which is a key factor in outsourcing partnerships.
Disadvantages of onshoring:
More expensive: Onshore outsourcing tends to be much more expensive as compared to offshore development. This can be an issue for startups and businesses on a tight budget.
Backdoor offshoring: It’s easy to trick businesses that don’t have experience in the outsourcing market. Some onshore companies outsource the job you trust them to offshore companies thus making a profit and cutting costs. This is cheating and cannot be a good start for a successful partnership.
In case of nearshore outsourcing your tasks will be carried out by a company from a nearby country. If your business is in the UK and you partner with an outsourcing company somewhere in Eastern Europe, you are nearshoring. Or if you are a US-based company farming out to an IT provider in Mexico, you are again nearshoring.
Advantages of nearshoring:
- Closer time zones
- Fewer differences in culture
- Faster communication and more opportunities for in-person meetings
- Faster problem-solving
Disadvantages of nearshoring:
- More expensive as compared to offshoring
- Smaller talent pool as you limit yourself geographically
The hybrid model combines technical teams overseas and an onshore office in your country. So, you get the best of both worlds: an offshore development team with all its benefits and a local office to keep the communication clear and productive.
Advantages of the hybrid model:
- Better communication
- Core operations (e.g., project design and architecture) can be executed onshore
- Legal privileges (your offshore team has an office which functions under your country’s law)
Cons of the hybrid model:
- Still costly
A relatively new term used to refer to outsourcing companies that have geographically distributed workforces that can work from anywhere in the world. This is said to be the future of outsourcing after the changes that COVID-19 brought up.
Some of the advantages of flexshoring are as follows:
- Larger talent pool
- No risk of a single point of failure
- Minimum harm in case of geopolitical changes, natural disasters, or another pandemic.
- Flexible and dynamic working environment
- It might get hard to monitor the work of all your employees
- Project management and communication become more complicated
Software Development Outsourcing Models and Costs
A crucial part of planning your outsourcing needs is choosing the pricing model that best fits your business needs and demands. The good news is that most outsourcing companies offer different models to choose from to match your business goals and strategy.
Comparing Software Development Proposals
The most common outsourcing models are as follows:
Fixed Price Model
In case of this model, the price of the project is decided right at the start. This model works if you have finalized your project details to a T and can spell out the exact idea and specs of the product to your vendor. Be ready to spend a lot of time honing your requirements before signing a collaboration contract.
The outsourcing company will help you understand what information they need exactly to correctly price your project. This will be achieved through meetings and negotiations, which will greatly simplify your task as you might know your project but not be aware of the technical requirements, the needed IT resources, etc. Afterwards, deliverable milestones will be set.
The pros of a fixed price model include:
- Clearly set requirements
- Lower risks due to high predictability
- Reduced need for supervision
- No unexpected or hidden costs
Some of the cons of the fixed price model are as follows:
- Requires lots of time, effort, and energy right upfront. If you miss a detail, it will be hard to incorporate it into the project scope later.
- Less flexibility: if you need certain changes during the project implementation, new discussions should be carried out and can result in additional costs.
- Trying to take into consideration all possible risks, tech providers might set high prices which is why this model is usually more expensive than others.
The fixed price model works best for MVP outsourcing and start-ups with small projects that have a clearly defined scope.
Time and Material Model
In this scenario, the price will be determined according to the time and material used to execute and deliver the work. This model fits businesses that find it hard to specify their project details and scope and expect multiple tech requirement changes throughout the development process.
The Time and Material model comes with a number of advantages.
- More flexibility when changes are needed
- No strict deadlines
- Improved cost management
- Agile methodology
This model can be the right choice for companies with long-term and complex projects - those that want to define and redefine goals and priorities throughout the project development process, depending on what their business calls for.
The drawbacks of Time and Material pricing model are:
- Less clearly defined deadlines
- More difficulties with budget control
The outstaffing (or staffing) model presupposes the provision of dedicated IT staff and developers by the outsourcing company. In other words, you will have developers in your staff who you can go to whenever the need arises. Besides, you will be in direct communication with them and pay them a fixed monthly salary.
Benefits of IT staffing:
- Pricing transparency
- Trial period
- The outsourcing company is in charge of employee management issues
Downsides of IT staffing:
- You need to put in effort to integrate your new remote team with your existing team
This model works best for ongoing long-term projects.
When choosing this model, you pay per use, i.e., the outsourcing company sets a rate for a certain service level and your business pays for the amount used.
On-demand pricing can be more efficient in terms of component cost analysis, however, you will need to determine a precise estimation of the demand volume.
A cost-plus contract presupposes the payment of all possible costs (fixed and variable) plus a markup percentage to these costs. This model leaves close to no space for flexibility during the product development process.
Performance-Based or Incentive-Based Pricing
Incentive-based pricing suggests the use of financial incentives for better supplier productivity. At the same time, your outsourcing company will have to pay a penalty in case of poor service delivery.
Sometimes the performance-based pricing model is combined with either time and material or fixed-price to enhance the overall collaboration.
In this case, the service price is directly proportional to the delivered value or outcome. You determine where you see the value in the delivered product and then adjust the price based on that value.
This model puts both sides “at risk”, at the same time giving them a chance to gain more in case of a successful collaboration.
Shared Risk/Reward Pricing Model
The outsourcing company and the business owner fund the project development together and share rewards for a predefined time period.
Here again we deal with an equally shared financial risk. This model encourages the outsourcer to think of methods for improving the business and increasing revenue.
Where are the Top Software Outsourcing Companies Located? Outsourcing Destinations 2021
The stereotype that the tech industry is not as developed in the East as it is in first-world countries has long been discredited. Nowadays, the IT sector is growing exponentially in the Eastern parts of the world introducing some of the world’s top talent and leading tech companies.
In fact, it is in this part of the world that Westerners find the perfect combination of quality, sense of responsibility, and cost efficiency.
Here are some of the countries that stand out with successful software development outsourcing companies:
- Armenia: As Wade Shepard, a contributing writer at Forbes, wrote in his article, Armenia is “the world’s next tech hub”, situated at the crossroads between Asia and Europe, this country has a lot to offer when it comes to technology, software development, and IT outsourcing. Outsourcing companies in Armenia offer high-quality work at affordable prices. Additionally, Armenians are pretty flexible with working hours.
- Ukraine: Ukraine is one of the largest exporters of IT outsourcing services in Europe. You must have heard of Grammarly or DepositPhotos: both were created by Ukrainian top talent. The Ukrainian tech sector is growing rapidly. This means that you will easily find a specialist of any technology stack and seniority level there. Outsourcing your IT tasks to this Eastern European country will essentially reduce your expenses and bring more revenue.
- Poland: Google, IBM, and Motorola have opened their R&D centers in Poland, yet another growing technology market in Eastern Europe. Here you can choose from a large number of reliable software IT outsourcing companies with a proven history of successfully completed projects and long-term collaborations. Besides, the country is in a very convenient geographical location and time zone.
- The Philippines: When outsourcing to the Philippines you can rest assured that there won’t be a language barrier as about 90% of the population there knows and speaks English. Besides, the country is one of the most demanded destinations when it comes to software outsourcing, offering a large number of highly qualified tech specialists and software engineers.
- China: With over 4.7 million tech graduates on a yearly basis, China is one of the rapidly growing tech hubs in the world. It’s also a desirable outsourcing destination as there are a lot of options to choose from, additionally, the prices are much lower than in other Asian countries.
- Taiwan: Taiwanese government is largely investing in STEM education and IT infrastructure development. Here you can definitely find some of the best specialists with various technical and engineering skills. The only drawback is the language barrier, people don’t speak much English in Taiwan which might complicate the communication process.
- India: Probably one of the most popular outsourcing destinations, India boasts an IT industry worth $150 billion and expected to rise up to $350 billion by 2025. The country gives essential importance to STEM education and has a tech-focused school system aimed to develop the IT infrastructure and produce well-educated tech specialists. The IT community in India speaks English so you won’t have to worry about getting lost in translation.
Outsourcing vs In-House
While outsourcing software development services can be an optimal and efficient choice for most businesses, this doesn’t mean it can be the right fit for everyone. Some businesses can be better off with an in-house IT team. Let’s see the pros and cons of both to help you make the right decision for your business.
In-house development or insourcing means that you will hire a team of software engineers to work at your company full-time, on-site, instead of farming out your tech tasks to a third party.
So, how to choose between the two?
Here is a quick list of the advantages and disadvantages of outsourcing and insourcing:
How to understand whether you need to outsource or insource though?
Here is a list of questions you should ask yourself before making this important business decision.
Is software development a core business function?
Outsourcing is good if the outsourced tasks are not core to your business. In essence, software development is an essential part of most companies nowadays, however, if it’s not related to the core business functions, the efficient decision would be to outsource.
Do you know the possible expenses?
An in-house team can sometimes be an unnecessary luxury. Consider the following expenses:
- Gross salary
- Office and hardware/software costs
- Recruitment and training
Taking the outsourcing path, all these recruitment tasks and other costs will be already covered by the outsourcing company. As soon as you are done with the project, you will have no more obligations or costs to handle in relation to the outsourcing company - no strings attached. This is not the case with an in-house team.
In any case, if you still want to go with insourcing, at least make sure your project is long-term and that an in-house team will be more effective for that.
What skills and expertise does your project require?
If your project requires knowledge of rare technologies, outsourcing is the way to go. Especially, if your project is short-term, investing in an in-house team will be a waste of money and time.
Choose insourcing when the skills you need will complement your core competencies and will be useful in the long-term.
In the rest of the cases, outsourcing should be your go-to business strategy.
Do you want to keep up with tech innovations?
In-house teams are usually slow and can become stagnant while getting too indulged in office politics.
Unlike this, outsourcing companies are more effective, fast, agile, and always keep up with IT trends which is a crucial factor for modern businesses to survive in the competitive market.
How to Choose the Right Outsourcing Company? Important Tips You Need to Know
Considering the rapid development of the software IT outsourcing market and the establishment of hundreds of new companies around the world, it can be easy to get tricked and hand your project to an irresponsible outsourcer.
To avoid this, you need to do your own research and find the best fit for your goals. Here are a few tips to help you as you go:
Experience: Look for an outsourcing partner that has proven experience in the field. Check their reputation (social media and other ranking sites can help you in this) and customer reviews. Look through their case studies and see what industries they have worked in.
Team Spirit: Your outsourcing partner should be an extension of your team. They should care about your business’ success as much as you do in order to deliver the expected results. Don’t ever go for the cheapest option just for the sake of saving money. A poor quality and untrustworthy IT provider can end up costing you much more than you expect.
Communication: Arrange calls with the providers that have caught your eye and see if you “vibe”. Communication is key in a successful business partnership and if you don’t understand your new partners and your messages are not getting through then you should look for other options. Make sure they are easy to get in contact with and willing to provide you with quick feedback.
Tech Skills: What skills do they offer? How experienced are their software engineers? Look for a provider with established technical expertise in various areas: mobile, web, databases, DevOps, video, ML/AI, Cloud, CRM, analytics, etc.
Agile Methodology: Quality IT outsourcers use agile processes for better productivity and faster development. This helps avoid constant changes and reworks ensuring you are on the same page with the IT vendor.
Send requests for proposals in order to understand the knowledge and expertise of your vendor better. Discuss further and negotiate the most beneficial deal that will help you set the right goals, responsibilities, and restrictions. Keep in mind to include the following details in your request: submission details, business goals, project specs, terms and conditions, and selection criteria. Evaluate and compare the proposals, arrange interviews and meetings for further negotiations and contract-related discussions.
Read more about the team composition you can expect from an outsourcing partner
If, after all, you cannot make up your mind as to which outsourcing company to choose, you can hire an outsourcing advisor. An experienced and trustworthy advisor can help you choose the best fit for your business. On the other hand, if you stumble upon an inexperienced or biased advisor, things can get worse.
Turn to an advisor only if it’s extremely necessary and you have no idea at all what you need. Otherwise, research on your own and you will find the right vendor.
What are the Approximate Rates of IT Outsourcing?
Let’s look at the average hourly rates of software development outsourcing in different parts of the world:
- Eastern Europe: $35-45
- Central, Western, and Northern Europe: $50-60
- Asia: $25-30
Keep in mind that there can be hidden and ad hoc costs as well:
- SSL Certificate
- Costs for on-site visits (if it matters to you)
- Cost of technical consultancy
- Duplicate work (this happens when, in case of a problem, businesses try to solve it themselves, rather than letting the outsourcing provider do their job).
With all the costs included, outsourcing is still a much more cost-efficient business strategy than insourcing. A rule of thumb is to not go for the cheapest option. Though Asian countries offer really attractive pricing, they might not always come with quality software development outsourcing services. Eastern Europe is the golden mean that combines affordability and quality.
And Finally! Let’s Debunk Them Myths!
If you’ve read thus far, this article should have cleared up most of the common misconceptions or stereotypes that you might have had about software outsourcing.
However, to settle all remaining doubts, let’s also take a look at some of the software outsourcing myths that tend to confuse business owners and aspiring tech enthusiasts alike.
You always get lost in translation and cultural misunderstandings with an outsourcing team
You can’t do without English knowledge when working in the IT sector as it’s the language of modern technologies. Most IT communities around the world, be it Eastern Europe, Asia, or Latin America, speak fluent English. The language definitely will not be an issue provided you choose the right IT vendor.
As for the cultural differences, they can actually become an asset. Your outsourcing company can bring a diversity of ideas to the table with an entirely different way of looking at the software development process thereby offering a more efficient solution. You’ll be surprised how much of an asset different perspectives may be.
To succeed in your collaboration with an outsourcing company, you need to be open-minded and willing to look into new ideas and approaches, at the same time keeping your eye on your business principles and goals.
As soon as you find the right IT provider, learn to trust them to do their job and avoid micromanagement. Trust forms the foundations of any successful business relationship.
You lose control over your project
Losing project control seems to be one of the biggest outsourcing concerns of Western companies. This may be true if you neglect to do your due diligence in terms of vendor selection and fail to discuss the project in enough detail with the vendor.
With thorough planning and discussions on expectation management, shared responsibilities, and detailed documentation, you can rest assured that you’ll retain control over your project and avoid unpleasant surprises.
Clarify mutual expectations (preferably in written form) right at the start of your collaboration and make sure they do not contradict the business ethics of either side. Decide on the rules, guidelines, and problem-solving approaches. A capable and experienced outsourcing company should become your trusted business partner, providing complete transparency and accountability.
By outsourcing your software development you compromise your business data security
Security is of crucial importance for all businesses. If you experience breaches, financial losses will be the least of your worries. In case of critical data loss or theft, you will put your customers’ security at risk as well and be forced to undergo costly legal procedures. This will also affect your brand reputation with all of the subsequent collateral damage. So, needless to say, security concerns are never in vain.
However, this doesn’t mean that outsourcing will compromise your business security. A credible software development outsourcing company will take all the necessary measures to ensure your data security and protect your IP rights according to international best practices and standards with all the corresponding regulations. (Do check whether they operate under ISO standards, for example, as an indicator of their credibility.)
Above all, it’s in your tech vendor’s best interests to provide you with high-level security. Otherwise, they risk taking a huge hit to their reputation by losing credibility and customers.
Outsourcing means dropping Agile and DevOps strategies
Technology doesn’t like conservatism. Those who stick with the old methodologies in business, fall behind in the fierce race that is the tech world. If you want to invest in software development, be ready to employ innovative and efficient strategies that will help you handle your IT operations in a highly optimized manner.
Agile and DevOps can be and are integrated into outsourcing collaborations. They make the overall software development process more effective and enhance the communication between business owners and IT providers.
At VOLO, we’ve been successfully practicing Agile for well over a decade, and it’s one of the many factors that draws our customers to us.
The only thing custom tech providers care about is closing that deal
Most business owners fear that outsourcing their custom software solutions will not be efficient because service providers do not care about a client’s business. They just want to get the deal and make money in order to keep their business going.
While this might hold true for some companies, it’s actually not the case with credible and trustworthy IT outsourcers, who treasure and safeguard their stellar track records. It’s natural that not everyone provides high-quality software outsourcing services, some do it poorly. This is common to all industries. But it should not affect the way you view outsourcing.
Let’s put it this way - the success of an outsourcing business hangs on the quality of the services it providers. It is through successful outcomes, customer-oriented policies, and a people-centered approach that successful business relationships are formed. Caring and trustful approach is beneficial for both sides which is why it’s insensible to give up on outsourcing benefits because of such a misconception
Software engineers in developing countries are not as professional and well-trained
Probably one of the most unjustified misconceptions that exists about software development IT outsourcing is the linking of a country’s social and economic situation with the possible unprofessionalism of its IT sector.
While people in developing countries might not have the benefit of advanced education as those in the West, it doesn’t mean that they are less capable than Westerners.
As mentioned earlier, the IT sector is exponentially growing in Eastern countries. They invest largely in highly professional IT training programs and education. Software engineers from Asia and Eastern Europe have various technical skills and knowledge and always keep up with the tech trends in order to improve and hone their skills, same as software engineers from developed countries.
Have a look at these examples: PicsArt, an Armenia-based IT company with offices around the world has become tech’s new unicorn; Google has 4 offices in India alone; Belarusian companies provide IT services to such big corporations as Samsung, HTC, World Bank, etc.
Long story short, IT specialists in developing countries are equally professional and talented as their Western colleagues. They use the same technologies and follow the same trend changes as others in the USA, Europe, or Australia.
Outsourcing is the luxury of big businesses
Startups and big businesses benefit from software outsourcing alike. There are many outsourcing companies that do not focus on servicing big businesses only. Some are happy to cover the IT needs of small- and medium-sized businesses as well.
In fact, outsourcing can be highly profitable for startups:
Faster project start and implementation
Cutting costs (startups are usually on a tight budget)
Efficiency enhancement (focus on core competencies)
Outsourcing companies “sell” developers for a higher position than they actually are
This would be utterly unethical not only toward businesses, but also toward the software engineers of the software team provider.
You can expect nothing of the sort from a reputable outsourcing company. Think of such issues as employee retention and customer satisfaction. Good outsourcing companies do not want to lose their top talent by overloading them with work or assigning them tasks and projects that they cannot handle. That would be detrimental to their brand as a business and as an employer.
Outsourcing is for cutting costs only
There is more to outsourcing than just helping you improve your bottom line. Outsourcing increases your business efficiency, lets you focus on your core activities and business goals, as well as solves capacity issues.
To sum up, let’s be terse and remind ourselves of the words of the former prime minister of Singapore, Lee Kuan Yew:
“If you deprive yourself of outsourcing and your competitors do not, you’re putting yourself out of business.”