Software Development Outsourcing - advantages and challenges (2023)

27 Aug • 2020

When starting a new software development project, one of the first questions you'll need to answer is: how am I going to build this?

Taking that a step further, you'll have to answer: can my team build this, or will we need to work with an outsourcing partner to complete this project?

We aim to help you answer that question by breaking down the distinct advantages and disadvantages of using in-house development, vs outsourcing, vs a blended approach.

This isn’t a comparison of which option is better – that will likely depend heavily on your company's unique strategy – our goal is to help you choose which option makes the most sense for your current project.

We'll look at each option's strengths and weaknesses in detail, as well as provide links to useful resources to help you further understand each option in depth.

Advantages of in-house software development

Culture fit

An external agency can easily screen candidates based on technical expertise, but assessing culture fit can be a bit more tricky. By carefully overseeing every step of the recruitment process yourself, you know you're bringing in the very best talent for your organization.

Allows you to build internal expertise

Seniority is one of the most important factors for companies when evaluating candidates for a software development role, and with good reason: software developers build up expertise and become more efficient over time.

Hiring developers directly and on long-term contracts allows you to benefit from the experience they gain through the completion of each new project.

Reliable communication

In-house developers generally have a better understanding of your company’s expectations and internal processes, leading to better communication and allowing teams to get more done with less back and forth.

Challenges & limitations of in-house development

While having an in-house team offers plenty of advantages, it also has its disadvantages. Let’s look at some of the most significant disadvantages and limitations of in-house development, starting with high cost.

High cost

The cost of maintaining an in-house employee is higher than with outsourcing. With in-house employees, on top of the hourly rate you’re paying employee benefits, supplying equipment, providing training, bonuses, etc.

With outsourcing, that’s all included in the price tag. This holds especially true when outsourcing to countries outside of North America. Another important factor is the cost of recruitment, whose cost can be unpredictable and difficult to quantify with an in-house team, but is part of the deal when outsourcing. Keep in mind that, when working with a firm, there may be a margin on top of what you might expect to pay an outsourced freelancer – but it will still likely add up to less than an in-house employee all things considered.

It’s a time sink

Having your in-house team develop a process for recruiting software development talent from scratch is an inefficient use of time and resources. Managing the process internally with an inexperienced team often leads to inconsistent or poor results.

Even small teams with experience hiring software developers might choose to outsource the process to save time and allow their in-house team to focus on other initiatives. Without access to a reliable and diverse talent pool, it’s easy to drain lots of time and resources on the recruitment process.

Limited talent pool

There are regularly limited options for in-house talent, especially for companies looking to hire locally. For example, if you limit your search to the state of New York, you’d be competing for a pool of a little over 200,000 developers. If you were to expand your search nationwide, you increase the total to around 1.3M developers. But let’s say you expand your search globally – you're looking at 23.9M developers.

By limiting your search to people who live in your immediate area or are willing to relocate, you are only scratching the surface of the available talent pool. Keep in mind that the cities with the most developers are usually the most competitive.

Lack of versatility.

Most in-house software development teams specialize in one area more than others. Bringing developers in-house that specialize in the niches that are most relevant to your business makes sense from an operational perspective, but also presents a challenge when launching a new product powered by an unfamiliar technology.

This leaves you with only a few options:

• Make a significant investment in training your existing team on the new technology

• Hire freelancers or outsource the project to an outsourcing partner who specializes in the new technology.

• Divert internal resources to recruit a new team specializing in the new technology, which makes the most sense if you’re planning to continue to develop the product in the long term.

What is software development outsourcing?

Outsourcing software development means outsourcing either parts of or the entire process to an external company. Many times, companies turn to outsourcing as a way to save time

and money.

There are many variations and models of outsourcing, including:

• Staff augmentation
• Managed services
• End-to-end software delivery
• Offshore development
• Onshore development
• Nearshore development
• Hourly pricing models
• Project-based pricing models

Advantages of software development outsourcing

Let’s take a quick look at the advantages of outsourcing software development, starting with the ability to scale your team up or down flexibly and on-demand:

Scale up or down on demand — flexibly and reliably

Working with an outsourcing partner allows you to scale your software development team quickly, flexibly, and reliably. Scale your team based on shifting business needs without worrying about legal or financial implications. Outsourcing your temporary software development roles allows you to scale your team up or down without negatively affecting your brand.

Lower costs

If you choose to outsource development nearshore or offshore, you can generally expect to pay lower rates than you would by hiring locally. On top of saving on the hourly rate, you won’t need to pay for equipment, maintenance, training, workspace, or employee benefits. In most cases, outsourcing means you’re only paying for what you need and no extras.

Increased efficiency

Do you need an expert? Outsourcing gives you immediate access to a large pool of highly qualified candidates. Don’t waste your resources on recruitment and training, hire an expert who can come in and make an impact right away.

Access to more talent

One of our clients put it best: the best talent isn’t always in your city – or even your country. By going remote you’re already gaining access to a bigger pool of talent, and by opening those positions to developers located outside of North America you amplify that even further. Not to mention the significant financial benefit of hiring developers from areas with lower median salaries like Southeast Asia, Eastern Europe, and Latin America. In most cases, the software developers from those regions are highly motivated to work with North American clients because they tend to earn more than the national average.

Disadvantages of software development outsourcing

No solution is perfect. If you’re considering outsourcing, here are some factors you should consider when making your decision.

Potentially unreliable communication

This is usually the first concern that comes to mind when companies think about outsourcing development offshore or nearshore. Not only do you have to consider potential language and cultural barriers, but many companies struggle with the idea of being limited to tools like Slack and email for communication. This is generally less of a concern for internationally distributed teams and teams that are already familiar with tools that facilitate remote work like Zoom, Slack, Jira, and others.

New security concerns

While your level of concern about cybersecurity may vary depending on the nature of your project, it's important to have basic measures in place to protect your company’s interest. For example, non-disclosure agreements and security protocols help ensure your data and company assets are protected from potential cyber threats.

Less control

When working with an outsourcing partner, you have less control over some of the factors that influence employee loyalty, such as the developer’s hourly rates, benefits, and training. However, if you’re really happy with a developer that you’ve been working with, most outsourcing partners offer the option of hiring the developer directly for an established fee.

What are the differences between onshore, nearshore, and offshore software development?

• Onshore software development is when you outsource software development to a partner located in the same country as you.

• Offshore software development refers to outsourcing to a partner in another country, many times a country on the other side of the globe like Pakistan or China. In this model, many times you’ll be dealing with a significant time zone difference, which in some cases can be as much as 12 hours.

• Outsourcing nearshore, or nearshoring, provides a middle ground where you can still see significant cost benefits without sacrificing convenience or efficiency. Outsourcing to a nearby country – especially one in your time zone – allows you to collaborate in real-time, with minimal effort.

Interestingly enough, the benefits and disadvantages of all three are basically the same but to varying degrees.

For example, the farther away your outsourcing partner is geographically, the lower the rates tend to be and the same goes for challenges like language/cultural barriers. The farther away your outsourcing partner is geographical, the more pronounced the barriers tend to be. It’s important to note that this isn’t always the case – for example, we’ve heard of situations where the level of English and cultural affinity of countries like the Philippines can even rival countries in the Western Hemisphere – but it is a general rule of thumb to keep in mind.

Want to learn more about outsourcing software development nearshore to Latin America? Be sure to check out “Companies Outsourcing to Latin America” & “Nearshore Outsourcing: Hiring in Latin America”

Best practices for outsourcing software development

If you’ve weighed your options and are considering outsourcing, here is some advice to get you started.

Find the right outsourcing partner

Finding the right partner can be really tricky, especially if you don’t have a lot of experience. Not all outsourcing partners are created equal; you'll need to pay special attention to experience, level of transparency, and communication style, among other things.

From there we recommend you look at reviews through third-party websites like Clutch, GoodFirms, etc. Just keep in mind that third-party doesn’t always mean impartial; we always recommend looking at reviews on multiple sources.

Figure out which type of outsourcing is right for you

The first thing you’ll need to decide is which service offering is going to best help you accomplish your outsourcing goals. To do that, you have to understand what options are available, since outsourcing comes in many flavors.

You’ll need to start out by deciding which pricing model makes sense: hourly or project-based. Next, decide whether you need full-cycle custom development or staff augmentation, nearshore, onshore or offshore development. As you can see, there are many variables to consider when making your decision.

For actionable advice on how to achieve outsourcing success, be sure to check out the Outsourcing Oasis Podcast.

Make good use of project management tools

Whether you’re fully remote or have some of your employees working out of a central office, you’ll need to have a good command of project management tools to get the most out of your outsourcing experience.

You have plenty of tools to choose from, including Trello, Jira, and Asana. Efficient use of project management tools will help you keep your projects on track. Learn more about tools that facilitate remote team collaboration here: “Must Have Remote Work Tools For Distributed Teams In 2020.”

Set clear expectations from the start and communicate regularly

This is a point that cannot be stressed enough, as it’s the single most common failing point for outsourcing projects!

You need to make it clear from the start what your preferred channel is for communication and what the communication schedule looks like. Be sure to stay consistent even if things are going well. We know it’s tempting to start skipping check-ins when everything is marching along as expected, but tight control leads to better results.

Summary: Final thoughts on in-house development vs. outsourcing developers

It’s easy to understand why the outsourcing industry is growing at such a rapid pace. It’s an effective and reliable cost-saving measure that allows you to produce results almost immediately.

New software and wider adoption of remote team culture has gone a long way towards reducing the traditional challenges of outsourcing. While companies are champing at the bit at the opportunity of accessing a larger pool of talent, there is still a lot to be said for in-house development.

There is no denying the benefit that in-person meetings and impromptu hallway and water cooler conversations have. This has been notoriously difficult to recreate with a remote team.

The tradeoff lies between more talent at lower rates or increased loyalty and oversight. Which one you choose really depends on your goals and what growth stage you’re in. As with many things, you don’t necessarily need to decide between one or the other – many teams have found success using a blended approach to gain the best of both worlds.

Finally, don’t look at this as a comparison of which is better. It’s more about gaining a detailed understanding of the strengths and weaknesses of each. Apply that knowledge to your recruitment strategy, and if you’re successful, you’ll gain a competitive edge over your competitors.

If you need a hand deciding which outsourcing option best fits your organization, schedule a free outsourcing strategy call with us today!