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Outsourcing
Table of Contents
Each year, the art of striking a balance between costs and gaining value becomes more crucial for businesses. Turning to external IT service providers to meet these demands is the trend that is here to stay. Thus, according to 2023 Global Software Outsourcing Rates and Trends Research, 60% of US businesses rely on vendors.
In this article, you'll find a comprehensive guide on all aspects of outsourcing software development: trends, benefits, factors to consider, costs, and tips on the teams' hiring and managing process.
If you ask yourself the question, 'What is software development outsourcing for my business?', the answers may differ. One option may sound like, 'We want to experiment for once and see how it goes'. You might turn to an IT consulting services provider to check if you have any gaps in your technical infrastructure or IT product strategy.
Or it may be hiring an external team or company to deal with certain development stages, like outsourcing QA. Whatever path you choose, engaging IT service providers may bear fruit in the end. Here are some of the most foreseeable benefits you may get with outsourcing.
One of the main reasons why companies opt for outsourced IT services is cost control. The Accelerance Global Outsourcing Report as of 2023 suggests that outsourcing software results in a 40% to 70% reduction in development costs.
With outsourcing, you pay only for the work that is done and engage IT providers when needed. Outsourcing software development does not imply onboarding and training employees. Office-related expenses like renting space, purchasing supplies, and maintaining equipment are no longer on the list. Retention of in-house specialists is another share of expenses, especially if they have a niche, complex or domain-based expertise, like DevOps specialists. Outsourcing eliminates this need as well.
Although still one of the weighty arguments, cost saving is no longer the only driver, as the recent Deloitte report proves. Today, just 34% of organizations state cost reduction as the main motive to outsource programming to a vendor. Service quality and agility become businesses' priorities more and more often.
Time is one of the most decisive factors for product development outsourcing. It is crucial to come up with an innovative product that is also in high demand before your competitors do. A faster launch may win you a long-lasting competitive advantage. Although outsourcing is not a silver bullet, it works even for the most flooded markets, such as mobile app development.
The US Bureau Of Labor Statistics revealed that the employment of software developers is projected to grow by 22% from 2020 to 2030. Demand for highly-skilled software developers will likely increase, while the programmers’ expertise may not keep up with it. Yet, offshore outsourcing services open up new possibilities for expanding the talent pool. For instance, if you're a US-based company, you can find reliable vendors from Europe who outsource programmers with the required expertise.
Let’s say your company doesn't have the necessary specialization or you're planning to scale and launch a new product or features while keeping an eye on the core tasks and services. In this case, outsourcing software product development may release the burden. WhatsApp, the top messenger in many countries, heavily relied on programmer outsourcing from Eastern Europe for creating its core functionality.
One of many examples, it shows how delegating a multicomponent development process to experts may affect your business goals. Ultimately, the critical thing is ensuring that you're delivering the best product and service possible to your customers.
Although cutting costs was the main intention behind outsourcing before, there's been a change in that attitude in the recent 5-7 years. Companies see more benefits of outsourcing beyond cost savings. Operational costs for outsourced programmers may be drastically lower. But will the collaboration be fruitful and result in a clear code, scalable product, and fast time to market? 'How much will it cost me in the end?', is the question business owners ask.
They now also perceive vendors as the source of latest tech expertise, new capabilities, and expect them to bring value. Then, what are the benefits, besides reduced costs, you are supposed to get from outsourcing software?
Imagine you endeavor to build a messaging app. Your team should be versed in Android and iOS technologies, as well as cloud services, database management, data protocols, chat architectures, and more. It may require much overhead expenses, time, and engagement from the in-house team to fill the gap. Tech outsourcing may save you these valuable resources.
A 2022 tech staffing report revealed that more than 68% of companies spend a month or more recruiting a single developer, and most of the time, one in five recruits ends up being replaced. Delays, hiring, training, and retention efforts cause further costs. This makes businesses even more unstable. Therefore companies rely on third-party development companies to vet, recruit, and nurture developers.
Outsourcing software development makes it possible to quickly adjust the talents headcount — augment the team at any time, scale it up and down. Thus, businesses can save a substantial amount of money that would otherwise be allocated to hiring and training.
Outsourcing the entire project may be the best option for non-technical leaders. There is no need to manage the external team, as it usually has a project manager and a business analyst on board. Instead, the business owners can focus on the core aspects of their business.
Outsourcing companies typically have multiple running and implemented projects. This brings both experience in different development areas and a deep domain knowledge. For instance, developing healthcare software implies dealing with patients' personal data. Teams that work a lot with HealthTech projects know how to prepare your product for regulations like HIPAA, GDPR, and others. Mobile development companies aware of the latest Android and iOS updates will save you from multiple roundabouts during release to the app stores.
If you're still unsure whether to launch your project in-house or with an outsourcing vendor, here are all the aspects you may consider to make a balanced decision.
With all the advantages listed, outsourcing software development is not a one-size-fits-all strategy. Some challenges become especially tangible for startups, such as resource constraints, market fit, and the pressure to iterate quickly. Others may be especially relevant to a mid-sized company. Test yourself: do you have any of these pain points described below? If you can relate to one or several points described above, outsourcing software development may be the right option for your business.
The most risk-sensitive companies in fast-paced environments, startups need to innovate rapidly and stay competitive. If you can relate to this, an outsourcing vendor can assist you a great deal with the common pain points:
As a middle-sized or established company you might often juggle multiple projects. Or maybe you're running a complex product right now. Therefore, you are always in need of reliable talent. Outsourcing can help you with:
As you run several client projects simultaneously, you might find some gaps to fill:
Third-party delivery models historically have fallen into two categories.
We have compiled a short software development outsourcing guide on the most popular models. Compare the key features and use cases for each model, to make an informed decision based on your specific needs.
Project-based outsourcing and team augmentation are still the most common types of third-party delivery services. Yet, businesses are becoming more open to other outsourcing models, Deloitte Global Outsourcing Survey 2024 states. Companies can combine elements from both traditional in-house hiring and collaboration with an outsourcing vendor, and thus leverage the strengths of both. Here are some frequent cases of how you can effectively distribute resources between the in-house and the outsourcing team.
As stated in 2023 Global Software Outsourcing Rates and Trends Research, several factors influence global software outsourcing rates. The most critical ones are the following: skills set, developers location, level of English proficiency, and length of engagement.
With hot tech skills in short supply, expect to pay a premium for cutting-edge or highly specialized skills. No matter the location, cutting-edge technologies, such as AI, ML, blockchain, and data science will command high rates. Meanwhile 'core' tech expertise, such as Ruby on Rails development or Java development will cost more moderately.
Certain regions have a reputation for specific expertise and are known for big tech hubs — such as Eastern Europe or India. Rates in the countries located near a first-world economy tend to be higher. Nearshore regions with close time zone overlaps will most certainly elevate rates, while offshore outsourcing is cost-beneficial. Yet, as a rule, these developer rates will be lower in comparison with the ones in the US.
Sure enough, you would like to avoid slowdowns and miscommunication in the project. You are likely to look for a vendor whose command of English is solid, from management down to developer level. Fluent English speakers expectedly cost more. Still, it does not necessarily mean you should hire a team from the US.
Developer rates will vary based on their experience and skills, even within one region. Reliable outsourcing vendors vet their talents by hiring and offer you specialists from the mid-to-senior level. This could mean higher costs but proven quality and speed.
Outsourcing companies are likely to offer more favorable rates for long-term engagements than for short-term projects. On the other hand, if the project scope or timeline changes midway, it can lead to changes in the delivery plan and, thus, the pricing. So, if you're planning a multi-year project, discuss it with your potential vendor upfront.
You've already estimated the budget with all the factors in mind. The next adjustments will happen when you will be choosing a pricing model for an agreement with the vendor. Here are four common models that an outsourcing vendor may offer you, with the benefits they bring.
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Your pricing model should strike the right balance between your expectations for budget, timeline and quality on the one side, and level of commitment you expect from the vendor, on the other side.
Make up a list of 5 to 7 software development companies. Compile a table to structure all the information available. Some of the parameters for comparison to include may be:
Study their website, social media, and profiles on directories like Clutch or GoodFirms. Reliable vendors typically have a consistent online presence. Look for:
Clearly defined product requirements will help you find a vendor that aligns with your vision. Here are the steps:
Like any strategic decision, outsourcing software development comes with potential risks. According to recent research, top challenges are lack of tracking and reporting, organizational change management, and poor integration of vendor services.
Let's list the major concerns and work out a winning outsourcing strategy.
Risk: misunderstandings due to language and cultural differences, differing work cultures, time zone mismatches, unclear expectations.
Mitigation:
Risk: deliverables that do not meet expected standards and project requirements.
Mitigation:
For each project, we have acceptance criteria — a clear description of the expected functionality. Therefore, the client knows what will be delivered and how it will function, and our development team takes responsibility for how the solution is implemented.
Anastasiya Kulesh, NEKLO's Project Manager
Risk: data breaches or unauthorized access to sensitive information.
Mitigation:
Data breaches and cyber attacks are both reputational and financial risks for the client. From our end, we take a set of security measures.
Risk: unexpected costs due to scope changes, project revisions, low performance, or additional support.
Mitigation:
To successfully outsource software development, think of it as a partnership. This implies thoughtful planning, transparent communication, and responsibility from both sides of the project.
We prefer being transparent in cost estimations from the start. When agreeing upon the costs with the client, we always consider how much time the project and specific features require (‘for instance, we say ‘this feature will cost 10 hours’). We use time as cost estimation, as the price per hour may vary depending on the task and the specialists involved. As a rule, the features are estimated by the developer responsible for implementing them.
Anastasiya Kulesh, NEKLO's Project Manager
Third-party delivery models keep evolving alongside the challenges that businesses are facing.
Just a couple years ago, 70% of surveyed businesses named cost as a primary reason for outsourcing. But on the one hand, there are technology changes and a growing need for innovation. On the other hand, there is a competitive global talent market. In such an environment, organizations see how important it is to balance between cost and access to new capabilities. At the same time, they expect more agile and integrated solutions from vendors.
The reliance on third-party models continues to grow. In 2022, 76% of organizations surveyed for Deloitte outsourcing research stated they deliver their IT services via third-party models. Budgets across various outsourcing models are rising accordingly. This shift shows that outsourcing software development is no longer accepted as a means to balance costs but mainly as a source for innovation and growth
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Organizations are expanding into new markets and tapping into new business models. Therefore, third-party delivery approaches also differentiate. Insourcing (assigning projects to internal teams) and GICs (global in-house centers) become complementary strategies to outsourcing. They do not replace traditional outsourcing services but bring more stability and flexibility. Together, these approaches create a more adaptable system helping businesses thrive in a world of constant change.
Approaches to outsourcing software development have been evolving for the last 5 years. Their advantages go far beyond mere cost savings. Companies can now benefit from access to a diverse pool of skilled professionals, added value, and the ability to focus on their core business activities. Additionally, new models continue to appear, giving organizations more stability and more options to choose from.
Want to fine-tune your development or build a new product? NEKLO leverages best practices from 15+ years of experience and the latest trends in software development. Drop us a line to discuss your project!
US-based and operating globally, NEKLO spearheads digital transformation initiatives for businesses worldwide. We deliver software solutions complying with your market and legislation.
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