Interesting fact: according to Statista, the global outsourcing market was $92.5 billion in 2019.
The total value of the outsourcing industry will reach $405.6 billion by 2027. Not bad, is it? But many large companies and startups are still wondering which path of development to choose: in-house or outsourcing software development? Thousands of companies ask themselves this question every day. Some seek to do their development, developing the product with the help of the in-house team, without trusting contractors. While others consciously use the expertise of outsourced specialists, optimizing financial and time costs to concentrate their resources on higher priority tasks.
However, there are many factors to consider before making a decision. Choosing between models will have long-term implications for not only the product itself but also for the organization and profitability. In this article, we’ll explain how in-house development differs from outsourcing, and maybe help you in making an informed decision.
In-house development implies having a team, which has all necessary skills and abilities in IT. Internal teams are usually located in company offices. The company assumes full responsibility for managing the in-house staff and paying them.
Pros of In-house Development
- Control over the whole situation. People who are in the same office can look for solutions to atypical problems together, discuss work and resolve misunderstandings promptly. This makes it possible to work more productively on a project.
- High motivation. Developers who work at the company all the time pay more attention to the business needs. They are genuinely interested in achieving the best results and want to do the most good.
- Deep involvement and understanding of the specifics. An in-house IT employee understands the intricacies of the business, understands the goals and undercurrents, and reacts quickly to changes in processes.
- Work productivity. Full-time employees devote all their energy to one project, so they are quite productive. Also, agency employees work side by side with other team members and can always discuss problems or innovative ideas in person – this speeds up processes.
Cons of In-house development
- Employee burnout. On the other hand, working on the same project can lead to professional burnout in employees.
- Personnel issues. There are more and more issues with human resources in the development of IT projects. Even if to leave aside the huge problem of hiring qualified programmers, there are still questions of planning their work, assessing complexity, and a lot of other factors that need to be managed at all stages of project development.
- High operating expenses. All sorts of things happen. Sometimes people have to be fired, transferred from one project to another, and retrained if they don’t meet expectations. The firing process is also costly. When hiring, it’s not enough to just recruit a new employee. You need to give him a workplace, a laptop, and guarantees of official registration for work and fulfillment of certain obligations spelled out in the contract. It is also worth providing additional guarantees for the employee, such as health insurance, the payment of bonuses, etc.
- High cost of specialists’ salaries. Finding and hiring a specialist is often costly for a company – HR costs, recruiting commissions. In addition, the professional developers’ salaries are costly. And in the case of insufficient specialist workload, the company will essentially pay for “downtime”.
- Problems in employee compatibility. To develop any project properly, you always need a whole team of people-not just programmers, but also designers, testers, product engineers, and managers. It is not just necessary to gather them together, but also to make them work effectively. Compatibility and coordinated work of employees is an issue that is still a big problem for many companies.
- Long organization process from scratch. It is quite difficult to find good specialists, especially if the task is to start working on a new project as soon as possible. Plus, good specialists don’t agree to short projects. Qualified developers need stable long-term employment. It is also necessary to objectively assess the skills of applicants. Otherwise, recruiting turns into a lottery, where every slip-up incurs additional costs to the business.
- Developers migration. Technical specialists often change their place of work. The demand for talented workers is high. Many other companies are willing to offer them better offers and it may be hard for you to compete with them. As a result, the recruitment process becomes more difficult and you will only lose time looking for new employees.
When to Use In-house Development?
Often only large companies open their own development department, for which the disadvantages associated with costs do not exceed the pluses of controlling the situation. If a large offline business is not afraid to invest heavily in a website or other web services, this choice will ultimately be optimal. But that doesn’t mean that smaller companies can’t have their own in-house development department.
Also, in-house development is suitable for companies that already have an IT infrastructure and organized process. All you need to do is scale your staff. And this is already conditioned by the availability of staff on the market, interesting tasks on your project, and an adequate budget for buying developers into the company.
Read more about Development: What software development methodologies exist and which one would fit your project?
Outsourcing is a method of organizing business processes in which a company abandons the independent performance of a number of functions by transferring them to a third-party contractor. According to Efficio Consulting, 80% of companies that outsource their services also do it to improve business performance.
The hired external company works remotely or from an offshore location. When outsourcing, you can hire offshore staff on an hourly basis, with a fixed salary, or according to project requirements. Outsourced company is steadily developing under the conditions of strong competition in the IT market. In turn, the competition requires improvement of all internal processes: development, team management, quality assurance. In these conditions, outsourcers can quickly form teams and immerse themselves in new subject areas that gain an advantage.
Pros of Outsourced Development
- Operating costs are lower than in-house development. By combining the cost of infrastructure, hiring, and hourly rates for developers, you can reduce your development costs by up to 60% through outsourcing. Hence, outsourcing saves not only time but also a huge amount of capital that you can use for other important tasks to grow your business.
- No cost for salaries. Outsourcing services help customers reduce the cost of the company to pay taxes, sick leave, vacations, contributions to pension funds, and other things.
- No need to retrain employees. Usually, the studio has a product team with a lot of experience, which has already released many solutions to the market. Without much expense, the customer gets all the expertise, including analytics, design, strategy, and testing, and there is no need to retrain employees.
- Quality assurance. By concluding a contract with the client, the company undertakes to fulfill its obligations on time, scope, and quality of work.
- All communication process is through a manager, who sets the tasks for specialists himself. The project manager controls all the project work: keeps track of deadlines, shows interim results, tracks payments, and so on. This person is always in touch and ready to listen to all the wishes and complaints and pass them on to the team. Communicating with a manager is easier and more convenient.
- Work will start from the first day of cooperation. You don’t have to worry about hiring and training a very skilled team of engineers. You can start working on your project right away.
- Risk reduction. Outsourcing is always governed by a legal contract. It includes not only the scope of work, NDA but also some other important aspects such as payment clause, deadline, performance clause, confidentiality clause, project exit clause, etc.
- Exclusion of disputes and disagreements with the staff. If a specialist is dissatisfied with something, he can only present a claim to his employer. The client pays the agency for its services and is not involved in personnel management.
Read more about Development: What is NDA and why you should know about it
Cons of Outsourced Development
- No ability to interfere with established processes. When working with an outsourced development team, you have to constantly monitor deadlines. Of course, you can document all your requirements by creating milestones and a project charter. But if something goes wrong, you can’t personally participate in the project.
- Response time to tasks can be delayed. What should you do if for some reason you cannot contact your team? Expect delays if you try to work with a team on the other side of the world. And you are not alone with this team. Besides you, there are other projects they are working on.
- Difficult to choose a quality team. Any company wants to start working with a team of highly skilled developers right away, but finding a reliable executive company is not so easy. You can simply run into non-professionals and waste your budget.
- The risk of contractor bankruptcy. The agency can go bankrupt just like any production company. This will lead to the failure to perform delegated functions and a temporary reduction in the efficiency of the enterprise.
- Misunderstandings of the company’s corporate style. By all standards, the contractor does the job correctly. However, the specifics of the company often involve nuances that need to be clearly explained to the partner.
When to Use Outsourced Development?
Outsourcing is not only more cost-effective but also greatly simplifies, speeds up, and improves the quality of the development process. Companies of all sizes hire a ready-made team so they don’t have to spend time recruiting and training developers. If the result is needed as quickly as possible or budget savings are important, a hired outsourced team is the best choice.
First of all, it is when development is not at all a company’s core business. In this case, it is easier and more profitable to outsource the development process rather than hire a staff of programmers.
Outsourcing helps when there are not enough resources, and it is necessary to begin work on a new project on a tight deadline. In this case, you should also consider hiring a contractor, because it is almost impossible to quickly form a good team.
Or, for example, there is a certain staff of specialists, but they do not have enough expertise to solve the problem. Here it is also advisable to find a specialized outsourced team, so as not to have financial and time costs for the business. Below we describe in more detail how to choose an outsourcing company and not to fail.
How to Successfully Outsource Software Development?
Depending on the type of outsourcing model, subcontractors perform certain functions of the company, related to information technology, human resources, accounting and others.
There are several options for outsourcing work:
- the service provider submits temporary employees to the client, where qualified engineers who meet the requirements for the project are placed at the client’s disposal, while the team and project management function remains with the client
- creation of a basic dedicated development center, where the service provider supplies the client with the necessary resources, but manages the specialists independently, while the processes used by the employees are selected and controlled by the client organization
- creation of a fully functional dedicated software development center, where in addition to providing standard services the contractor is responsible for the selection and efficient management of the processes performed by the team
Companies from almost all industries are turning to outsource, including high-tech leaders who have their own IT departments. With the help of external teams, businesses are able to find new technological solutions and speed up development, if necessary. In addition, product teams sometimes need help building development processes.
All right, but how to choose an outsourced company? Despite all the benefits, you won’t pick the first one on the list. Finding a contractor is quite a long process that requires a carefully considered decision. Below we have points to take into account in your search.
- Scope of work. Before contacting the executors, write a clear requirement with the volume of work. Determine what you will outsource to the programmers, and what work you can handle on your own. You must set the goal of the job, find out exactly what your company needs and what will be the best solution to achieve the desired results. You can’t just share vague requirements like “create a mobile app that our customers will love” with an outsourcing company.
- Portfolio. It is not always possible to objectively assess the performer, since a significant portion of projects may be under NDA. Nevertheless, it is worth paying attention to this point and asking for available work or to see if there is a block with cases on the company’s website.
- A clear outline of the developers’ skills. Outsourcers should clearly describe the grades and skills of their developers – Junes, Middles, or Seniors. It has to be clear to the customer what he is paying for. Remember that technical expertise is critical to the success of a programmer rental deal.
- The complexity of the project. The scope of development is also one of the important issues to keep in mind when thinking about outsourcing development. If the situation is such that you need to redesign a product that does not cope with the current business tasks, and the trend is not in favor of the product, or the amount of resources is enough to quickly change the entire software, then outsourcing is the right thing to do!
- Market Reputation. When looking for a company to outsource, it is important to immediately cut out those who are disruptive or rude in their work. So be sure to check your partner’s reputation before signing a contract. Recommendations are the best way to choose a restaurant or hotel. The same applies to choosing an outsourcer. You can study their history and reputation on the Internet. On platforms like Clutch and GoodFirms, you can look up company reviews. If there are still doubts, contact the outsourcer’s previous clients and ask about the cooperation experience. By the way, you can also see our reputation here and here.
Read more about Development: What to choose: Time & Materials, Fixed Price, or Dedicated Team?
Examples of Outsourcing in Large Companies
Google started out as a search engine but has gradually grown into a huge organization offering hardware and software in addition to advertising services, with employees all over the world. They understands that even with their huge size, they can’t do everything, so they outsource non-core functions such as administrative and IT work, email support for products like AdWords, and more.
Slack came out in 2013, and the core team consisted of just four developers who created the product and brought it to market. The team understood that for the product to be successful, it needed to look good and work flawlessly. So Slack brought in a third-party design firm to conduct beta testing. Feedback on what in the product worked and what didn’t help Slack create a solution that was accepted by the business.
Skype is another big outsourcing company, and they chose Estonia, Eastern Europe, as a source of talent and brought in several developers to work on the product. Over time, the company brought in these developers as partners, which further strengthened the relationship.
IKEA has virtually no in-house production; instead, it cooperates with 2,500 suppliers, proven over the years. IKEA’s logistics functions are also delegated to a third-party organization. It turns out that IKEA devotes all its resources to the organization of the retail business, while the rest of the services and business infrastructure are outsourced.
Kodak decided in the early 1990s that high-tech leadership was not its strategic goal. It outsourced all IT activities to IBM, which was just trying to gain leadership in this segment. A perfect example of mutually beneficial outsourcing.
The head of the automobile company sought to personally control all stages of production, but soon he was faced with the exorbitant costs of maintaining all areas of the company. That’s when he turned to independent companies for help, who took over some of the tasks. Now Ford produces only 30% of components on its own; the rest of the production is outsourced.
NOKIA has completely outsourced maintenance services and uses the services of IT outsourcing companies, which allows the company to reduce costs. The company also outsourced call center services, which allowed the company to focus on core production and marketing, as well as new product development.
GitHub appeared in 2008 and became a repository for developers who wanted to document, share, and post personal code. But from the beginning, it was not very suitable for small code snippets. That’s when the idea for Gist was born. After determining what they wanted to do and what it should look like, the question of implementing the idea came up. The founders didn’t have enough financial capital to do the work themselves, so they hired a third-party developer as a Git contractor.
WhatsApp is a good example of outsourcing because they were engaged in it from the beginning. In 2012, the company had 30 full-time employees and five freelancers. Based in California, USA, they understood that if they wanted to grow, they needed to cut costs. For WhatsApp Russia was a great solution, and they bought development resources in Russia for a fraction of what they would have had to pay in the U.S.
What is Offshoring?
Outsourcing itself implies that some of the company’s business processes are outsourced to other companies. That is, it is mutually beneficial cooperation between two firms, which allows one company to conduct full-fledged activities, and the other to receive income for the provision of services.
Outsourcing is also present in offshore companies. The only difference between offshore outsourcing and regular outsourcing is that the functions are entrusted to a company that is located at a certain geographical distance: in another city, country, or continent. Statistically, 71% of financial service executives offshore some of their services.
Offshore outsourcing is the best option for optimizing company costs. It is used by a large number of companies all over the world, including large corporations with multi-million revenues.
Firstly, offshore outsourcing saves the company money due to the different wages amount and lower tax rates. It is also a rational solution to the problem of implementing non-core business processes. A striking example is ordering software. Well, and with the help of offshore outsourcing, it is possible to organize non-critical production tasks that require unskilled labor.
To which countries to offshore and with which partners is it advisable to do so?
When selecting an offshoring partner, you need to consider the types of experience, skills, abilities, and cultural aspects you need from a provider to work successfully with them. For example, in each country, factors to be considered should include labor potential, expected product quality, and cost advantage. Before making a decision, you should propose several alternatives and evaluate them.
Of course, it is impossible not to mention China, since the majority of all industrial outsourcing production is concentrated here. Eastern European countries, including Belarus, develop software for customers all over the world.
One of the main reasons why Belarus has become an IT center is the high quality of the IT itself. This sector received state support as one of the priority sectors for future development and this country has concentrated most of its talented professionals. Belarus is a low-cost outsourcing center – one of the cheapest in Eastern Europe. The Eastern European region is becoming more and more prominent on the outsourcing map as the global outsourcing trend shifts from far to near abroad. It is worth mentioning that Belarusian IT outsourcing companies have clients in more than 50 countries around the world, about 45% of them are from the United States and Canada and 30% from Europe.
In the field of outsourcing, Belarus is gaining a reputation as a quality, reliable, profitable business partner. New international connections, including relocation of foreign workers to Belarus and close cooperation of Belarusians with foreign companies, contribute to this image.
What to choose?
The choice between outsourcing and in-house software development should take into account the following:
- Project scope
The in-house team has in-depth knowledge of the company’s business and product. This advantage often saves time when dealing with basic technology and day-to-day operations. However, faced with the need for a certain skill set for some projects, the in-house team has fewer benefits compared to an outsourced team. For example, if Android or iOS app development is needed, companies often do not have such experts. Outsourcing teams, working with many different clients, get a broader set of tools and expertise and have a range of skills to meet the client’s immediate needs.
And outsourcing itself is suitable not only for startups, but also for large companies, which often face situations where outsourcing is not just an option, but the only way. There are many pros to hiring outsourced software development companies. It saves on office space, workstations, hardware, and software.
On the other hand, hiring an in-house developer may seem like a very good idea at first glance, but there may be some real problems. Finding and hiring the right people, explaining your needs, and getting the most out of the developer takes a lot of time and effort.
A general recommendation is to assess the overall situation with a SWOT analysis. You can only determine the best perspective by self-assessment of the situation. Outsourcing takes over most of the planning and part of the workload, thereby allowing the customer to focus on the tasks that require attention.
Преимущества работы с оффшорной командой склоняют все больше и больше владельцев бизнеса к аутсорсингу. Работая с оффшорными разработчиками, вы можете найти долгосрочных игроков, ориентированных на успех вашего бизнеса. Нет сомнений в том, что лучшая – это квалифицированная, обученная и опытная команда, способная справиться с любым проектом.
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