Software Development Outsourcing: Full Guide for Your 2024 Project

The developing market of software outsourcing has no shortage of clients as more and more businesses opt for a convenient, fast, and cost-efficient approach to software development.

Technologies are evolving at a stunning pace. What’s innovative today is outdated tomorrow. Companies that fail to keep up with recent advances quickly get left behind in the race for profits. To stay ahead of the competition, businesses shift their strategies towards outsourcing, achieving the flexibility an in-house development team would never provide.

Wonder if your company could benefit from delegating some of the software-related tasks to a third party? Which outsourcing model would fit your project the best? How to find a reliable contractor that focuses on the result instead of profits? Then delve deeper into the world of IT outsourcing and learn what new it brings to the table.

What Is Software Outsourcing and Why Outsourcing Development Is Popular?

For modern businesses, keeping a large staff is ineffective and unprofitable. It’s more rational to transfer the most budget-eating tasks, like software development or mobile app development, to an outsourcing company. But the whole idea of letting someone else do your job raises a few questions.

First and foremost, what is software outsourcing, anyway? In simple terms, software outsourcing is a form of arrangement where a company hires an independent team of programmers to work on a software-related project instead of performing all tasks in-house. Typically, the outsourcing vendor is better equipped and experienced to handle the custom software development process than the client’s staff, ensuring high project completion speed and shorter time to market.

Today, technologies dictate the rules. Tech-savvy companies win customers, earn a reputation and go international in a couple of years. At the same time, businesses relying on outdated software flop before they even go profitable. In addition to giving you an edge over your less-advanced competitors, IT outsourcing also allows for a cost-efficient business model with fewer processes to keep track of.

Every company has a choice – to deal with a software project on their own or turn to an outsourcing provider and use their software developers. Large enterprises rely on the services of third-party contractors because the larger the scale, the more difficult it becomes to control the implementation and the overall quality of results. Smaller businesses are switching to outsourcing to minimize the costs of maintaining full-time employees and receive A-grade services in supporting areas. As you can see, benefits of outsourcing work for companies of any size and organizational structure.

Outsourcing is the answer when you know your needs and seek to optimize costs. That is, you have enough experience to figure out which tasks should be done within the company and which are better to be delegated in order to get the right software of time and with minimal cost overheads.

How Does Software Development Outsourcing Work in 2024?

Basically, an outsourcing company provides extra hands. It hires employees and forms its own staff to cover the development needs of others. Then they find a customer who needs a contractor to perform particular tasks and, once the conditions are agreed upon, provides employees to get the job done.

Let’s say you need an automated email server that would be sending thousands of messages a day. The application must allow multiple remote users to access the system and send emails in a few clicks. A task like this would probably require people experienced in .NET Framework 4, ASP.Net, MVC 2, jQuery, Microsoft SQL Server, and so on.

At the same time, you need a software solution that would automatically transfer money to a credit card or PayPal account, which requires Authorize.Net and PayPal integration. This means augmenting your team with someone who digs in PayPal API and Authorize.Net API.

Both are one-time projects, so forming an in-house development team makes no sense – they simply won’t have enough work to make it worth the money, unless you plan to make an application development of your business brunches. Instead, you screen the global IT outsourcing market to find a service that takes over the bulk of the job, while you’re busy with your company’s day-to-day tasks. To kick-start the outsourcing process, your vendor reviews the projects and estimates the costs. As a customer, you only need to fund the project and follow its progress.

The Benefits of Software Outsourcing and its Potential Pitfalls

The worst mistake you can make when deciding to outsource is to rely completely on the experience of your competitors. Software development outsourcing isn’t always an ultimate solution, and before considering this option, you should always consider all the pros and cons.

Software Development Outsourcing
Cost effectiveness. Hiring an outsourcing business allows you to cut a great portion of your expenses, as you no longer need to maintain extra infrastructure and staff. Some fixed expenses become variable depending on your current business needs and you get more control over the project costs—you can make changes anytime during the development.Increased costs may occur if you outsource too many processes, for example,  the entire development scope, at a time. So before introducing outsourcing into your business, make sure that you’ve carried out a careful cost-benefit analysis and put together a solid business strategy for this outsourcing project.
Strategic flexibility. When it comes to decision-making and strategic goals, successful outsourcing allows you to focus more resources on carrying out the core strategic tasks. This helps you speed up the process and gives great flexibility in introducing new technological or managerial improvements.With increased flexibility comes the risk of losing control over the results if you delegate too many decision-making responsibilities to an outsourcing vendor without due supervision. Your lack of participation may lead to possible miscommunication and disappointing implementation.
Broad expertise. Outsourcing opens the door to the world of innovation. Lacking some crucial specialists in your staff? No problem – hire a software outsourcing service with relevant skills and experience and let them do the job you have no hands for. The quality of service will surprise you because third-party companies just can’t afford to do a sloppy job with your new software.Information security. Whether due to the lack of proper information security measures or malicious intentions, there is risk of potential data leakage when working with outsourcing software development companies. To minimize potential damage, you need to carefully check the vendor’s background before you hire anyone and be certain about what kind of information they will have access to on the project.
Speed and quality. For a software companies, this type of activity is the main one. They can afford to devote much more time and resources to all aspects of a specific activity: from the latest hardware and software for employees to deeper professional training, niche expertise, and fast onboarding.Depending on the vendor’s location, time zone differences can turn a project into a difficult communication challenge. If neither the contractor nor the client have dedicated employees to stay in touch despite the time difference, this may hamper the development process.
Reliability is another great advantage in the field of software development outsourcing. When working with a proven company, the contract guarantees that your vendor will deliver on the responsibilities and project acceptance criteria stated in it.In some cases, there may be the lack of a clear legal framework for outsourcing when working with offshore vendors. With so many Some businesses are afraid to delegate software development to third parties due to the risk of potential contract violations.

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What Are the Types of Software Outsourcing?

Companies can choose between three different types of outsourcing bases on the “outsourcing destination”: vendors within the country (local outsourcing), contractors located in neighboring countries or states within the same time zone (nearshore outsourcing), or businesses that operate from distant countries (offshore outsourcing). All three types come with certain benefits in terms of convenience and cost-efficiency.

Local outsourcing

As the name implies, the first type refers to outsourcing software-related tasks to a contractor located within the same geographical area as the client company. The definition of the term slightly changes depending on the proximity of the outsourcing team to the customer. For instance, if your company is based in LA, and your contractor operates from New Jersey, the term onshore would be more appropriate.

Small distances are the key feature of local outsourcing. Since the hired team is “around the corner,” you won’t have to deal with problems like the language barrier or different time zones. This allows you and the contractor to work in sync (or with a minor time difference), resulting in better productivity, as you can work out challenges together. As a bonus, you can arrange occasional meet-ups with the vendor without traveling half the planet.

Naturally, a small distance between you and your outsourcing partner means you can easily keep track of the progress and other project-related tasks. There’s one thing to keep in mind, though, – local outsourcing works only when the budget isn’t a problem. Domestic vendors typically charge a lot.

Here are some of the key advantages of this type of software development outsourcing over the other options:

  • Better focus on business-related tasks. Outsourcing a software development project, you get more time to manage your company’s primary activities while an independent team carries out less important assignments. You save hundreds of working hours that would otherwise be spent on putting together an in-house team or arranging IT courses for your current employees. In the end, your productivity reaches a new level while you’re preparing to roll out software that costs you no extra time to develop.
  • Minimal time difference. Working within one geographical area, both you and the contractor don’t have to worry about different time zones, an issue that always takes its toll on productivity. Even if you’re an hour or two behind, the time you have left still covers most of the vendor’s working day, which ultimately results in shorter project terms and allows develop software faster. To top it all off, you’ll have no problem arranging a face-to-face meeting. Just hop on a plane or bus and be at the vendor’s office in a few hours. The same trick won’t be as easy to perform if your contractor operates from another continent.
  • Cultural differences won’t be an issue. Hiring a team from the same country gives you a handy perk you probably haven’t even considered: you both come from one cultural background, meaning that you most likely see eye to eye when it comes to working ethics. Also, the same country means the same holidays, so you’ll always know when your vendor has a day off. Any project goes smoothly when you’re aware of what to expect from your partners.
  • No language barrier. These days, the chance of coming across a software outsourcing team that can’t manage correspondence in English is pretty slim, but it always feels more natural when you interact with a native speaker. You can be sure your words will be correctly interpreted.
  • Agile management. With a local contractor, you’ll be able to participate in the development of your project on a regular basis. This level of collaboration means you can spot potential issues way before they hinder the process.

Judging from the pros, local software development outsourcing services may seem like the best option on the market. However, it also comes with several shortcomings that might affect your final decision:

  • Hefty prices. This is the main concern for companies operating in North America. If you compare two similar companies – one from Ukraine and one two blocks away from you, – the latter will charge considerably more than the Ukrainian one. That’s because average hourly rates in the US are somewhere around $80-250, while Ukrainian rates barely reach $50.
  • Finding a perfect candidate might be tricky. Choosing from local vendors, you leave 90% of the overall talent pool behind. You’ll find the right people for the job eventually, but the search may last for months. Opting for other outsourcing options, you’ll have your project started in no time.
  • Limited services. Regardless of expertise, locals will never match offshore ones in terms of service variety. This may be a problem if you have several different projects to take care of.

Offshore outsourcing

Offshore outsourcing is the go-to option for optimizing company expenses. Hiring a development team from another coutnry or another continent is popular among large companies around the world, including corporations with multi-million revenues, thanks to its advantages:

  • Cost-efficiency. Offshore software outsourcing provides a lot more opportunities to save company funds, allowing you to profit from significantly lower hourly rates and tax rates. Apart from that, you’re cutting production costs by eliminating the need to maintain a permanent team of employees at one or all development phases.
  • Highly competitive market. The quality of work done by offshore specialists is often higher than that of local companies due to tougher competition in the global market. This provides for a better choice of vendors. Instead of choosing between five or six companies locally, you’re free to explore the whole world of IT with hundreds of reputable companies ready to carry out any task.
  •  A wider range of services. Offshore vendors can deliver on all sorts of tasks and provide any type of specialist you need for the project. The more sophisticated the software for your company should be, the smaller the chance you’ll find an appropriate contractor within your area. There’s no point in looking for a needle in a haystack when you have a crate full of needles at your neighbor’s house.

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But just like local outsourcing, this type also comes with several drawbacks to consider:

  • Offshore operations are harder to control. When you can’t swiftly respond to minor problems in your development cycle and manage timelines, occasional hiccups may turn into missed deadlines, and the mistakes you could’ve prevented return as critical issues. Loss of control over your project development is probably the most common downside of offshoring. If you decide to trust software development to an overseas contractor, make sure to research the market thoroughly instead of chasing the lowest bidders.
  • Language and cultural barriers. Each type of custom software development companies comes with certain operational issues. When working with contractors based thousands of miles away, you may come across some cultural and language barriers. Sure, almost all overseas companies that offer software development services employ English-speaking specialists, but software development is such a delicate matter that certain terms may be misinterpreted. That’s why you always need to communicate your requirements clearly if the plan is to receive quality software within the deadline.
  • Potential damage to public image. US-based companies often get criticized for finding the right software development team offshore, as the majority of citizens believe that overseas outsourcing is one of the key reasons for economic struggles. This may not be your case, though.

Nearshore outsourcing

It’s the middle ground between the first two types of outsourcing. While the cost of hiring a nearshore contractor is typically lower compared to local vendors, offshore companies offer more affordable rates. Again, the location of the software development team is paramount. A Texas-based company has no interest in hiring a Canadian team, as the difference in hourly rates would be minimal. The money saved will be lost in the long run due to logistics.

On the other hand, you can benefit from neighboring time zones. Outsourcing a software project to a nearshore contractor means a two-three-hour difference maximum. This means fewer headaches when organizing the development process. You’re guaranteed to have at least four hours of shared working time. Communication and traveling also shouldn’t be a problem.

All in all, the key advantages of nearshore software development outsourcing come down to:

  • Barrier-free communication. When you outsource your project to a nearshore contractor, discussing technical nuances won’t cause any slow-downs as both of you are equally familiar with the terminology.
  • Shared cultural values. Some companies underestimate the benefits of working with a team that’s close not only geographically but also culturally. This makes it easier to establish friendly relations between the companies and cultivate the contractor’s feeling of responsibility for your project.
  • Smaller distances. Cultural similarities are one thing, but the ability to arrange regular meetings in person is a significant plus you won’t be able to enjoy when working with an offshore company. This advantage will be useful for elaborate long-term projects.

Similar to the cons of local outsourcing, the biggest disadvantage working with an outsourcing business nearshore is the cost. Nearshore companies charge more for their services compared to offshore vendors and even the funds spent exclusively on the development (no hiring and retention costs) may cross the maximum budget line pretty soon. And same as with local outsourcing, the higher pricing doesn’t necessarily guarantee better quality of work. If the project doesn’t require constant communication between you and your outsourcing provider, working with an offshore team would bring more benefits. 

Bottom line, to understand which of the common software outsourcing types would suit you better, you should first accurately determine your needs and expectations. There’s no ultimate solution when it comes to choosing an appropriate type of outsourcing as much as you’d wanted to. Each of the types shows great efficiency depending on the task you delegate. With this in mind, be sure to do some research before taking any steps.

Common Software Development Outsourcing Models 

The world of IT knows four common software outsourcing models. Your company can benefit from each of them depending on your business goals and the projects at hand.

Time and material

The first of the software outsourcing models works best when the scale of the project isn’t clear and you can’t predefine its cost. The client pays for the actual amount of work performed by the dedicated team of software developers, covering the hourly rates of the contractor’s specialists. Thus, both parties can flexibly approach changing requirements, conditions, and priorities of the project and swiftly adjust.

On the one hand, the time and material model offers great flexibility and quality of service. On the other, a dishonest contractor might deliberately delay the project to try and squeeze more money out of the client. You can avoid it by splitting the main task into smaller subprojects, gradually building up your software functionality without losing control over the contractor.

Fixed cost contract

The fixed cost model has the tasks to be performed by the software development outsourcing company and the cost of the entire project defined and agreed upon before the project implementation actually starts. On the bright side is that the contractor covers extra costs from their own pocket if they go beyond the agreed scope of work for some reason.

However, going with the fixed price model is only effective when both the customer and the contractor have an accurate, detailed picture of what and how exactly needs to be done within the project. Allocate more funds and time to the project planning phase to make sure you’ve considered all expenses. 

Without clear requirements, your project goals and ways of achieving them are likely to go through some changes. In comparison to the time and material model, unfortunately the fixed cost model does not feature such flexibility in change control. Every time you decide to introduce changes into the predefined plan, you will be obliged to renegotiate the cost and contract terms, which can be a lengthy and annoying process. 

Dedicated development teams or resources

The dedicated development team model is focused on long-term partnership between the client and the outsourcing firm. The contractor assesses the customer’s needs, forms a team of IT specialists, and provides it with the necessary infrastructure. Dedicated specialists extend the client’s internal staff but don’t take part in other projects, covering the responsibilities they were hired to fulfill. The client gets a team of experts formed specifically for the task but has to cover their hourly rates regardless of their current workload. That’s why the third model pays off only if you have a steady flow of IT-related tasks. Such teams can provide a wide range of services from maintaining existing systems to developing new solutions. 

Whereas the time and material model puts the risks on the customer, and the second on the vendor, the dedicated development team model implies equal responsibility. You depend on your outsourcing partner since you have delegated the development process to them. In turn, the outsourcing partner is bound to you because if the contract is terminated, they’ll end up with a fully stacked team of specialists it now has no use for. Such codependence opens up opportunities for a transparent and mutually beneficial partnership.


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Offshore development center

The final model is an alternative to the dedicated team one but shares a few similarities with it. With this model, you outsource a project to a dedicated team of developers overseas that will work as a subsidiary of your company, focusing on one or several tasks, while you cover management and resource costs.

Still not sure how to pick the right model? Picture the following scenarios:

1.  Suppose a company uses a few information systems that have a tiny impact on the success of its activities. At the same time, there are tasks requiring minor revision of their functionality or tech support. The first or second model would perfectly fit the company’s needs. They’re also optimal if you’re dealing with a one-time project like a new business application.

2.  Another scenario follows a company that relies on dozens of systems, including those developed in-house years ago and operating on different platforms. Often, the documentation for these systems is outdated or non-existent, which complicates the maintenance and support processes. Further development of the functionality requires knowledge of not only the technology but also the architecture and quirks of building these systems, as well as the competence specific to your business. In this case, the third or fourth model is your best option. Remote specialists will study your systems and find the right approach to them.

Why to outsource software development? Top-7 Benefits of Outsourcing

Globalization and IT innovations provide companies with opportunities to save resources and optimize business processes. But why do companies involved in the software development outsource software-related projects instead of using those opportunities to form an ultimate development team? Delegating some functions to third-party businesses allows you to cut costs on the one hand and shift your focus towards developing the main areas of activity on the other. This is also a simple way to attract external resources – knowledge, experience, and assets with minimal administrative obligations and related risks.

Key reasons to outsource software development

  1. Outsourcing saves time and gives you room for development. When it comes to small and medium-sized businesses, outsourcing helps to focus on administrative and operational tasks and take some load off of your staff, using human and financial resources with greater efficiency.
  2. New connections and business opportunities. Depending on the outsourcing type you choose, you may get access to a foreign market with its useful contacts, talent pool, technologies, potential revenues, and growth prospects.
  3. Yo