Software Development Outsourcing: Full Guide

by Andrew M. on Jul 27, 2022

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 What’s innovative today is outdated tomorrow.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?

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, 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 project than the client’s staff, ensuring high development 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 At the same time, businesses relying on outdated software flop before they even go profitable.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 company. 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.

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.

How does software outsourcing work?

Basically, an outsourcing company provides extra hands. The outsourcing vendor hires employees and forms its own staff. 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 software 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. Instead, you find an outsourcing company that takes over the bulk of the job, while you’re busy with your company’s day-to-day tasks. The vendor reviews the projects and estimates the costs. As a customer, you only need to fund the project and follow its progress.

The pros and cons of software development outsourcing

The worst mistake you can make when deciding to outsource is to rely completely on the experience of your competitors. 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 vendor 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 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.
Strategic flexibility. When it comes to decision-making and strategic goals, 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 company 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.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 an outsourcing company. To minimize potential damage to your company, 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 company providing outsourcing services, this type of activity is the main one. It 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 outsourcing 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: 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 vendor 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. 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 vendor 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 outsourcing 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, local outsourcing vendors 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. It’s popular among large companies around the world, including corporations with multi-million revenues, thanks to its advantages:

  • Cost-efficiency. Offshore 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.
  • 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 outsourcing companies ready to carry out any task.
  •  A wider range of services. Offshore outsourcing vendors can deliver on all sorts of tasks and provide any type of specialist you need for the project. The more sophisticated software you require, 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 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 of the outsourcing types 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 outsourcing companies 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.
  • Potential damage to public image. US-based companies often get criticized for offshoring, 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. 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. Opting for 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 of hiring a nearshore vendor is the cost. Nearshore companies charge more for their services compared to offshore outsourcing vendors. 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 partner, working with an offshore team would bring more benefits. 

Bottom line, to understand what type of outsourcing 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.

Software outsourcing models

The world of IT knows four 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 model 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 outsourcing company, 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 company. 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 company 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?

Globalization and IT innovations provide companies with opportunities to save resources and optimize business processes. But why do companies 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. You get to work with a cohesive and motivated team. For outsourcing companies, software development is a business, not a job. To stay ahead of the competition, they need to keep up with high standards of quality. It’s difficult to gain the same level of dedication from in-house employees.
  4. Cost-efficiency. Outsourcing certain functions will reduce operating costs and bump up profits. Opting for an independent IT software outsourcing company instead of your own development team, you translate fixed costs into variable ones and become more flexible, which means more competitive.
  5. Better management. Cranking up a large-scale project, you’ll have to deal with intense problem-solving. With so much pressure going on, your team will eventually start making mistakes, some of which will get past your QA engineers. Hiring a contractor, all you have to do is make sure they follow the terms of the agreement. Fewer tasks for the company to perform means less pressure on your management, giving you space for developing core business areas.
  6. Outsourcing will keep your business compact. The larger the staff, the more trouble you get. Apart from maintaining a complex corporate structure, the company has to manage workplace climate, task management, and other factors that bring down efficiency. With a separate team working on your project remotely, handling your own crew won’t be much of a hassle. Outsourcing might also be your go-to option if you plan to reorganize your business or optimize operating costs.
  7. Faster development. Time to market is no joke, so introducing your software to the consumer ASAP is in your best interest. Third-party IT firms easily keep up with tight deadlines thanks to years of experience and experienced team members, delivering results in the shortest terms.

The scale of outsourcing depends on the company’s needs and financial capabilities. Some businesses delegate two or three tasks, while others prefer to keep a close-knit staff of ten employees, having the bulk of work done by contractor firms. But the major reasons why companies outsource software development are the same – to boost the flexibility of the company’s business model and bring down operating costs. Considering the growing popularity of outsourcing, it does a pretty good job delivering on both promises.

How much does it cost to outsource software development?

Today, outsourcing opens endless possibilities for software development. You’re free to choose between local vendors, companies from neighboring countries, or even go overseas to find a perfect team that meets your standards. Regardless of your choice, you’ll see that every company is unique in its own way, which results in a wide range of pricing options.

Factors that define the outsourcing rates

One of the most common IT outsourcing contract hiccups is related to pricing. Both parties must clearly understand how, when, and where the prices are formed. To have a better idea of why the outsourcing company charges so much for its services, familiarize yourself with the factors that define software development rates.

  1. Geography. Location is one of the most important factors affecting the overall cost of software outsourcing. Vendors in countries with solid, thriving economies would charge more than companies from developing countries.
  2. Experience. Teams with a background of dozens of large-scale projects are usually ready for any challenge you give them. This, however, comes at a considerable cost. No one would argue that experienced development teams cost more than junior ones, but thanks to offshore outsourcing, you’ll have no problem finding a senior outsourcing vendor for the price you’d typically pay for an average team in the U.S. The final decision depends on your needs, which takes us to the next factor.
  3. Scope of work. Project specification is what usually balloons the cost of outsourcing, even more so if it includes the whole process of software development from A to Z: project management, design, development, quality assurance, and so on. And while the previous two factors are pretty self-explanatory when it comes to costs, it’s not always clear how much you’ll have to pay for the project, especially if the project is long-term.
  4. Timeframes. Speaking of time, lasting collaborations with development teams always result in a heftier price tag but come with extra benefits for your company. Outsourcing vendors are interested in long-term partnerships when working on sophisticated projects. Some vendors even provide discounts depending on the estimated project length. When hiring a team of 10 developers for two years, the rates you have to cover may be the same as those for a 5-person team hired for one year.
  5. Hypercompetition. This term characterizes the IT service purchaser market, where several factors work together to determine broad, value-based decision making. Hypercompetition drives the lowest value deals. And the problem is that clients often fall for those deals, putting their projects at risk.

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So you’ve decided it’s time to outsource. The next question is who you can trust with this important task, considering the risks. Make sure you approach the choice of an outsourcing vendor with all care. The process shouldn’t be too hard if you follow these several steps.

Define your project requirements and goals

Before choosing a contractor, you need to decide on the functions you’re going to outsource. A clear understanding of the tasks, required results, and deadlines will make collaboration as efficient as possible, reducing the risks in key processes and boosting your competitiveness in the long run.

Research for outsourcing vendors

There are thousands of IT companies out there. How to choose the right one? You can start by googling, just like you always do when looking for other products or services. But be prepared to pile through a hundred pages. As an alternative, you can also refer to websites like Clutch or Top Tech Biz. They provide all the info you need on the best IT companies on the market, such as the costs and customer reviews. Pick any area you’re interested in, such as the best web design creators in the U.S. or the top back-end software providers in Asia. There are also links to company websites where you’ll find plenty of information to help you choose.

Research the provider’s background

While you’re putting together a list of potential outsourcing partners that meet your requirements, you can start communicating with some of them. Rash decisions lead to poor results, so take your time to talk with managers, discuss the terms of possible cooperation, and also get more information for making an informed decision:

  1. Check their accounts on Dribbble, GitHub, and Facebook.
  2. Ask for a video call and get them to arrange a tour around the office for you.
  3. Chat with key people who will be involved in your project.
  4. If you have technical expertise, ask them to show you snippets of their code.

Evaluate capabilities and expertise

The next step is to figure out if the vendors you choose are up for the task. Here’s the fastest way to do this:

  1. Check their portfolio. Explore their projects. Is there something from your industry? If there are websites, visit a few and see if they look great. If there are mobile apps, it would be a good idea to test them, see what rating they have. And if you have an opportunity, feel free to chat with previous clients, especially if they’re from your niche. They have no interest in covering the truth about the vendor’s work.
  2. Check their technologies. If you’re not a developer yourself, it can be difficult to assess the technical potential of an outsourcing company. What you can figure out, though, is how extensive their expertise is. A decent software development outsourcing company keeps its tech up-to-date, constantly expands its field of expertise, and invests heavily in courses for employees.
  3. Get in touch with the team. Find out what certificates they have. For IT outsourcing, the company must provide a full range of services (this includes design, coding, testing, and all types of tasks). Otherwise, you may have to look for another outsourcing vendor to finish the job.
  4. A blog may also provide a lot of info about all the aspects behind a company, from workflows to English skills. Good vendors are always striving to bring something new to the table. So the more articles you’ll see on the blog, regardless of the topic, the better.

An outsourcing company is also positively characterized by its openness to dialogue and cooperation with colleagues. This means that they have something to offer to the public, and they’re not afraid of being researched.

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Determine standards of quality

Every customer is looking for the best outsourcing company on the market. You expect the job to be done professionally, quickly, and preferably without extra expenses. And would you hire a team that doesn’t know what ethics means? That’s unlikely. Do you know if the vendor can scale to meet your requirements? Make sure you do. Have you asked how flexible they are when it comes to unpredicted challenges? All these questions should be answered before you even consider putting a company on your list of potential outsourcing partners.

Make a shortlist of candidates

It’ll take a lot more than a day to find the right team for the job. It’s quite likely that you’ll have to give up free time for a few weeks unless you have a dedicated team doing the research. If not, be sure to consider the following factors when sorting through vendors:

  • Is the vendor’s pricing policy adequate?
  • Has the vendor shown steady growth over the years of work?
  • What’s the situation with their location, tax regulations, and time zone?

Discuss the project with the selected candidates

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