Why and How to Offshore Software Development
Looking to speed up your product launch? Need technical expertise to add new features to your product? Or perhaps you’re considering hiring an independent QA control team to assess the quality of your market-ready product? If any of this sounds like you, then one of the effective solutions is to explore offshore outsourcing.
Offshore software development has gained significant popularity in recent years, and the numbers prove this. Over the past three decades, the IT outsourcing market has grown from $9 billion registered in 1989 to $460.10 billion in 2023, which is not a small feat.
Here are a few more numbers to consider:
- Approximately 54% of all companies around the globe use offshore teams to engage with their customers.
- 66% of US companies outsource at least one business process overseas.
- 92% of the top 2000 public companies use IT outsourcing for daily business activities.
All this highlights the growing demand for offshore IT support teams. However, offshore outsourcing is far from being a simple concept. Like any other form of business arrangement, it comes with its own set of benefits and risks that you should know before embarking on the journey.
Each decision you make involves time and money, and how you allocate these resources can significantly impact your overall business processes. Check this article to make an informed decision about the best course of action for your business case.
What Does Offshore Development Mean?
While you may well know what outsourcing is, it’s quite common for people to confuse terms like “offshore”, “onshore”, and “nearshore,” and this confusion can be costly. Let’s take a closer look at these IT outsourcing models:
- Onshore. This is a model of outsourcing in which one company partners with another located in the same region or country.
- Nearshore. In this model, companies partner with vendors from neighboring countries located within a short time difference (a maximum of 3 hours).
- Offshore. This model specifically refers to the practice of delegating software-related tasks or projects to contractors located in faraway countries or regions with a time difference of at least 4 hours.
As you can see, the main difference between offshore outsourcing and other types of IT outsourcing is the travel distance. In the case of offshore, this distance is quite substantial, and, in most cases, it will mean that your working hours will overlap by only 1-2 hours a day. It also comes with substantial savings but more on that later.
Works for Small Startups and Large Companies
Contrary to popular belief, offshoring is no longer viewed as a cheap source of labor, but rather as an opportunity to tap into the knowledge and creativity of global teams and spur innovation. So, both small tech startups and large enterprises can benefit from exporting development work.
Let’s take Google, for example. Its outsourcing journey started in 2011 when the company opened about 1,000 AdWords positions to fill contact centers. In 2016, they outsourced several more IT-related tasks to an American tech partner with offices in India. Two years later, the total number of Google employees working abroad exceeded the number of in-house team members.
In 2020, Google acquired CloudSimple, one of the largest providers of cloud-based services headquartered in Ukraine. This move not only expanded Google’s tech capabilities but also allowed it to solidify its leading position in the cloud-based niche and expand its global reach.
Obviously, Google isn’t the only company that successfully uses offshore outsourcing. Many other companies, including IBM, Microsoft, and Facebook, are outsourcing software development to foreign countries as well, highlighting the growing interest in tech talent from overseas.
Are You in a Position to Outsource Software Development?
It worked for Google. It worked for Facebook and IBM. Does it mean that it will work for you? To answer it honestly, let’s take a look at the most common scenarios where companies that outsource software development teams from overseas benefit the most. This will help you understand if an outsourcing software development company is the right hero for your business story.
Startups at an Early Stage
If you’ve just started and lack tech talent or expertise to execute your project, partnering with an offshore software development team can be the way to go. Many companies, including big names like Skype and Slack, took this route, and, as evidenced by their achievements, that route was instrumental in their success.
- Cutting overhead costs. By offshoring, companies can avoid a lot of the cost overheads required to build a team, such as buying equipment, renting a physical office, and investing time and money in onboarding new staff.
- Jumpstart. Instead of spending time forming a team, startups can get right down to business. Most foreign vendors are working on a few ongoing projects and have enough employees to take on a project within less than two weeks.
- Low building risks. Collaborating with overseas teams gives companies confidence in the high-quality outcome. Most offshore software development services provide a diverse tech expertise and strict quality assurance to make sure the final product works well without any issues.
SMBs That Don’t Have Technical Expertise
For small and medium-sized businesses (SMBs) lacking in-house technical expertise, offshore outsourcing comes as a beacon of opportunity and empowerment. Many SMBs face the challenge of finding tech talent. Not to mention finding niche software developers skilled in SAP, Sitecore, or cutting-edge technologies like AI, ML, and Blockchain.
Engaging offshore software developers presents an apt solution for SMBs. By extending their gaze far beyond local boundaries, businesses can uncover IT talent to fill critical technical roles, enabling them to nail even complex development procedures.
- Domain expertise. Offshoring allows companies to access a wide pool of tech talent with the needed domain expertise that is difficult to find domestically.
- Tap into previous experience. Offshore teams of developers come equipped with a range of project histories and problem-solving skills. This experience can significantly enhance the quality and efficiency of development processes.
- Focus on business core functionalities. For businesses not directly involved in IT, partnering with an offshore software development company helps avoid the hassle of diving into the complexities of the IT realm themselves. Instead, they can rely on a skilled software development team to build the product from scratch while they can focus on core business competencies.
Businesses That Want to Get Their Product Fast to Market
Speed is often the determining factor that can make or break a project’s success. However, it can be quite challenging to achieve. For large enterprises, product delivery often becomes too long due to non-transparent management and bureaucracy, while small companies cannot get to market too quickly due to a lack of budget or understanding which element of the MVP will be the most successful. That’s exactly where offshore outsourcing comes in, effectively addressing these constraints and offering an efficient route to accelerate product launches.
- Product deployment in a short time. Drawing outside help can help meet the go-to-market deadlines for companies where the demand for products increases and decreases seasonally. This can include educational platforms that need to be launched before the start of the school year, retail businesses gearing up for holiday sales, and many more.
- Flexibility. Another advantage of offshoring is that it allows companies to scale up and down their teams, avoiding the issue of overstaffing after peak periods cease. This can be particularly valuable for short-term or one-time projects where expanding an in-house team may not be practical or cost-effective.
Have an idea? We have the software development expertise to make it happen.
When Offshore Software Development Outsourcing May Not Be the Best Option
While the benefits of offshore software development are numerous, it may be inappropriate in certain circumstances. For example, for small startups with just a few employees and working on a tight budget, setting up the outsourcing process can be an intolerable burden. In this case, it’d be more reasonable to get tasks-based support from freelancers.
Aside from this, there can be time-sensitive projects requiring close collaboration — something that offshore developers may struggle to accommodate due to time zone differences. Therefore, it’s important to carefully evaluate project requirements and offshore development challenges (which we will discuss later in the article) before deciding to outsource.
What Services Can Be Outsourced?
Many large IT enterprises run core processes in-house and outsource some parts of IT tasks offshore, such as additional feature development, testing, and support. However, this doesn’t mean they can’t outsource the full development cycle. Everything from prototyping to an MVP and UI/UX design to product development can be delegated to an offshore development company, depending on the specific needs of a project.
There are a lot of overseas companies that specialize exclusively in creating MVPs and are ready to bring their invaluable expertise to the team. By approaching the prototyping stage from every possible perspective, they can help turn any ambitious business idea into a functional MVP and save you from wasting precious time developing a product no one wants or will use.
When to outsource:
- There’s no CTO with technical expertise to control MVP development on the team;
- The company has no experience creating digital solutions;
- It’s vital to speed up MVP development;
- A specific niche expertise is necessary to build a complex product.
Mobile App Development
Mobile application outsourcing is very popular among both IT and non-IT-related companies due to the lack of overhead costs and the ability to quickly get a top-notch application. It’s also sought after by organizations that already have a website and are looking for domain expertise to tap into the mobile space.
When to outsource:
- The company doesn’t have the tech stack to develop a mobile application;
- Speed is crucial in launching a mobile app;
- Cost-effectiveness is a priority;
- It’s easier to hire an external agency of offshore mobile developers to execute the entire project rather than to distract the internal team from their core tasks.
Many offshore software development projects are outsourced when companies need to mitigate from one technology to another and it’s difficult to find the required technology stack domestically. By bringing in specialists from the outside, companies can not only expand the team’s expertise but also speed up product launches.
When to outsource:
- Project timelines require faster execution;
- The company needs domain expertise that is not available locally;
- To create scalable solutions that can adapt to changing market demands.
UI/UX design is constantly evolving, and offshore designers who have long histories of projects across various industries recognize and pick up these changes very quickly. What’s more, they have experience creating inclusive digital solutions — a trend that’s gaining momentum and can’t be ignored by companies who want to thrive in the business world.
When to outsource:
- There’s no UX designer on the team.
- The project is at the start, and it’s necessary to align its UX design with the entire logic of a digital solution.
- There’s a need to bring in a specialist well versed in best UI/UX practices to create a highly accessible website or application design.
Offshore quality control teams are often hired to provide independent testing and fresh look at the product. In some cases, when the deadlines are tight, large companies may hire both an in-house and external team to create a seamless workflow, thereby greatly improving productivity.
When to outsource:
- A project is one-time, and there’s no point in hiring QA engineers to work internally.
- A project has a short timeframe, requiring more people on board to get the testing done.
- A company is looking for independent testing vendors to get unbiased feedback about its product.
Post-development Maintenance Support
The journey doesn’t end with website or application development. It extends to post-launch maintenance and support, which are vital to preventing glitches and ensuring robust functionality, security, and performance of the product.
When to outsource:
- There’s no internal maintenance team, and forming one doesn’t fit into the budget;
- When businesses are not directly related to IT but have a digital solution that requires maintenance and updates.
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Which Offshore Development Business Model to Choose
If you have decided that offshoring is the best option for you, let’s choose the business model that best suits your needs. The beauty of outsourcing is its flexibility.
In IT offshoring, there are three primary software development models:
- Fixed cost model,
- Dedicated development team/resources model,
- Time and material model.
Besides these three, some companies, including ours, distinguish the fourth model — mixed/hybrid model (also known as fixed cost plus). Let’s talk about each of them in detail.
Fixed Cost Model
Fixed cost is the safest software development model for small companies and SMBs. As the name suggests, this model implies fixed pricing, which means you pay a set price, no matter how long it takes to develop a project or what resources are used. It’s like buying a meal at a fixed price regardless of the ingredients or time taken to cook it.
- Transparent cost structure. The project budget is set upfront, fostering transparency without any concealed fees lurking.
- Accurate timeline. Coupled with budgeting, this model affords a precise delivery timeline.
- Simplified management. With predetermined costs and deadlines, software development project management becomes notably streamlined.
- Easy progress monitoring. Detailed initial planning facilitates efficient progress tracking and management.
- Limited flexibility. Introducing additional features during development may require changes to the agreement or the creation of a new one.
- Exhaustive planning. Meticulous project planning is essential to ensure that no critical details are overlooked, which can lead to delays in product deployment.
- Risk of misinterpretation. If the project requirements aren’t clear enough, it’s possible that the vendor and developers might misunderstand each other.
Time and Material Model
In the time and material (T&M) model, you pay for the actual time spent and materials used. Put simply, it’s like paying for groceries based on the weight and type of items you buy. If you buy more, or if it takes longer, you pay more.
- A high level of flexibility. This model is associated with an adaptable methodology in which the development process is carried out in sprints. This way, whether you need to add new features or remove some, any changes can be done quickly.
- High-quality outcomes. Due to the sprint-based approach of the TM model, rigorous testing is conducted at every stage, ensuring that the final product maintains superior quality and is free from bugs.
- Immediate start. While you would still need to spend some time planning your project, the planning doesn’t take nearly as long as with the fixed-cost model, allowing you to get started almost immediately.
- Minimized risks. Even though you have a high level of control over the development, the responsibility for the outcome lies with the providers. So, if you’re not satisfied with the results, you can change the composition of the team at any time to finish the project.
- Undefined release. Project revisions and alterations may shift delivery times.
- Undetermined budget. Project budget estimation can be challenging due to potential changes.
- Unpredictability. The services market is rapidly changing, and it is quite possible that the features you wanted to add yesterday may no longer be needed tomorrow. In this case, it’s important to let your team know about the changes so you don’t pay for the features that you don’t need.
Dedicated Development Team/Resources Model
A dedicated development team is a business model where companies pay for the time a software team spends on a project. It’s most often used for the development of high-volume products and includes the salary of all IT specialists involved in the project at different stages of the development cycle.
- High level of control. You determine the composition of the team yourself. By personally interviewing candidates based on agency-suggested CVs and conducting evaluations, you can decide who will perform a certain task.
- Reduced administrative burden. While working with a dedicated team feels almost like working with an in-house software team, you don’t have the burden of management responsibilities like onboarding, sick leaves, vacations, and so on.
- Enhanced project clarity. With an exclusively dedicated team, the risk of misinterpreting project requirements is minimized. Their singular focus on your project ensures a clearer understanding of your needs, leading to better outcomes.
- Intensive management responsibilities. Beyond candidate evaluations, you assume full management responsibilities like budgeting, team motivation, and project completion will be your sole responsibility, which could be overwhelming for SMBs.
- Higher costs. This model often incurs higher expenses compared to other models, rendering it less suitable for startups.
Mixed/Hybrid Model (Fixed Cost +)
The mixed or hybrid model combines the elements of the fixed cost and time and material models. It offers a versatile approach, allowing for both predefined budgets for certain aspects of the project and the flexibility to accommodate changes as needed. This model is particularly beneficial when a project has distinct phases, some of which require a fixed scope while others may need adaptability.
- Cost-effectiveness. By opting for the fixed cost + model, you can decide which development aspects are essential for your project and which can be excluded without compromising outcomes. For example, if you don’t need a business analysis but require quality assurance, you can allocate a fixed budget for the latter while omitting the former.
- Any kind of involvement. The mixed model grants you the flexibility to engage in a project to the extent that suits you best. For example, if you’re limited on time, you can opt to review the project only at key milestones. Alternatively, if you want comprehensive control over development, you can arrange daily calls and meetings with your team.
- Unpredictable budget. The adjustable nature of the mixed pricing model makes it quite difficult to determine the project budget. The greater the gaps in requirements, the more fluctuation in the final price.
- Delayed launch. Unlike quick initiation, often seen in the time and material model, the hybrid model can involve a slower start. Before the product can move into the development stage, both the software outsourcing company and the business owner must coordinate all formalities, including project budget, development phases, and deadlines, which can lead to potential delays.
All in all, choosing the right pricing model is just as important as choosing the technologies and service providers, so be sure to weigh all the pros and cons of each model, as well as the scale of your project, before making a decision.
The Cost of Offshore Software Development
Partnering with an offshore development vendor generally results in financial gains for companies, but it’s not possible to place an exact figure because it may vary dramatically based on a number of factors. Below, we outline the key factors that contribute to cost fluctuations and average hourly rates based on the country of the offshore development team.
- Website or app complexity. If you’re aiming to develop a simple software solution with basic functionality and limited interactive features, the cost will be at a minimum. Conversely, a more complex solution with advanced features, intricate design, and interactive elements will require more resources and thus incur higher costs.
- Platform compatibility. A software product that is only available on one platform will be cheaper than a product that is compatible with multiple platforms.
- UI/UX design. The price may go up or down depending on the design requirements. Web application design with complex graphics and 3D rendering naturally costs more, while simpler solutions come at a much more affordable price.
- Back-end processing. The complexity of back-end processing required for your software solution is a significant cost factor. If your project involves complex data processing, integrations with external services, or advanced algorithms, the development effort and associated costs will be higher.
- Project scope. Offshore services aren’t limited to just building software products. If you also request QA assurance and post-launch maintenance support, the expenses for these additional services will add up to the overall cost.
- Development team location. The geographical location of your offshore development team has a direct impact on costs. For instance, hiring a team from Eastern Europe or Asia is usually more cost-effective compared to teams from North America or Western Europe.
- Tech stack required. If your project requires specialized skills or knowledge of cutting-edge technologies, you may need to hire software engineers with higher expertise, which will drive up the cost.
- Outsourcing model. As previously discussed, the chosen business model, whether fixed cost, dedicated team, time and management, or mixed, impacts cost structure.
By considering these factors, along with your project requirements and budget constraints, you can roughly estimate the anticipated cost of offshore IT development.
Average Rates of Offshore Developers by Region
Now, let’s compare the rates of developers from the most popular offshoring locations. Of course, these rates are average and may vary depending on the skill level of developers. However, they will give you an idea of what to expect in terms of the costs involved in running an offshore team.
Eastern-European countries have become one of the favorite hubs for IT offshoring, and for a good reason. This region hits the spot of diverse tech talent, affordable prices, and high-quality outcomes. Moreover, the vast majority of developers from Eastern Europe are proficient in English, so language barriers will be the least of your concerns.
Let’s compare average hourly rates in this region:
- Poland — $25-$45
- Hungary — $25-$45
- Romania — $20-$40
- Ukraine — $20-$40
- Bulgaria — $20-$40
Another attractive offshore area is Asia. With over 4 million tech talent ready to take on any type of project, Asian countries are renowned for their massive IT workforce and economical pricing. It’s not a secret that the average salary of a senior developer in India is $20,000 per year, which is five times less than in the USA.
Here are the rates of Asian software companies:
- India — $15-$30
- China — $15-$25
- Philippines — $15-$30
- Singapore — $30-$60
- Vietnam — $10-$25
South America, also known as Latin America, is another famous supplier of tech talent abroad, with Argentina, Colombia, Mexico, and Chile leading the way. Due to the strong government support, these areas have experienced significant growth in their tech industries, creating a favorable environment for software offshore. As an added benefit, because the time in these countries overlap more with the USA, it’s easier to collaborate with teams.
The hourly rates of offshore development teams in this region vary in the following range:
- Brazil — $15-$30
- Argentina — $20-$40
- Mexico — $20-$40
How to Hire the Best Offshore Developers?
There are thousands of offshore companies around the world, and they all claim to be experts. But how do you know if they actually mean business? Let’s dive into the aspects that you should pay particular attention to when choosing a team to work with in order to select the right offshore company.
Carefully evaluate your chosen supplier’s track record by reviewing their portfolio, past projects, and customer testimonials. Look through their profiles on professional websites like LinkedIn or Dribble. It can also be a good idea to search for the provider’s mentions on social media, which can shed light on their reputation and engagement with the wider industry community.
Alternatively, you can go to platforms such as Clutch, GoodFirms, etc. Typically, these sites list companies with a well-established history of successful ventures, along with their achievements and rankings. If you can find a vendor that you want to partner with on this list, it’s a solid indicator of its competence and reliability.
While experience is important, proficiency in the relevant technologies is a cornerstone of offshore development. So, don’t hesitate to talk to the project manager of the team to find out if they have hands-on experience in the technologies essential for your project. Aside from that, make sure to conduct skill set assessments. It’s important to ensure that the team you work with is up-to-date with the latest programming languages, frameworks, and tools, mitigating the risk of falling short in product delivery.
Discuss the project budget with the team. Make sure to communicate all needs from the outset to minimize any unexpected costs during the course of the project. In general, building an application with overseas software engineers from Eastern Europe costs from $50,000 to $250,000, depending on the complexity of the app. If you hear that the prices are lower, this may very well be an indicator of lower quality, so don’t rush to sign contracts until you check their reviews and testimonials.
Assess the level of commitment the team demonstrates towards their projects. The easiest way to do this is to look at their past assignments and determine if they aligned with the project goals. You can also speak with their previous clients. Talking to a real person can provide invaluable insights into the team’s dedication, including how they approach challenges and what they do when unforeseen roadblocks arise.
Selecting a flexible team that can handle unexpected shifts in the project scope or goals is crucial for successful offshore collaboration. With this in mind, ask your team if they have had a history of accommodating evolving project requirements and, if so, how they adjusted their strategies and plans to meet project goals. A team that can seamlessly adapt to changing project requirements can be a valuable asset.
Communication is another cornerstone of effective offshore collaboration. It is important not only that you do not have language barriers but that the team itself has well-established and transparent communication, allowing them to quickly respond to any requests and track the progress of the project.
Once you’ve found a team to develop your product, define the business model for collaboration, sift through the CVs of IT specialists to select those with the skills to carry out the project tasks and sign the contract.
Challenges of Offshore Software Development
Now it’s time to dwell on the challenges of offshore software development, so you can get a grasp of what hurdles may come your way and handle them more effectively.
Time Zone Gaps
When working with a third-party contractor from abroad, time differences are inevitable. Moreover, in some cases, it can even be 9 hours, making it quite challenging to align your business hours with the working day of the team.
How to mitigate
To avoid delays in product delivery, it’s a good practice to create a shared schedule where you and your team can be available for at least half an hour or so to discuss project details. Alternatively, you can organize pre-scheduled calls once or a few times a week to catch up on all the things that are happening with the project.
Another common challenge faced while working with overseas contractors is the potential misinterpretation of project requirements. One reason for this can be language barriers. If none of your team is fluent