The momentum in the outsourcing market is ever-accelerating due to digitization and the increased demand for various types of software. New business models, such as SaaS and Open-Source are also highlighting growth opportunities for software-based businesses.
Moreover, the economic benefits of software outsourcing make it mutually beneficial for both software vendors and outsourcing companies.
All these aforementioned reasons have made software outsourcing a lucrative business strategy for all kinds of business across the world. As per stats, the CAGR rate of the IT software market is 4.58% for the period 2019-2024.
So what exactly is software outsourcing and why are companies more inclined towards it? In this guide, we will learn everything about software outsourcing that you as a software vendor or IT company should know.
What is Software Development Outsourcing?
Software or software development outsourcing refers to a business strategy in which a software vendor company assigns a project to an external third-party organization, which is the software outsourcing company. It is then this company who develops the software on the vendor’s behalf.
The software outsourcing workflow is simple to understand. The software vendor accepts a project from the customer and hires a software outsourcing firm for the development. While the outsourcing company provides an invoice to the vendor, the vendor prepares a different invoice for the customer, which is inclusive of the software vendor’s profit margin.
Revenue streams available in software outsourcing are:
- Development cost margin
- Paid customer support
- Third-party integrations
Pros of Software Outsourcing
Software vendor companies and IT companies can take benefit of the following pros by outsourcing their projects to a third-party organization:
1. Low Development Cost
Software outsourcing in itself is a B2B transaction, which can be compared to traditional wholesale purchase models. The outsourcing company develops the software for a vendor at a very cheap price, and the vendor sells that software to the customer at a higher price. As outsourcing a project does not require the vendor to hire a team of developers or spend resources on utilities like water, electricity and computers, software development outsourcing emerges as an overall economic option. It is very profitable for startups and small budget IT companies with limited budgets.
2. Access to Global Talent
Development skills vary from developer to developer and it is highly-possible for an IT company to be unable to find the right talent for a project in its local province. Two common solutions that arise to this problem are to hire a freelancer or outsource the project to an offshore development company.
The benefits of outsourcing the project outweigh those of hiring a freelancer with formal code of conduct, better coordination and higher chances of completing the project within the deadline being the most impressive. Moreover, an outsourcing software development company has significant experience in handling software development projects and is more professional in its approach.
3. Service Expansion
Software vendors who have a reliable outsourcing partner can mention extra services under their service catalogue. Although they themselves may not have the capabilities to provide the mentioned service, they can always assign the project to their outsourcing partner. This way, they can expand its service catalogue and rival competitors.
4. Faster Development
Another reason to outsource software development is short turnaround times. With the help of cross-functional teams and experienced developers, outsourcing firms are able to complete software development projects before the deadline. Faster development leaves scope for thorough testing and major adjustments so that the vendor can provide a fully-satisfying end-product to its clients.
5. Reduced Workload
IT companies have various responsibilities and software outsourcing can assist in reducing the workload. For example, a software vendor may have a full-fledged development team, but it can lack the bandwidth to accept more projects to provide customer support in time. Similarly, the emergency maintenance contracts of an IT firm can also force it to reopen previously closed projects. By outsourcing, the company can free some bandwidth and let the outsourcing deal with maintenance and emergency support.
6. Eliminates the Hiring Process
Hiring process can be tedious, especially while finding highly-experienced developers, team leads or managers. Moreover, hiring also involves expenses and scheduling multiple interviews. In various scenarios, several candidates are rejected or have to serve a notice period in their previous company. Outsourcing is exclusive of all such trouble so that you can begin the client’s product as immediately as possible.
Cons of Software Outsourcing
1. Regional Differences
Regional differences, such as cultural traditions, timeline differences and language differences make outsourcing ineffective. An offshore outsourcing company may have a different holiday calendar or intra-office activities that may slow down the work. Similarly, English accents and language variations also lead to poor coordination. So while working with an software outsourcing company, a vendor has to pre-consider the regional differences.
There are high chances of miscommunication or ineffective communication between the software vendor and outsourcing company. Moreover, proper communication channels are not always maintained between the two companies. Thus there can be a delay in exchanging important information and details, such as development problems and new requirements or demands from either side. The different timelines and cultural differences further aggravate the problem.
3. Privacy Risk
The risk of information getting leaked always remains in outsourcing. The non-disclosure agreement (NDA) can be violated by the outsourcing company or an individual employee can replicate the source code. Either way, the software vendor company has to face damages. Despite this non-disclosure agreements are the best bet against privacy risks as they allow you to initiate judicial proceedings against the outsourcing company.
4. Presence of Fraudulent Companies
Fraudulent outsourcing companies that overstate their experience or make false promises for securing projects are present in abundance on hiring websites like UpWork and Freelancer. They often have false reviews and ratings or work without proper documentation and contracts. This leads to several fraudulent cases where the outsourcing companies fail to deliver quality or meet deadlines. Several such companies further outsource the work to freelancers or way cheaper companies. The best way to protect yourself from such companies is to review their websites and social proofings.
Most Common Software Outsourcing Models
Software development outsourcing strategies are of various types with each following different model. These models change how the software outsourcing company will be communicating with the vendor and the approach to execute the tasks in hand. Similarly, payment calculation methods vary in these models and the same outsourcing model cannot be fit for all software vendor companies.
Thus, you can refer to the following models to decide which one is more suitable for your requirements:
1. Staff Augmentation
The staff augmentation model involves the maximum cooperation between the outsourcing company and the software vendor. In this model, the outsourcing company only provides the designers and developers for the project but their management and coordination is handled by the software vendor itself.
This means that while the outsourcing team will be working on your client’s project, you are responsible for allocating tasks amongst the development team members, collect reports, scrutinize the work, begin the various software development stages and handle the entire management process. Payment in this model can be collected via both per project and per hour basis.
Reasons to Opt for Staff Augmentation Outsourcing:
- Most economic
- The vendor remains an active member of the development team
- The vendor enjoys maximum control over the team
2. Project-Based Outsourcing
Project-based outsourcing involves assigning various projects to a software outsourcing company. In this model, the payment is calculated on a per-project basis. Meaning, complex projects with advanced requirements will cost more than simple software development projects. The outsourcing team handles the management, task allocation and software development stages itself.
Reasons to Opt for Project-Based Outsourcing:
- When the project requires more experienced or skillful developers
- Assists in service expansion
- Reduces workload
3. Dedicated Team Outsourcing
Dedicated team outsourcing is the most comprehensive outsourcing model that involves complete management and development of multiple projects by the outsourcing company. However, in contrast to project-based outsourcing, this model includes hours-based payment calculation and the hourly rate can vary from developer to developer depending on experience and skills.
Reasons to Opt for Dedicated-Team Outsourcing:
- If you need a long-term outsourcing team
- Need to outsource multiple projects
- Require minimum participation in the development process
- Require more flexible pricing
Best Software Outsourcing Countries
The following is the criteria for the selection of countries:
- Diversification of talent and software development skills
- Historical record of successful software outsourcing operations
- Hourly rates of developers and overall cost effectiveness
Key Tips For Efficient Software Development Outsourcing
Resolving the common outsourcing queries, such as tracking the performance of the outsourcing team and enabling smooth and effective communication are imperative. There are various other queries that you may encounter while outsourcing your software development work. However, with proper coordination and strategic management, they can be resolved easily.
Some tips we would like to share for streaming software outsourcing solutions are:
1. Pre-define communication channels
By this, we not only mean the selection of communication channels but also the dedicated personals for interaction from both yours and the outsourcing company’s team. Usually, software outsourcing firms provide a dedicated project manager or customer-relationship manager to enable smooth interaction, but if that’s not the case then you can ask to provide one.
Moreover, you should also fix timings for daily reports and select a screen sharing app before the beginning of a project.
2. Track KPIs
Key Performance Indicators (KPIs) are important metrics to measure the performance of your outsourcing team. Some KPIs that will be useful for you are segmented deadlines, weekly work hours, click rates on tracking software, etc. However, ensure to keep achievable KPIs, such as 30-40 hours work per week for a single team member.
3. Receive Detailed Daily Reports
Ensure that the daily reports you receive are well-detailed and provide a clear overview of the work done by a team member. With the help of such reports, you can ensure better performance and also find the cause of any delays in the project. Furthermore, these reports will also assist you in evaluating individual performance, allocating tasks and ameliorating the entire workflow.
4. Organize Weekly Meetings
Meetings with all important persons of the outsourcing team will provide you a thorough update of your project and being a two-way communication channel, are more reliable than daily reports. They also maintain pressure on the outsourcing team, foster business relations and encourage the outsourcing team to bring quality work to the table. As by arranging meetings, you will be showing proactive efforts, the outsourcing company will be more dedicated to your project.
5. Maintain Transparency with Demands and Expectations
Several software vendors hesitate to speak up their minds with large and reputed software outsourcing companies. As a result, the end-product fails to meet the expectations despite no shortcomings from the outsourcing partner. For this reason, it is important to establish clear and consistent communication with the outsourcing company and state your requirements, performance reviews and expectations very clearly.
How to Choose the Right Software Outsourcing Partner
The following information will assist you in choosing the right software outsourcing partner for your company:
1. Select the Budget and Country
Although the budget selection is important, it should be neither too high or low to give you optimum profit margins and a quality end-product for client satisfaction. After deciding the budget, you can select a country from the aforementioned table under the section ‘Best Software Outsourcing Countries’.
2. Shortlist Software Development Companies
With some research on business listing websites, you will find a list of various software outsourcing companies present in your selected country. From that list, you can preview some websites and shortlist some software development companies. Use attributes like experience, reviews and previous clients to shortlist the best companies.
3. View Project Portfolios
Amongst your selected companies, go through their project portfolios to find out if the company has even worked on a similar project like yours. You can compare the work of two or more software development companies if a similar project is present in their portfolio.
4. Attend Demos
Some companies also offer software demos and dedicated team demos. It is recommended to ask a software outsourcing company for a demo where you can clear your any query or doubt very easily.
5. Review Support
The last thing that will help in company selection is the available customer and technical support. Go for the company that provides 24/7 customer support via multiple channels like chat, email and video call. Furthermore, some software development companies charge extra for post-deployment technical support while some offer free technical support for a limited period.
Considering all the pros and cons of software outsourcing, it is a very profitable business strategy for various startups and IT companies. As the need for digitalization and number of online buyers increases, businesses all over the world would prefer to switch from brick-and-mortar stores to eCommerce stores. To provide them a highly-functional software along with the satisfaction they seek, outsourcing is a very lucrative solution for businesses of all sizes.