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Software Development Outsourcing- A Detailed Guide

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Software Outsourcing: Overview

Do you know the worldwide IT outsourcing market is predicted to reach $425.19 billion by 2026?

Yes, COVID-19 has transformed the whole contemporary world, and the software development domain is no exception. With digitalization and interconnected economies, businesses are discovering world-class expertise at an affordable price. Outsourcing lets and empowers startups, SMEs, enterprises, and product companies to get the most significant assets.

Here are some statistics showcasing the increasing demand for software development outsourcing services and eventually IT outsourcing companies.

The innovation and productivity from having access to a whole set of IT solutions have led to a notable increase in the outsourced IT market. It is predicted to reach USD 937.6 billion by 2027.

U.S IT Services Outsourcing Market Size, by Services, 2016-2017 (USD Billion)

software development outsourcing

The crisis produced by the pandemic has significantly hit IT outsourcing trends in 2021. A growing number of firms of various sizes plan to boost their use of IT outsourcing. Several businesses, those who have never outsourced software services, intend to do it in 2021.

Planning to increase their use of outsourcing or outsource for the first time in 2021

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Surprised by the figures? It is time to dig deeper and know every bit about IT outsourcing.

What is Software Outsourcing?

Software development outsourcing, also known as offshoring or nearshoring, is a business process whereby a company hires a third-party service provider to handle all or part of its information technology needs. In other words, it means you outsource your software development projects to experts in another country.

Traditionally, organizations used outsourcing services for tasks like data entry and customer support; however, more and more organizations are utilizing these services for critical IT work like custom programming. Sometimes, outsourced IT professionals will work offshore; sometimes, they’ll work with developers on-site. And sometimes, they’ll use their own office space but work closely with offshore developers.

In-house vs. Outsourcing- Key Difference

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What are 3 Software Development Outsourcing Models

Top 5 Advantages of Time and Material Model

No need to involve in the operational aspects like HR, Accounts, and Finance.

There will be no cap on the billable hours, leading to increased costs without any corresponding benefit; it also makes tracking hours worked for a project difficult and time-consuming for software development companies and consultants.

Hourly rates vary within a geographical location and between different locations – hence making an hourly rate applies only within a specific region/locale.

The variable nature of the rates makes it difficult for clients to make appropriate financial plans or budgets.

Another advantage will be our expertise in the T&M model. You get experienced and dedicated professionals for your project.

The Dedicated Development Team Model

In this model, the outsourced software developer/software programmer or software development company works on a dedicated team with the client and helps achieve business goals.

The outsourced software developer/software programmer or software development company provides technical consultation and advice to the client on various aspects of the project like design, development, etc.

Top 5 Advantages of Time and Material Model

The outsourced software development firm has in-depth knowledge about the client's business and processes.

The outsourced software development company helps achieve business goals faster by providing technical expertise through the cost-effective delivery model with in-depth knowledge about client business and processes.

The team works with the client in project management, consulting on different parts of the project like design, development, etc.

The workforce can add technical expertise to avoid making mistakes that can be expensive to fix.

Time and material billing in architecture include a pre-design meeting to determine a budget range.

Challenges of Software Outsourcing

The idea behind outsourcing is that you focus on your business while the third-party company focuses on its expertise to create or deliver an outcome. This can be possible only when both parties share complete trust and understanding of what has to be done when it should happen and how.

In other words, you need to have a clearly defined contract with the outsourcer. Here are a few challenges that you might come across while outsourcing your projects:

outsource software development

Trust is the heart of a successful relationship. Outsourcing may seem like a viable option, but companies must ensure that their outsourcing partner does not misuse or violate its access to company data and resources. A lack of trust may lead to time wastage as each party would be checking on the other. This will ultimately result in high costs for the company.

Loopholes in Contract:- Both the business and the outsourced company must have a copy of the same contract. This is because some manufacturers may try to bypass specific clauses if they feel so inclined. If this happens, you may not get what you had expected from them in return for your money.

Ambiguous Stakeholders :- In an outsourcing environment, roles and responsibilities can be ambiguous. The outsourced company may have a different business model from yours, which means that it is ignorant of the fact that your product specifications mean something else altogether to you. This could lead to a lack of a clear vision for both parties as to what they will produce or deliver.

Communication Issues :- While outsourcing, communication is of utmost importance. A lack of communication may create problems in the long run. For example, you will not be able to determine if your partner is on the right track or has made an error somewhere along the way. You may also fail to provide feedback to them on time, resulting in more delays and time wastage.

Code Quality Challenges :- It is vital to know the code quality, as this would affect your ability to attract customers. If you are outsourcing software products, both companies must come together and decide how they want their product to function. This will ensure that the end product meets your business's needs and performs efficiently for your customers.

Difference Between Onshore, Nearshore & Offshore Software Development

  • Onshore Outsourcing

    A company from the USA selects developers from the USA

  • Offshore Outsourcing

    A company from the Sweden recruits developers from the Vietnam

  • Nearshore Outsourcing

    A German company selects a team from poland

outsourced software development

There are three basic types of software development in geographies where the work is done; are Onshore, Nearshore & Offshore Software Development. These are sometimes also referred to as in-house software development, nearshoring, and offshoring, respectively. Business factors often drive the choice of development geography.

Offshore Software Development:- When Software is developed in a country distant from where it will be used, it is referred to as Offshore software development or sometimes called Global software development or international software project. If the company has a large Offshore software project or more than one Offshore software development project, it is also referred to as a Software house.

Nearshore Development:- Nearshore software development is outsourcing software projects to a nearby country for better communication and lower cost of Labor. Startup founders also use nearshoring to iterate quickly with frequent on-site visits without having too many managers or middlemen involved in the process.

Onshore Software Development:- Onshore software development is outsourcing software projects to a nearby country for better communication and lower cost of Labor. Startup founders also use onshoring to iterate quickly with frequent on-site visits without having too many managers or middlemen involved in the process.

What are the Advantages and Disadvantages of Outsourcing?

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Advantages of Software Outsourcing

Outsourcing has always been one of the most demanded services in recent years, as it offers a lot of advantages for those who choose to work with software outsourcing companies.

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Global talent at your doorstep:- One of the most significant benefits of working with outsourcing companies is that you can access a larger workforce. The outsourcing company will have people in its system who are local in their area, allowing your team to work efficiently with them in any project you work on.

70% decrease in costs:- Another benefit of choosing outsourcing companies for your work is that you can get the same quality of work done at 70% lower costs than what it would cost if you hired people locally. This means that not merely will it be cheaper, but you'll also have more money left in your pocket once everything is said and done.

Focus on core expertise:- Outsourcing allows you to focus on your core business aspect and not worry about the more minor things. This means that you can simply come up with an idea and then hand it off to the people who work within the outsourcing system, and they will handle all of the work involved with the project allowing you more time.

Faster time to market :- Outsourcing software development project allows you to get your project out there much faster than it would be if you did everything on your own. The way this works is simple; since outsourcing companies have a lot of people working within their system, they can quickly take care of any problems or concerns, allowing for your product to be launched on time.

Flexibility :- Flexibility is another benefit of outsourcing your project. You can choose the amount of time for your projects to be completed, which will allow you to meet all kinds of deadlines within your budget. This allows for a higher chance of success when producing your product or service.

Disadvantages of Software Outsourcing

Partial Loss of Control:- Partial Loss of Control is a considerably pervasive issue. Poor communication by the outsourcer and partial acceptance of deliverables by the client can cause parts of a system to be developed with different design approaches, resulting in an inconsistent user experience and less than perfect product performance.

Data Privacy Issues:- The prospect of sending out confidential information to parties not located in one’s own country might seem like a good idea because it offers cost savings. However, the risk here is that such data can be exposed or misused by others (e.g., competitors). This factor becomes particularly problematic when your outsourced partner company is in another country.

Time Zone Problems:- Working with a software development firm in another country implies working around time zones, language, and culture variations. One or a mixture of all can create miscommunication and disappointment on both sides.
By extension, collaboration problems can lead to poor performance and the necessity for rework.

Risk Sharing:- Offshore outsourcing is a risky proposition on many fronts. While cost savings are often the main selling point, risks related to quality, security, and compliance issues must also be addressed. While collaboration allows both parties to share information and benefit from learning experiences, a collaboration between teams with different cultural backgrounds can lead to miscommunication of critical terms and concepts.

How can Software Development Outsourcing Help CTOs or Product Managers or Business Owners?

Recruiting Tech Specialists for CTO The majority of the CTOs find it challenging to find the specialist for several reasons, the geographical limitation being one of the biggest.

How Does Outsourcing Help Here?
Outsourcing's economy and universal availability help the CTOs to overcome this challenge. Also, it saves their time for priority tasks. It becomes effortless for the CTO to find the best developers, testers, and managers worldwide by choosing from a large pool of dedicated hires.

Ensuring Tech Innovation:- A CTO not only needs to ensure technology leadership but also needs to create an environment where people are constantly innovating. In conditions of intense competition, it is tough for CTOs to retain their technology leadership.

How Does Outsourcing Help Here?-
The outsourcing model can be beneficial in this context, as it helps create an environment where people are constantly innovating with new ideas and new products. This becomes possible because geographical boundaries do not bind the employees. Instead, they are bound by working hours.

Meeting Project Deadlines:- The projects need to be done within the timeframe, which becomes very difficult in fierce competition. There are chances that if a project deadline is missed, then an opportunity for earning good revenue might be missed.

How Does Outsourcing Help Here?
Outsourcing provides the CTOs with a crucial advantage, and it allows creating a virtual R&D department where the work of different functional teams of the companies can be outsourced. This way, deadlines of other projects can be met, and technology leadership can be retained.

Complex Projects :- Complex projects are challenging for CTOs to handle. Tight deadlines, stringent quality standards, and changes in project requirements make it very difficult for CTOs to retain their technology leadership.

How Does Outsourcing Help Here?
Outsourcing can be highly beneficial in these situations as well, as it provides a flexible and scalable technology platform to increase the efficiency of R&D teams.

Challenges for Product Managers

Competing with Startups based on Fiercely Competitive Technologies
In today's age, product managers need to not only compete with well-established companies but also need to compete with the startups having a highly aggressive approach.

How Does Outsourcing Help Here?
Outsourcing provides a host of benefits to product managers. It gives an excellent opportunity for assessing the talent available across the world and select those who have relevant skills, experience, and expertise in the latest technology trends.

Handling Increased Workload- The product managers are required to handle multiple projects these days. This results in increased workload and makes it difficult for the product managers to focus on each project properly. Also, finding time to hire new talent becomes very difficult.

How Does Outsourcing Help Here?
Outsourcing provides a host of benefits to product managers. It helps them reduce the cost of hiring new talent, it gives flexible work hours and provides access to a large pool of highly-skilled workforce.

Assessing Product Quality:- The product managers must thoroughly assess the product quality to ensure that they can compete with other leading companies in its domain. This becomes very difficult in cases where the product managers are required to handle multiple projects simultaneously.

How Does Outsourcing Help Here?
The outsourcing model can provide a host of benefits to product managers. It provides them with access to a dedicated team of experts who can assess the quality of their products. Also, the software development process in outsourced teams is very rapid.

Is Outsourcing Software Development for Startups, Product Companies, or Enterprises a Good Idea?

Yes, outsourcing software development is a good idea due to a lot of reasons, including-

1) You get access to world-class talent.

With outsourcing software development, you can easily find talented master-level IT personnel willing to deliver high-quality results in record time. Outsourced software development services allow you to hire more developers than your internal resources can provide, thus eliminating "hiring bottleneck" issues for expanding companies.

2) You get access to timely results at lower costs.

Outsourcing software development is not just about cutting costs. Yes, it is true that most of the time, you can get results at a fraction of the cost of what you would have to spend on an in-house team.
But more importantly, with software outsourcing services, you will be able to initiate and complete your new project on schedule – without delays – no matter how big or complex it is.

3) You get access to the best people from the best companies.

Some outsourcing software development companies have been in business for 10 years, which means they have a great pool of developers and engineers. Take advantage of this because when working with outsourcing partners, you get to actually see their work history and read feedback from other customers.

4) You get access to better results in a shorter amount of time.

Outsourcing software development services allow you to shorten your product development cycle, launch new features faster, adapt to market changes more quickly. Besides, it provides an advantage over your competitors and all of this at a lower cost than what you would have paid for an in-house team.

Software Development Outsourcing in India

Yes, outsourcing software development is a good idea due to a lot of reasons, including-

Pros

With India being a fast-growing economy, there is an abundance of engineers and technical professionals. Software development engineer India offers cultural diversity, which enables companies to hire from a large talent pool.

A time zone that is in line with many countries - enabling better communication and collaboration with their clients who are based across multiple time zones.

Several top universities in India produce large numbers of students every year, thus creating continuous availability of talent for software development.

The average monthly salary for a software developer is between US$500 and US$1,000, and this makes it one of the most cost-effective software development locations in the world.

The Indian workforce possesses the right mix of technical skills necessary to support clients' projects. Many professionals have experience working with leading American companies on successful software outsourcing engagements for over a decade.

Cons

The language barrier may seem to be high compared to English-speaking nations such as the UK & the USA.

Many Indians have been migrating to various developed nations, including Canada and the UK, for better job opportunities. This has led to software developers being a rare commodity in India. Also, outsourcing from India is often frowned upon in Indian media.

Routing through a company that is not in the same time zone as your project may lead to significant communication gaps, reducing productivity.

While salaries are low compared to developed nations, they are still high compared to other developing countries such as the Philippines, China, etc.

Software Development Outsourcing in the Philippines

Pros

The Philippines is an excellent place for outsourcing, thanks to its advanced infrastructure and educated workforce.

English proficiency in the workforce is excellent. This provides an edge when working with English speaking clients and projects where communication is critical (such as telemarketing)

The Philippine government offers various incentives that can help reduce development costs, such as tax breaks and access to low-cost labor.

Cons

The main drawback of working with an offshore company is the language barrier. There can be a misinterpretation of what you say, especially if the person on the other end is rigorous for time and has multiple tasks at hand. However, this can be compensated through effective communication.

The quality of work done in the Philippines is often considered inferior to that of other more developed nations such as the US and UK. Not only are some Filipino developers new to outsourcing work, but some have not had the opportunity to receive higher education due to financial constraints.

Some Filipinos are hesitant towards working with foreign firms due to the American military presence in their country. This has led some Filipinos to favor local companies over foreign ones.

How to Choose an IT Outsourcing Company?

software outsourcing services
Step 1: Analyzing the Business Requirements

When it comes to software development, most companies are not aware of precisely what they want. They have some vague ideas in their minds about what needs to be done but don't know how to turn those ideas into working prototypes. Thus, before selecting an IT outsourcing company, a business organization must determine what they need and how they want it to be done.

Step 2: Research the Market and Filter Vendors

Once the organization determines what they need, it's time to do some online research and conduct a detailed analysis of their budget. This analysis should include both existing software and those that other companies and businesses are currently using. The goal here is to determine how much similar projects have cost and what kind of service they have received.

Step 3: Use Agile Methodologies in the Organization's Development Process

As soon as the IT outsourcing company is chosen, it's time to ensure that the customer organization uses agile methodologies in its development process. This might sound funny, but many companies have tried to outsource software development built by the traditional waterfall model internally. To achieve the result, an organization needs to choose a software development methodology best suited for its internal workflow.

Step 4: Request for Proposals (RFP)

When it comes to IT outsourcing companies, many promise the moon and the stars but do a shoddy job. For this not to happen, a business organization needs to request proposals from various companies before choosing one which suits their needs best. Once they have received enough proposals, they should analyze them and compare the cost of development, level of customization required for that particular project, the time needed to complete it, etc.

Step 5: Analyze and Evaluate Responses

After the proposals are received from various IT outsourcing companies, it's time to analyze and evaluate them. This does not mean that you should choose the company which has proposed the highest cost for their product development process. Instead, you need to ensure that they find out if the company that provides high-cost IT outsourcing services can provide quality work and timely delivery.

Step 6: Schedule Demos and Interviews

Now, it is time to schedule demos and interviews with vendors who have been shortlisted. During this process, they should also ensure that they provide them access to their existing code/product development process where necessary. This would help them not only make a better decision but also understand their current development process better.

Step 7: Negotiate the Contract

As soon as the negotiations are complete and both parties have agreed upon all terms and conditions, it's time to sign the contract. This is important because many organizations fail to see flaws in their contract when they finally receive them after signing them. Businesses should be keen enough to read every clause in the agreement before signing it to avoid regretting anything later.

Some Good Countries For Software Development Outsourcing

Yes, outsourcing software development is a good idea due to a lot of reasons, including-

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There are some good countries for software development outsourcing like India, Ukraine & the Philippines. All these countries offer cheap labor that attracts outsourcing companies to hire local developers. There is a significant advantage of having outsourced developers over in-house resources; they are incredibly affordable.

How Can I Ensure Success with Software Development Outsourcing?

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First, Define the goals clearly.
Before you can work towards success, you must define success for yourself. How much revenue do you expect to earn from your outsourced project? What are levels of quality reasonable for your budget? What is market share achievable given the resources at hand?

Conduct feasibility studies and market research
You should study the target market thoroughly—who's buying, what they're looking for, what drives purchase decisions, how other products are selling, and so forth. Probe your clients to discover their specific needs and expectations concerning timeframes and budgets.

Choose a provider in a similar time zone (look for satellite office options)
You should look for a provider that has a close-by office or location. This will both reduce communication costs and provide you with a way to meet in person if necessary.

Check-in regularly for progress updates and feedback
Protect yourself by asking your provider for regular updates and feedback on the status of your project. Make it a point to have a detailed discussion early in the development cycle regarding delivery schedules, milestones, development processes, and procedures, as well as ways to monitor progress.

Choose a provider focused on iterative development (Agile and DevOps)
By choosing a provider focused on iterative development, you will be able to incorporate changes more quickly. An iterative approach lets the provider identify issues early in the development cycle before turning into show-stoppers down the road.

Choose a provider who can meet the compliance requirements without delay, providing confidence their processes are already secure.
A provider's processes must be secure, with a proven ability to meet or exceed compliance standards. Their source code should be protected, and their development team should be well versed in the latest methodologies for best practices.

Questions to Ask Before Outsourcing Software Development Company

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These are the questions you need to ask and this their significance

What does the process of software development your company follows?
If the company has experienced employees who can develop products, they will have their own process, which they follow to build new applications. This ensures quality and time management. They should be willing to explain it in detail before you make any decision about hiring them.

Have you ever operated on a project similar to mine?
The company should have at least a few applications similar to yours in terms of infrastructure and business model. If they have, it is a good indicator of their ability to develop your product too.

What technologies do you know well?
Your outsourced software development partner should know their area of expertise well, and they should avoid unnecessary delays by using specific technologies for your project.

How many software developers do you have? Are they experienced?
If a software development company has been in business for a while, it should have enough manpower to take on your project. The number of developers and their experience levels can help you gauge the overall capacity of the firm.

How much time would you require to scale up the workforce allotted to my project?
A company with the talent but without the resources to complete your project on time is useless. A good software development company should be able to hire more people within a given timeframe if necessary.

Which tools do you use for collaboration and communication?
Collaboration helps all the parties involved in creating an application work on it smoothly. A good outsourced software development company should have all the tools for easy communication and collaboration.

What are the payment terms? How do you handle scope changes during development?
A reliable software development partner will charge for their services depending on your project's requirements. They should be able to adjust with change requests without prolonging the delivery of your final product.

Can you give me some references from your past clients?
The company should be willing to provide you the names of their past clients. These people have already worked with them and can give an insight into what kind of services they are likely to deliver to you.

What would be the cost of your software development services?
A good software development partner will be transparent about their pricing and services. They should ensure your project's success and not just maximize profitability.

How do you determine the time of this project?
A company experienced in development will give you a precise estimate of the time and resources needed for your project.

What Traits Must Every Good IT Outsourcing Company Have?

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Experience! Experience! Experience!
A good IT outsourcing company will have more than a decade of experience. They need to be able to get it right from the start and every time. Inexperienced companies can bring you a lower quality product which might even cost you more in the end. Be sure the outsourcing company will not give up when things get tough or if your requirements begin to change.

Transparency is Important!
Transparency lets you understand what's happening inside the development process. More importantly, it gives you access to information about the team members working on your project. Transparency builds trust, which increases motivation and encourages creativity. A good outsourcing company will let you know if they're struggling with something or if there's a problem. They want the relationship to be a success as much as you do.

Communication & Responsiveness!
Good communication is essential for many reasons: it helps ensure everyone understands the requirements and expectations, projects stay on track, and that questions are answered quickly. It provides a sense of order and progress. An outsourcing company that can't be reached, or takes a long time to answer, is not worth hiring.
A good outsourcing company should have a strong presence in the industry. You don't want to hire someone who doesn't have any references from recognized companies and professionals to evaluate their trustworthiness and viability in the workplace.

Testimonials and References!
A good outsourcing company has positive references. You can ask for them (and read them) before you hire the company to see if they're happy with their work and professionalism.
Every outsourcing company needs to have experience in your industry. If a company has worked only in different industries, they're not specialized in yours, which increases the chances of unsatisfactory results. Be sure the outsourcing company knows your business, market, and audience inside out.

Technical Competency
No outsourcing company should compromise quality for time or the other way around. The end product must be accurate and finished on time. Again, if you're not sure how well they work, ask for references from clients in your business niche to know what kind of results are expected at every level.
An experienced outsourcing company should be able to give you a cost breakdown from the start. But, as we know, it's not just about money, and sometimes client and company goals can contradict each other. Be sure to find out: if they're willing/able to do customizations at no extra charge or for a fee that you agree upon.

Passionate and Skilled Team
A good IT outsourcing company will have a passionate and skilled team. They need to get excited about your project and feel that it's their own, even if they're not directly involved in the development process, which makes them work harder to achieve great results.

Excellent Customer Service
Good customer service is always essential to any business. When you outsource your work, it becomes even more critical because there's a greater chance that a misunderstanding will end up in a bad relationship and poor results. It's why great companies pay attention to the quality of their customer service.

Choosing Outsourcing Strategy Based on Scenarios

Scenario #1: When you require particular tech experts.
Suppose you're a business that relies on a custom logistics tracking program for your day-to-day operations, and it would be too costly to develop this from scratch in-house. In that case, the cost of hiring coders and buying all of the required hardware might be prohibitively expensive. In this case, outsourcing your software development might be a viable solution to avoid such prohibitive costs.

Scenario #2: When you require a whole development team.
If you're a business starting with a completely blank slate and need to hire software developers and designers, outsourcing can help you avoid hiring all of these resources full time.

Scenario #3: When you want to hand over a complete development project
If your goals are for your IT department to focus on managing the business while letting someone else handle software development, then outsourcing can help you achieve this.

Scenario #4: When you wish to scale current software development
If you've already got a software development team and just need to hire additional help for coding, then outsourcing can be the perfect method to add developers without managing them internally.

Scenario #5: When you require a technology CTO/partner/tech co-founder
If you're a business owner who doesn't have the tech expertise to take your project from the idea phase to product launch, but you do have the financial capital, then outsourcing can help you find software development partners without having to hire them full-time. You could also use this method with limited or low funds if your goal is for a tech partner to act as the head of your development team.

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