How IT outsourcing can be useful for your business
Apr 28, 2020
When you decide to build a software product, you sooner or later have to decide between getting an in-house team or outsourcing product development offshore. Each of these strategies comes with its pros and cons.
In this article, we'll look further into IT outsourcing and figure out if you need to consider it.
A brief overview of the current IT outsourcing state
E-commerce, FinTech, healthcare, telecommunications, logistics, InsureTech will gain traction due to the digitization of services and demand of the public.
E-commerce continues growing at light speed. Oberloo's research states that global e-commerce sales will soar from $2.8 trillion in 2018 to $4.8 trillion in 2021. Such growth creates the demand for outsourcing services to eliminate the bottlenecks in internal operations.
Other industries like FinTech, healthcare, and InsureTech are undergoing (and will continue to do so) digital transformation. The transformation includes the rise of telemedicine, digital banking, IoT, and smart cities to improve the accessibility of services and eliminate a middleman.
Along with that, businesses will focus on cybersecurity and protection of user data to comply with regulations like GDPR and HIPAA.
The top destinations for IT outsourcing remain in India, China, and Indonesia. However, the landscape is changing towards a quality-driven approach.
Outsourcing companies from Eastern Europe come into play. They offer better quality at the same reasonable price and, on top of that, they share the same mentality, operate from similar time zones, and can boast top talents and a high level of business expertise. Countries like Poland, Russia, Ukraine, Romania, and Bulgaria are the leading outsourcers in Eastern Europe.
If you're interested in finding out the benefits of outsourcing for your software product, keep on reading!
Fixed price, time and material, or dedicated team — which one is better?
There are three most popular pricing models in IT outsourcing.
Fixed price model
A fixed price model is an agreement that guarantees a fixed budget for the completed project. Even in the case of developing extra features, design changes, or product tweaks, the final price remains the same. This pricing model allows businesses to plan the budget in advance and not worry about extra costs.
Choose a fixed price model when:
- You've got a strictly defined project scope that isn't likely to overrun timeframes and budget
- You're on a tight budget building an MVP
- You've got a small project with a limited project scope
Time and material model
A time and material model is the total opposite of the fixed price model. In this model, clients are billed for an actual scope of work or hours done. This is a popular type of collaboration as it's beneficial for both sides.
For instance, outsourcing partners protect themselves from extra unpaid work, while clients can adjust and tweak project scope to keep up with a timeframe and budget.
A time and material model is a good choice if:
- You've got a long-term project with quickly changing requirements
- You're working in an ever-changing environment and can't predict the final project's scope
- You need the flexibility to modify the project's scope
- You're working in a joint team of in-house and outsourcing specialists
A dedicated team model
In terms of this model, clients hire a specialist or the whole team of specialists for a certain period of time. Clients choose this type of cooperation for mature, complex projects lacking expertise. External specialists complement the existing team with their unique knowledge and experience.
Go for a dedicated team model when:
- You're developing a complex and stable project where you can predict the scope
- You clearly understand the time interval you need a dedicated team for
- You require unique expertise that for some reason can't be gained in your area
Now that we figured out the most popular outsourcing pricing models, let's see when it's best to move your software development offshore and what the disadvantages of outsourcing are.
In-house or an outsourced development team: who wins the battle
Here's a small sneak peek: there isn't a right or wrong answer. We won't advocate for any approach. Instead, we'll name the advantages and disadvantages of outsourcing and in-house teams, so you can choose which one is better for you.
In-house team: pros and cons
Traditional, enterprise companies like Amazon and Salesforce prefer in-house teams. This move allows them to gather a team of like-minded people, reinforce corporate culture, and cultivate skills and expertise within a team.
Here are the additional pros of keeping an in-house team:
- Close collaboration with the team. The in-house team means no barriers to communication. It's convenient to discuss urgent questions, have casual watercooler talks, and boost team morale.
- Developed corporate culture. This benefit is vital for startups that want to develop their culture and ethics.
- Cost-efficiency of corporate training. You're able to create a centralized knowledge-sharing base that can be scaled on the future employees.
- Allocated expertise. With an in-house team, you're able to allocate your expertise and knowledge within a team and don't share your development secrets with anyone else outside.
On the other side, an in-house team comes with several cons:
- High maintenance cost. An in-house team comes with inevitable expenses like payroll, medical insurance, vacation, sick leaves, and other benefits. Moreover, office facilities, technical equipment, and other supplies will extend the monthly bill.
- Human resources management. Hiring, firing, and team management are on your side while the outsourced team requires little or no management.
- Limitations in a skillset. While with outsourced teams it's easy to find any skillset on demand, your in-house team may require extra training and time to acquire necessary skills.
Outsourced team: pros and cons
Why do companies outsource their software development? There are several significant benefits of outsourcing that companies can't resist:
- Cost efficiency. It's no secret that the hourly rate of outsourced teams may be significantly lower than in your country. But a cheaper price doesn't mean worse quality – you just don't pay the extra maintenance price that comes with an in-house team.
- Necessary expertise at hand. In addition to experience and knowledge of external specialists, you can also get an outside perspective on your product.
- No need to manage human resources. IT outsourcing means no recruitment and HR branding hassle. Legal issues are also easier to handle since you negotiate on a particular commitment from day one.
- Ability to focus on critical tasks. Programming outsourcing allows you to focus on critical tasks like marketing and business development.
Finally, here are a few disadvantages of outsourcing we should mention:
- No direct control.
- Security issues. When working with outsourcing partners, there's a risk of confidential data leakage. In order not to compromise your company's security, check external vendors' reputation and reviews about them.
- Culture fit. If you're going to set up a long-term collaboration, you may face the problem of mentality and culture fit. Do your research before cooperation, so you won't feel disappointed after.
Have you already liked the benefits of outsourcing? Now it's time to briefly review the price efficiency of in-house and outsourced software development!
- Eastern Europe. Outsourcing vendors from this area are famous for their strong programming skills, Western culture mindset, and proximity to Western European countries. The average rate of Eastern European companies ranges from $25 to $99 in general.
- Latin America. Programmers from Latin America have a number of assets including excellent English and proximity to Northern America. Expect to spend from $25 to $150 on software development with countries like Mexico and Brazil.
- Asia. Asia is attractive for offshore clients because of its attractive prices that start from $10 per hour. On the other side, cultural differences, low programming and management skills, and low barrier entry to the IT sphere tarnish Asian outsourcers' reputation.
Now, when being asked "Why do companies outsource software development?" you'll know the answer.
Benefits of outsourcing are obvious:
- Ability to build a product quickly
- Ability to get the necessary expertise
- Handling routine tasks while freeing up your team for more challenging and vital tasks
- Acceleration of business processes
Companies like Google, Uber, Slack, and Basecamp can't be wrong!
If you want to outsource your software development, we'll be happy to help. Feel free to drop us a line and we'll get in touch with you shortly.