Outsourcing Software Development: Practical Guide [Key Regions, Rates, Models]
The definition of software outsourcing is when an organization hires a third-party vendor (either a software development firm or an individual programmer) to perform software development tasks to save money, streamline business processes, and access tech talent.
And you know what else? Google, Boeing, and even Ashton Kutcher - all of them outsource.
The benefits of outsourcing software development are colossal. 80% of retailers rely on software development outsourcing, the market revenue of which will reach $103.9 billion by 2021, according to Statista.
Aside from outsourcing software development, offshore IT vendors can cover services like quality assurance, project management, business analysis, UX/UI design, etc. You can outsource all varieties of works to one software development company.
Google, Ashton Kutcher, and Boeing all outsource. Only some of them succeed in doing so.
The benefits of outsourcing software development are colossal. Nonetheless, hiring a contractor can be a task from hell, as the Boeing story indicates and is described further in the article. However, 80% of retailers still rely on software development outsourcing, the gross market of which hit $64B in 2018, according to Statista.com.
So, why do some companies fail when others glow with regard to how to outsource successfully?
Find answers to these and other questions on software development outsourcing in our ultimate guide:
- state of outsourcing development - What's outsourcing? Who outsources and why?
- risks & rewards of software development outsourcing
- detailed list of software outsourcing services
- software development outsourcing models + comparison table
- top 5 destinations for outsourcing software development
- how to start with software development outsourcing
Let’s get straight to the point!
Software Outsourcing: General Practice Worldwide
Yesterday, outsourcing software development was the domain of SMBs and start-ups. Today, Google, Skype, and Alibaba welcome contractors. Top-rated apps like Google Assistant and YouTube emerged in offshore labs.
The reasons for outsourcing are varied. Intel, Orange, and Reuters see no point in hiring an in-house team permanently because of possible cost savings.
OnContracting reports that tech companies may save an average of $100,000 per year, per job thanks to outsourcing software development.
Interesting fact: The benefits of hiring software outsourcing firms have united software outsourcing and Hollywood. Celebrities like Britney Spears and 50 Cent delegate their social media projects and websites to contractors.
Let’s look at the main reasons why companies outsource software development:
Cost-efficiency - businesses can save 30% on operating costs by hiring a software outsourcing company. (Deloitte Global Outsourcing Survey 2018)
GitHub outsourced the development of its flagship feature - Gist, which allowed it to become an extremely competitive solution.
- Innovation & optimization - research by Deloitte indicates that software engineer outsourcing attracts companies thanks to the promised innovations. In fact, among companies looking to outsource software development, 35% are doing so to access innovation. Innovations helped to improve the quality of provided services for 58% of the companies surveyed.
Software development outsourcing at the beginning of Alibaba’s history allowed the online marketplace to compete with giants like Amazon and eBay.
- Better business focus - Deloitte states that 57% of companies sign a software outsourcing contract to get a better focus on core business operations.
Software outsourcing examples to support this point are numerous, with Slack being one of the most prominent. In the beginning, its web and app design and development were outsourced, which allowed the founders to find early investors.
- Service quality - 31% of businesses state that software outsourcing helps them enhance the quality of their services.
Basecamp outsourced development for just this reason. Software development outsourcing allowed the company to provide improved services.
Choosing what and how to delegate to an external team is where you should start. However, you may fail even in this first step. Proper preparation is the solution, and it starts with learning the risks and rewards of software outsourcing.
The below list demonstrates the main challenges associated with software development outsourcing.
Read on for an advisory on how to mitigate these challenges:
- Security-related risks
Possible security issues stop many companies from pursuing software outsourcing. Instead of being afraid of possible problems, take a more proactive approach and choose a software outsourcing company carefully. Professionals in this field ensure that your applications will work within local laws and meet the highest security standards. GitLab, Google Drive, Slack, and Jira will help you have secure communication and project management.
- Data confidentiality
This is another concern of software outsourcing. Signing an NDA (Non-Disclosure Agreement) and a contract will help you protect your intellectual rights, digital product idea, and all the information that you share with your vendor.
- Cultural and language aspects
As a part of the pre-screening process, you will get in touch with different software outsourcing companies. It might be a good idea to talk to them via phone and video call in order to assess their level of English comprehension and expertise.
- Communication issues
Today, communication with a remote team is no problem. There are a lot of solutions that you can use, including Slack for messaging and calls, Google Meet, Skype, and other solutions.
Before you start looking for a company that provides software outsourcing services, it might be a good idea to understand how to outsource software development with minimum risks and maximum gains.
Further on, we give practical advice, so make sure to read all the way to the end.
Want to get information about software outsourcing from the experts?
Contact our team for a free consultation and a detailed explanation of the software development process in the outsourcing model. MLSDev team has been working in this field since 2009 and has implemented dozens of projects for clients from the USA, Europe, the GSS region, and more.
Advantages of Outsourcing Software Development
There are a few reasons why software development outsourcing has become a very popular practice among companies of all sizes.
Companies looking to outsource software development usually abide by the goals below:
1. Cost savings
Outsourcing software development is famous for saving costs.
Related example: Lower prices, tax rates, and savings on in-house labors laws are so attractive that even Google couldn’t resist. Over the last few years, the tech giant has hired 102,000 contractors, which is more than 50% of its workforce.
MLSDev Advantage: MLSDev is situated in Eastern Europe, which offers beneficial prices for software outsourcing. By outsourcing development to this area, you can save up to 50% of the development costs.
2. Access to a larger talent pool
Attracting top talent is easier once you go global, where you can find the specific and unique technical expertise. As well, you don't get stuck keeping unengaged talent as the project ends or end up scaling resources in the event of active growth.
Related Example: Alibaba made the decision to outsource software development because of local laws and internet restrictions in China. Thanks to software outsourcing, the company got a chance to work with the top talent and become a strong competitor in the most popular retail marketplaces.
MLSDev Advantage: Our company has access to a wide talent pool. We can easily scale our clients’ teams along with project growth, thus supporting them even during rapid business expansion.
3. Time savings
With wider resources for software outsourcing, you are in a position to better manage deadlines. It's not only about bigger teams - better task distribution matters as well.
If you become overwhelmed with tasks, you may even outsource project management.
Related Example: Google relies heavily on software outsourcing for new projects that need to be delivered to the market in record time. By speeding up the development process, the tech giant is able to quickly test a digital project or feature idea to either move on or stop with its further development.
MLSDev Advantages: In the digital world, everything can change in a matter of days. That’s why we strive to deliver the first results of software development outsourcing as soon as possible. We apply agile development methodologies, which allow us to quickly release new features and updates.
4. Streamlining the business process
Outsourcing software development streamlines business processes, which leaves space for concentration on core activities. Additionally, you can enjoy better risk management and accommodation of peak loads.
Related Example: Basecamp is a great example, as the company, at the start of their rapid growth, began noticing that they had problems with client relationships, organization, and the company image they were broadcasting to the world.
Internal processes at Basecamp were a huge mess, so they didn’t have time for any revision. Thus, they made the decision to opt for software development outsourcing to free up time that they could use to work on their core business processes.
MLSDev Advantage: We provide clients with project management services so that they don’t need to supervise every step taken by developers. We assess and mitigate risks; thus ensuring a smooth development process through all project steps.
As technology grows, keeping up to date in security and compliance matters is vital. Are you sure your internal team is ready to protect you?
Security is the domain that requires the highest expertise and most up-to-date skills. A well-trained contractor team can provide these exact things.
Related Example: Phenix Energy Group, an oil pipeline operator and construction company decided to outsource security related tasks because of the need to quickly grow their server infrastructure from zero to 60 in a matter of months. Since the company didn’t have the needed resources to ensure security, they opted for software outsourcing as the only means that would allow them to protect internal operations.
MLSDev Advantage: We work with clients from all over the world and help build secure products that comply with local regulations.
6. Higher scalability
With the growth of your project, you might find yourself needing to quickly scale your project. With an in-house team, it might take months to find the right professionals. If you work with a company providing software outsourcing services, there won’t be any problems scaling your team.
Related Example: Microsoft, a truly giant company with thousands of employees, has a lot of remote contractors. This way, the company can easily grow their team and add new resources when needed.
MLSDev Advantage: Thanks to our access to a huge pool of talent, we can scale development teams along with the growth of our clients’ projects.
When it comes to software development outsourcing, you can get enhanced project scalability. Many companies work within one of three software outsourcing frameworks: fixed price, time and material, and the dedicated team.
If you want to successfully outsource software development and get the highest flexibility, choose DDT or T&M model, as such development teams usually work with development methodologies like Scrum and Kanban. You will be able to make changes to your project even in the middle of the development process.
Related Example: Klout, a ranking tool for social media, was developed by an outsourced development team. As a result, the company managed to release a working prototype in record time, all while working on other business tasks in a distraction-free environment.
MLSDev Advantage: We work with different business models, with the most popular being DDT and T&M. We adjust the processes specifically for our clients needs, thus providing a comfortable environment for each of our partners.
How to Avoid the Risks of Software Development Outsourcing
Ironically, the advantages and disadvantages of outsourcing software development are often two sides of the same coin. Better flexibility is a pro, but it takes time to be flexible. Expertise is a benefit, but what about hidden costs?
First, you move your teams out-, then in-house. General Motors first out-, and then in-sourced IT development. Examples of this are growing. We don’t know what your story will be, but we know where you could slip up.
Two of the biggest software outsourcing disadvantages are financial losses and security breaches. You might be able to bypass these risks if you stay away from the following:
1. Choosing a team based on price comparison
John Griffin, from Forbes, warns against comparing candidates based on price estimates. Picking the cheapest may result in unique challenges, she says.
Because of price gaps, choosing an expensive team can also be a weak move. Without elementary literacy in software outsourсing prices, you are blind.
Solution: start with learning the prices of software development outsourcing companies around the world. Shortlist the companies that you find viable and move on to another step where you get in touch with their clients and ask about their experience with these companies.
Looking for a software outsourcing company?
Check our guide Vendor Selection Criteria [It’s Not Only the Cost & Rates That Matter] explaining the main criteria for choosing the best technical partner. Learn why price is not the number 1 factor and which are the main criteria today.
2. Overrating expertise
Sometimes, outsourcing software development is about taking on challenges. Sometimes, it’s about another sphere of knowledge, not a sky-high form of art.
Techies like Ashton Kutcher know this. The actor outsourced his tweets in order to start working as a contractor himself. He was a product designer for Lenovo in 2014.
Yet, non-techies tend to outsource simple tasks to overqualified teams, leading them to face unnecessary expenditures.
Solution: when beginning to outsourcing software development projects, make references. Ask a question in a community or contact Ashton Kutcher. If Ashton is silent, contact us for a free consultation and receive expert advice on how to outsource your project properly.
3. Sharing access to sensitive data
Trusting the treasures of your intellect to a software outsourcing company is a risk. You can't imagine what companies may do to mitigate this risk!
Apple offers contractors office seats for their time during software development outsourcing projects. Joe Fernandez from Klout moved in with his IT team. He even slept on the developer's couch before he finished the prototype of his product.
Solution: keep the tasks you would only trust your team with away from strangers and stick to an NDA. When choosing a vendor, look into how the processes are organized inside the company, how the vendor addresses security issues, and what regulations ensure that your sensitive information won’t land in the wrong hands.
4. Incorrect expectations
Here's the story: you hire a software outsourcing company to do some low-skill job, but they mess up even a simple task. Nightmare, isn’t it?
This is very likely to happen if you leave your contractors to try to "guess" your needs. This situation would only mirror your low business skills. It also proves the lack of responsibility, in the end, of a software outsourcing contract.
Solution: it is necessary to prepare specification documentation. A good software outsourcing company usually offers this service as well. Check the Bloomberg BNA guide for instructions. To minimize the risks, you can start your cooperation with a potential technical partner by entrusting them with small tasks to take a look at how the IT vendor understands your needs, check the team’s proactivity to add value to your project, how they stick to deadlines, and so on.
5. Communication issues
Communication is key in building a successful digital product.
Thus, you need to make sure that after you sign an agreement, you don’t have problems communicating with your team. To ensure that no problems will arise, start with finding out how the SDLC (Software Development Lifecycle) is organized, who manages the process, and how you can share your feedback with the vendor.
Professional outsourcing software development companies ensure the smoothness and flexibility of all communication processes. Usually, your main points of contact are the project manager and your team. Still, you need to make sure that you have another point of contact inside the company, but outside of your team, so that if you have any problems with a project manager or the team, you can communicate them to C-level contacts.
Solution: set up a communication procedure with the project manager. Before you sign an agreement, find out who controls that communication between your team and the vendor’s team, how the processes are organized, which communication tools are used, etc.
Software Outsourcing Services
These days, there are a lot of jobs that you can outsource. The best software outsourcing companies provide a full range of services, from business analysis to development and quality assurance.
The process of software development can be divided into two big phases - the Discovery and Development stages. Each stage is dedicated to specific jobs that relate to your project.
Let’s investigate all the IT services that you can outsource.
1. Business analysis
Business analysis can be approached in different ways. This is an optional software outsourcing service, as you can take care of it yourself or let an experienced software outsourcing company do the work.
Usually, when you outsource this part of software development, the business analysis includes market research and competitor analysis. The main goal of this stage is to create a project's functional specification and product backlog that list the necessary functionality in a logical way to complete its objectives.
The responsibilities of a business analyst usually include:
- Market and competition research
- Product market fit testing
- Gathering and preparing business requirements
- Creation of project specifications
2. Software architecture planning
Software architecture planning involves a Software Architect who creates a blueprint for the project in development. The Software Architect lays out the tasks necessary to be executed based on the gathered project requirements and business goals. The professional selects the best technology stacks, frameworks, integrations, and APIs to speed up the development process and ensure the DRY (Don’t Repeat Yourself) approach to development.
3. UX/UI design
UX and UI design involves the creation of an app’s interface, layout, and navigation based on software specifications identified during previous stages. The main goal is to create a user-friendly and attractive software interface that will include all the needed features.
4. Software development
Depending on the project requirements and business needs, there are a number of development services that you can outsource:
- Mobile app development (iOS or Android)
- Web development
- Front-end and back-end development
During development, the actual coding of your solution is performed. A software development outsourcing company can either create the first version of your digital project with the purpose of testing your idea or create a fully-featured solution.
5. Quality assurance and testing
This process is aimed at ensuring the high quality of the new digital product, its high performance, and proper functioning. Depending on the project type, the software development outsourcing company might need to conduct a number of tests, including UAT (user acceptance testing, automation testing, load testing, stress testing, etc.
6. Project management
It is possible to outsource project management to guide and organize project management during all stages of the app or web development.
7. Ongoing support and maintenance
The development process doesn’t stop with the release of a digital solution to the market. It is always a place for further improvements and possible fixes; thus, you need to outsource support and maintenance to ensure that your solution always works without hiccups.
Our team has a lot of experience successfully developing projects from just an idea and supporting them throughout the years of their operation. We’ve been providing ongoing software development and support services to goPuff since 2015. MLSDev has witnessed how the project started from a mere idea and expanded into one of the leading on-demand delivery systems in the world.
Models of Software Development Outsourcing
At this point, you know the pros and cons of outsourcing software development, and which services you can outsource. Now, your next step is to learn about software development outsourcing models. We recommend focusing on the three most frequently used:
- The fixed price model
The fixed price model assumes that you agree on the final result and price at the start. This model needs a lot of preparation and paperwork. You and an outsourcing software development company agree on requirements and further changes are not allowed.
However, if they are introduced, it means additional costs and potentially prolonged deadlines. A lot of preparation and paperwork precedes development, and when it starts, you need to have all the specifications, requirements, and final goals defined.
- The time and material model
You calculate the cost of the time and material project in hours per outsourcing developers. The process involves setting final goals and assigning milestones. As for changes, you may make them as needed. When a customer accepts a piece of a job, the next milestone and project part is set.
- The dedicated team
Outsourcing software development to a dedicated team is a flexible and convenient way to go about outsourcing. The dedicated team may augment your internal IT department or even become your remote IT department. You enjoy full visibility with regard to progress, not to mention communication - which is much better.
The following table compares the above listed models on all the steps of development.
|Time and material||Changes gradually||Estimated by team||Estimated by project requirements||Planned, but flexible||Flexible||Middle||Set per milestone|
|Dedicated team||Changes gradually||Estimated by team||Estimated in progress||Flexible||Assigned in progress||High||Hourly rate|
Top Regions for Outsourcing Software Development
Have you heard of the sweet couples of the software outsourcing world? Due to geographical proximity, some countries have built rock solid partnerships with wealthier neighbors and show no signs of splitting. China is an ally of Japan. Morocco provides outsourcing software development to France. As well, Mexico has deep ties with the US.
These neighbors enjoy cultural proximity, adjoining time zones, and cost benefits. However, sometimes experts in need miss out on the local market. In this case, you must search for them around the globe.
For decades, India has been the leading information technology outsourcing destination. That has since changed. Now, India outsources outsourcing. They focus on Indonesia, Vietnam, and even the United States. A. Giridharadas reports that Indian tech giants send tasks to US college graduates. The American code newbies welcome this chance for valuable experience.
The best countries to outsource software development are in Eastern Europe, Asia, and South America.
Let’s investigate each region in greater detail.
Eastern Europe for Software Outsourcing
Why outsource IT to Eastern Europe? Although the price factor is important, the main pro is the level of experience and expertise. Eastern European countries can boast good education and a long history of outsourcing software development.
Cost: The average price of a software developer in Eastern Europe ranges between $30-50 per hour.
Conditions: Ukraine, Czech Republic, Poland, Hungary, Romania, and Belarus are on the rise. The number of software outsourcing companies here is growing. These countries are able to curb the demand of the global IT market. Moreover, the region is in the perfect time zone to provide round-the-clock collaboration.
Expertise and skill level: The Eastern European countries have a reliable system of technical education, making it an attractive outsourcing software development location. A plethora of specialized experts ready to take over the tasks available is not a surprise.
Region’s best option. Ukraine
Due to taxation benefits, this country has the best price-to-quality ratio. The average price of a developer here is $40 per hour. Additionally, it hit the ranks of the 2017 Global Services Location Index. Ukraine ranks highly on the list of the "Top 20 IT Outsourcing Services Destinations.” Intel USA, Microsoft, Nokia, and Reuters are happy to outsource their IT development here.
Here is what different resources say about software outsourcing to Ukraine:
- 1st place Science and Technology (Good Country)
- 47th place among the most innovative countries in the world (Global Innovation Index, 2019)
- Among the most favorable software development outsourcing locations in the world (Kearney, 2019)
- 11th place among 50 countries with the best software developers (HackerRank)
Asia & Middle East to Outsource Software Development
The dragons of software development outsourcing in the region are India, China, Vietnam, Malaysia, the Philippines, and Indonesia.
Cost: Asia is the cheapest region in the world. The highest price required in the region is in China ($50-$100/hour) and the average cost is $18-$40/hour.
Conditions: Due to streamline economic growth, the level of expertise across the region is satisfactory. India was a pioneer of outsourcing software development. Moreover, tech development receives support from the government.
Expertise: You may expect a satisfactory level of expertise and good communication.
Region’s best option: The golden combo of skill, experience, and price is still India.
Software Development Outsourcing in Latin America
South America is a traditional outsourcing software development pool for the United States.
Cost: The average cost of hiring a developer in South America is $30-$50/hour.
Conditions: All countries in the region are in the same time zone as the United States and Canada. South America is new to outsourcing software development, but shows great potential.
Expertise: The region is still a leader in providing lower-cost expertise at the junior and middle level.
Region’s best option: Brazil. This country offers the best price-to-quality ratio with an average rate of $30-$50 per hour.
Optimal Zone for Outsourcing Software Development
Eastern Europe is the top location for outsourcing software development. Although not the cheapest, the region offers a unique level of expertise. Ukraine and Poland rank first as countries with the most developed software skill set (according to TopCoder and Hackerrank.).
If you are still looking for cheaper destinations, make sure to mitigate the risks. Over-saving may have fatal results. The sad Boeing story is an example.
The story of Boeing: To create software for 737 Max, Boeing hired $9-an-hour engineers, Bloomberg reports. The pursuit of half-price services ended in many rounds of development due to bad code. Moreover, temporary workers from an offshore software outsourcing company were under pressure to cut changes that may have required extra time and cost.
Now, Boeing is about to lose billions. A sad end for the bright ambitions of outsourcing software development cheaply.
Best Practices for Software Development Outsourcing
Even though software development outsourcing has a lot of benefits, the risks of it are no less stressing.
Let’s take a look at the best practices to make your process for software outsourcing easier.
- 1 - Do not focus on cost only!
When choosing a software outsourcing company, look at the long term and search for a reliable partner that will support you in the development processes. In most cases, price is not the key criteria you should choose a company based on. Years of experience and expertise are dividing factors. Moreover, a company with a higher rating of $50 per hour can sometimes create a new product faster than a company charging $15-20/hour. As a result, choosing the first option, you will save time and money in the long run.
- 2 - Document your requirements
Proper preparation may save up to 50% of expenses. Before outsourcing software development to a remote company, provide clarifications of all your requirements and expectations regarding deliverables, results, timeline, the scope of the project, etc.
You can start at creating an SRS (Software Requirements Specification) document where you need to list all the requirements:
- Background and capabilities
- Company culture and talent
- Internal processes and tools
- Quality standards
- Legal and security sides
- SDLC model and development approaches
3 - Due diligence
Do your homework and learn the differences in prices based on software outsourcing locations and companies. You can find the best companies in the field on Clutch or other similar platforms like ITFirms, The Manifest, etc. You can also google companies based on required software outsourcing services, location, expertise, etc.
- 4 - Ask for references, expertise, portfolio
Portfolio first, reference next. A portfolio is a great indication of a team’s expertise in the required software outsourcing field. The same goes for referrals. You may find a plethora of reviews on software outsourcing platforms, including Clutch, The Manifest, GoodFirms, etc.
- 5 - Set clear expectations and communication
The main benefit of software development outsourcing is the ability to work with companies from all over the world. This benefit may turn into a major difficulty if there are communication issues.
Before the development starts, you need to define channels of communication with your remote team. Tools like Slack, Skype, and Google Meet will help you communicate with developers in real time.
The only requirement from a software development team is to be proactive and completely involved in your project by providing timely and regular feedback, sharing your ideas for improvement, project vision, and other valuable insight.
- 6 - Testing and on-time feedback
To turn a software outsource project into a successful case, it’s important to rely on transparency in all processes and realistic milestones.
You can use different Agile management tools like Jira, to manage and track the workflow of your project. Don’t forget to provide feedback as soon as you receive results for each sprint so that developers can make the necessary changes before they move on to the next stage.
Select a dedicated team based on a number of factors. Don’t fixate on the price, location, or portfolio. Take into account the whole picture to find a company that will become your reliable partner for years to come.
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