How to successfully outsource product development: A detailed guide
hanna
hanna

How to successfully outsource product development: A detailed guide

7.5.2022

Software development remains the most frequently outsourced function compared to other IT sectors. According to a report, a growing majority of companies (60%, compared to 56% the year before) currently outsource at least part of their application development. 

With IT organizations growing each day, software outsourcing is projected to be on a 10-year growth roll through 2025. So why not give outsourcing a try? Read our in-depth guide to learn more about how to successfully outsource software development.

What is software outsourcing?

Software outsourcing is the process of choosing a third-party vendor instead of the in-house team for developing software products and services. 

According to statistics, the gap between 1.4 million open tech vacancies (US labor data) and only 400,000 CS graduates in 2020 will result in an unrealized output of $162 billion in 2021. Also, as stated by the McKinsey survey, 87% of organizations are already experiencing a talent shortage.

What does it mean for the global tech landscape? More and more companies will outsource their software development services to enter new markets and hire talents from all around the globe. If your company lacks internal resources or expertise to grow its current products or develop a new one — outsourcing is a great way out.

Gartner research gives additional evidence of this trend.

  • 55% of outsourcing organizations increase their outsourcing budget while only 11% have decided to decrease them
  • 53% of companies have mentioned that outsourcing costs are usually lower than hiring in-house staff
  • In comparison to in-house hiring, 25% of companies rate outsourcing as better, 59% as the same, and only 16% as worse 

So why outsource software development? Let’s find it out in the next chapter.

Why do companies outsource software development?

Hiring an outsourcing development team offers two great benefits for businesses: 

  • access to a vast talent pool worldwide
  • saving significant costs on offices, HR matters, recruitment, etc. 

One of the main reasons companies choose software outsourcing is cost-efficiency. For instance, you won’t have to pay office rent. Besides, the cost of living varies in different countries and thus, impacts billing rates. In most cases, you can get a candidate in Eastern Europe no less experienced than their US or UK colleagues, yet, for a better price.

Other benefits of partnering with an offshore development company and using outsourcing software development services include:

Better skills of candidates

Outsourcing development companies always strive to grow the skills of their employees and invest in their education to stay ahead of their competitors. Such businesses usually cover the costs for different technical courses, training programs, and certifications, so their specialists have better skills and more profound expertise.

More coordinated management

When you work with an outsourcing team, it usually provides you with a project manager. A project manager is responsible for the remote team on-site, its efficiency, and its ability to meet deadlines. Such practice frees you of micromanagement and planning so that you can spare more time for business strategy and goals.

More capacity

Sometimes there’s a need to scale the team during peak periods. And when the load is down, go back to normal. It’s easy as a pie with outsourcing development companies. You can upgrade and strengthen an outsourced development team faster than scaling up your in-house one. When the scope of work is completed, you simply finish your cooperation.

So, hire an outsourcing team if you need an entire team of engineers to outsource software development projects and then just a couple of them for support.

How to Outsource Software Development

Before outsourcing software development, you need to choose the option that will work best for your business. Here are the most commonly used types of outsourcing.

Working with a Software Vendor

Outsourcing to a vendor involves hiring specialists to perform certain tasks. Such companies are best at delivering fully functional products and are responsible for gathering the requirements and managing the development process. The advantage of outsourcing is that CTO does not need to micro-manage each task, as the team you hire usually provides business analysts, testers, project managers, and developers. 

But keep in mind that outsourced companies are usually not involved in the culture of your product and its specifics. So, don’t expect them to advise you on the best industry practices. Their goal is to perform the tasks and meet the deadlines, not achieve market demands. 

Outsourcing development works best if you already have studied the market and know what your product should look like. If you need a team with expertise in your field, we recommend hiring an outsourcing development team.

Working with a Tech Partner

Cooperation with the tech partner is also called “CTO as a service.” Unlike an outsourcing team, a tech partner will be fully involved in the market research and provide you with ideas of what works and what doesn’t. Tech partner will assist you in both the technical and business sides of your product development and suggest the features that will work exactly for your industry and target audience. 

The fact is that a tech partner aims for product success when a vendor focuses on the project’s success.  Also, tech partners have access to various departments of a startup (marketing, communications, legal, etc.) and take part in discussing the internal processes.

Hiring a Сonsultant

Think of a consultant as your assistant who will help you set the business processes from scratch, optime the performance of your team, and increase a feedback loop. Here are the main responsibilities of the consultant:

  • Validate your business idea
  • Set up the development and business processes
  • Estimate the MVP development costs

Outsourcing Models

Now, let’s review the most commonly used outsourcing models and their difference.

Time and material model

The time and material model is suitable for companies with a clear plan with final goals, budget, and timeline. Before proceeding to software development, the outsourcing company creates a system requirements specification document that includes the following items:

  • Product specifications
  • List of functionalities
  • Costs
  • Development timeline
  • Milestones
  • Deliverables

Usually, a company provides the client with the approximate quote and the model is calculated in person-hours. It means you pay an hourly rate to developers. It also includes a warranty period for fixing different issues and bugs in the final product and takes up to 30 days in IT projects outsourcing.

Fixed price model

The fixed price model is very similar to the time and materials one. Yet. in this case, you pay on a fixed basis, not on person-hours of effort. This outsourcing pricing model best suits simple applications, the development scope of which can be predicted. 

It has little to no flexibility, so it’s better to use it for short-term projects with a well-defined functionality, as adding new requirements or making changes may result in extra costs. As for the price, it’s usually made up of the volume of work multiplied by an hourly rate. 

Dedicated development team model

In a dedicated development model, an outsourced team of developers and the client’s team collaborate long-term. In this case, you get a team of experts who work on a previously defined task. The difference from the in-house team is that you don’t have to care about administrative tasks, HR, taxes, and other social benefits of your workers, as this all is covered by your software partner. 

How to Choose the Right Vendor

The number of outsourcing companies grows each year. According to statistics, around 300,000 jobs are outsourced by the US annually. The top reason for outsourcing (70%) is cost reduction. The total IT budget in 2020 grew from 12.7% in 2019 to 13.6%. 58.8% of US business owners and marketers saw no covid-related changes in the outsourcing marketing and development activities.

The bigger the choice, the harder it’s to choose. That’s why you need to pay attention to the following criteria when choosing an outsourcing vendor to work with.

Location

Each region has its area of expertise, demand, and rates. For example, nearshore regions where workdays overlap (Latin America and the US) will elevate the prices. Also, countries with a first-world economy tend to have higher rates. 

Team

Before choosing an outsourcing team to work with, make sure that they:

  • automate repetitive tasks
  • document everything: from project requirements to the latest updates and changes, project and development teams
  • use collaboration tools
  • have all the necessary development tools in one place
  • practice code reviews regularly
  • are free to show off their creativity and problem-solving skills

Ask as much as possible about their work process and communication channels. Make sure you know how they manage their responsibilities and track the efficiency of each team member.

Skills

The hotter and more highly specialized the tech skills are, the more you will pay, no matter where the location is. For example, such skills as architecture, DevOps, AI, and data science will command higher rates than “core and basic” development skills.

Time zone

When choosing a location, you also need to pay attention to the time zone to make it convenient for both teams. Communication is the key to effective cooperation. That’s why make sure you can maintain regular sync-ups with your outsourcing teams and hold periodic meetings.

Experience

The more seniority a developer has, the higher are the rates. However, remember that you pay for the benefits of hiring seasoned professionals. Rates will be different within a specific region depending on experience and skill.

Length of engagement

Sometimes outsourcing companies can offer better pricing for long-term projects. That’s why if you plan to stick with the development team for a longer period and plan to extend your product in the future, disclose that before beginning cooperation.

Successful cooperation

Software development outsourcing can become either a dream or a nightmare depending on the quality of the partner you select. A global market is overwhelmed with great – and not-so-great – software development firms, so confusing options, risky unknowns, and tepid qualifications are everywhere. Sometimes outsourcing software development projects take hundreds of hours of research and evaluation to find a top-quality partner. So here is what you should pay attention to when building successful cooperation with the outsourcing team.

Communication

Transparent communication is crucial. Make sure that everyone on the team stays on the same page, organize regular meetings and brainstorming sessions. It’s important to inform the outsourcing team about your main business goals and vision. When the team is aware of your business strategy, they will provide more efficient technical solutions to improve this strategy.

Control

There are a lot of tools that make virtual team management easier such as Jira, Trello, Slack, and Asana. You should always avoid misunderstanding and create an atmosphere where everyone in the team can easily reach each other and ask necessary questions at any time. At the beginning of each week, ask your team the following questions:

  • What do they have to do during the week?
  • How many hours do they have to work?
  • How much work do they have to do?
  • What do you expect from your team?

Agile Methodology

Agile methodology is a flexible method for developing software products that have the following values:

  • Individuals and interactions over processes and tools.
  • Working software over comprehensive documentation.
  • Customer collaboration over contract negotiation.
  • Responding to change over following a plan.

Agile is all about shorter time scales that make it easy to control the process and organize daily collaboration between business and technical teams.

Road map

The roadmap is a transparent plan that shows the direction your product is moving to, its main goals, and metrics to track. It should be available to each team member to provide better project planning and more effective collaboration. In Agile strategy, the roadmap is a product backlog that includes a list of all the features and deliverables of the final product. 

How to implement your outsourcing strategy

Let’s review how to outsource software development and when you should choose a tech partnership.

  • Go for the outsourcing team if your product is your USP

If you need a team that will constantly support your product, quickly spot and resolve issues, you’ll unlikely switch to support-only mode. In this case, you need a team that will constantly support your main value proposition – your product.

  • Go for a tech partner if you’re an industry expert with the idea

It’s better to go with CTO-as-a-service if technology is only a medium in service delivery. For example, if you have an online shop, your company has no technical expertise, and you need a short-term development service for up to 6 months.

  • Go for the outsourcing team if you move fast and break things

If you have just entered the market, you need to react to any market changes and feedback quickly. In such a case, your strategy requires quick action without any day-to-day bottlenecks.

  • Go for the outsourcing team if you rely on integrating into a technical ecosystem

If your product is integrated with enterprise software, uses specific language and frameworks for backend components – you need to find an experienced partner. This is especially common for such niche industries as finance or healthcare. Many tech partners specialize in certain industries and will help you build a unique solution on the market.

Outsourcing software development: How much does it cost

First of all, the price for outsourcing software development will depend on the following factors:

  • Your project size
  • The country developers are from
  • Technical and functional features of your product
  • The stage the product is at
  • Technical stack
  • Level of the software developer
  • Level of English

Let’s see the rates of software developers depending on the country:

How much does software development outsource cost

The conclusions are the following:

  • Latin America is trending as a nearshore outsourcing destination due to ease of coordination and collaboration across time zones. 
  • When it comes to Eastern Europe, the rates for outsourcing development have slightly increased because of the growing demand for software development and factors like remote work. That’s why a lot of partners are expanding recruitment efforts into additional cities and countries.
  • South Asia is a promising market with the demand growing but the pricing stays the same compared to other countries due to the vast resource pool of talent in India, Bangladesh, and Pakistan.

Advantages of outsourcing software development

The benefits of the outsourcing development team are the following:

Decrease in labor costs

When you hire an external team to conduct specific tasks, you save costs on their pay, benefit packages, and training and can focus these labor costs on your in-house staff. The same about equipment: outsourcing can decrease your equipment costs because it’s always cheaper to hire a third party than to buy new equipment, maintain, and control it.

Access to the wider talent pool

There are no boundaries when it comes to hiring and it all depends on your goals and budget. You can hire specialists from different countries and stay ahead of your competitors by working with tech specialists who specialize in different areas.

Better efficiency

When outsourcing, you get rid of micro-management and can concentrate on hiring, training, facilities, and other resources within your business model. You can always narrow costs to certain invoices and reports instead of spending budget on the in-house department to do the same.

Challenges of software outsourcing

When it comes to outsourcing software development services, there are some “red flags” you should be aware of. If you take time to resolve problems, you will lay the foundation for a safe, and efficient outsourcing development.

Undefined metrics

You need to make sure that your team’s business goals and metrics are clearly defined. Key internal players should know what builds up a positive ROI from the product you’re working on. Everyone on your internal team should also know the most important aspects of your product development roadmap.

No team engagement

Your internal team should care about the success of your outsourced engagement as well as demonstrate active involvement with the outsourced partner. It’s all about building connections and making the team work on a single goal.

Unrealistic and unclear expectations

Before starting cooperation all your team members should agree on the expectations you set for this project. Create an atmosphere where everyone is not afraid to ask questions and establish a lifecycle that will be accepted by both parties.

Dewais will help you successfully build your outsourcing process

Outsourcing, especially in software development, is becoming an essential tool as companies learn to cooperate in an environment where teamwork, quality, cost, and flexibility are way more important than location. In a modern competitive world, efficient outsourcing is all about building a partnership that is innovative and strong and not focusing too much on saving costs.

We at Dewais provide top-quality web and mobile outsourcing development services, design, testing, and support. We also consult startups on the best product development strategies to enter the right market and solve the needs of the target audience. We use the power of Javascript, AI, ML, and BigData to create wise solutions. Contact us to discuss your project and create a roadmap together!

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