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Benefits and Challenges of Software Outsourcing

BENEFITS AND CHALLENGES OF SOFTWARE OUTSOURCING

Let’s discuss when you should build an in-house team for your software project and when the best choice would be to outsource. If you decide to choose to work with the vendor, you should explore DevelopWay’s outsourcing offer.

Introduction

In recent years, more companies have been interested in using software development services. Digital transformation has made organizations dependent on the success of the creative applications and enhancements that IT can deliver. Moreover, IT has become a key competitive advantage for most companies.
Offshore software providers who have entered the international market, can now offer different perspectives to established companies in the US and Europe. Software development is a time-consuming and labour-intensive task, so companies should weigh the profitability of in-house development versus outsourcing being up an innovative startup or a company seeking digital transformation.
Having more than 13 years of experience in software development we have been engaged in improving in-house development processes and outsourcing projects, so we have some recommendations to share with you.

IT Outsourcing Market Trends

According to Reportlinker, the global IT outsourcing market was valued at USD 526.6 billion in 2021 and is expected to reach USD 682.3 billion by 2027, registering a compounding annual growth rate of 4.13%, during the period of 2022-2027.

Software application development remains the most frequently outsourced function among the dozen sectors in IT as the report by Statista shows.

Most frequently outsourced IT sectors report by statista

Source: Statista 

As ComputerEconomics research shows a growing majority of companies (60% compared to 56% in the 2020 year) outsource at least part of their application development. Customers using app Development outsourcing servicing mainly come from sectors like Financial Services, Retail/wholesale distribution and Manufacturing.

Why Do Companies Outsource?

Software outsourcing is projected to demonstrate significant growth by 2025 as IT organizations pick up the pace. The pandemic turned businesses upside down but failed to shake the fundamental dynamics of software outsourcing.

We’ve grouped the main driving forces of software outsourcing below:

1.  Demand for programmers

According to management consultancy company Korn Ferry, technology leaders in China and the United States face an incredible IT skills shortage. IT outsourcing becomes even more important for further development if no urgent solution is found. The study concludes that by 2030 there will be a global shortage of more than 85 million skilled workers, equivalent to the population of Germany.

This talent shortage for tech alone could cost America $162 billion a year in lost revenue unless it finds more tech workers.

That’s why outsourcing markets grow continuously as outsourced groups help to manage that growing demand.

2.  Opportunity to scale

Onboarding new employees take time. Even with all the online tools and employment opportunities available today, recruiting and training new employees takes time and effort. All the work related to onboarding prevents companies from opportunities to scale up.  Outsourcing software development works because qualified partners offer the ability to expand the company’s ability to generate production software.

3.  Cost Reduction

According to the recent report by Deloitte, one of the leading outsourcing and research partner, cost reduction continues to be the primary reason for outsourcing in 2022. The uncertain economic environment impacted by the covid-19 returns focus on numbers.

Source: Deloitte

Companies’ expenses on salaries, taxes, insurance and other benefits of internal staff are huge in developed countries. Additionally, internal staff should be equipped with tools, and trained and office space should be provided. According to the KFF Health Care Debt Survey employee health care costs are among the biggest challenges faced by small businesses in the USA.

Outsourcing software development works because it offers substantial cost savings compared to relying solely on in-house programming staff.

4.  Skill Gaps and Digital Transformation

As reported by Gartner in “The 2021 CIO Agenda”, more than 80% of  IT executives are rapidly adopting development initiatives as they believe that digital transformation is critical to the long-term viability of their businesses.

According to a global survey by McKinsey biggest threat facing executives right now is the lack of the necessary innovative skills. Finding and onboarding Software teams for trendy initiatives poses real challenges.

To keep up with the digital transformation, companies are augmenting their in-house resources with skilled outsourced developers. They can make much-needed expertise available at a lower cost than in the domestic market.

5.  Flexibility

Nowadays ability to change is crucial for companies. Change can be caused by new revenue goals, innovation and new product needs, regulatory changes and anything affected by competition.

Businesses should be able to adapt when changes occur. Outsourcing software development transforms an organization’s ability to remain flexible and take advantage of changing needs.

So which One to Choose? Outsourcing vs In-House Software Development?

The Main Factors that will impact your decision to outsource or not are the time, money, and complexity of the program to be built. We prepared a brief comparison of the pros and cons of in-house development and outsourcing.

When To Use In-House Development?

When deciding between in-house vs. outsourcing development, there are still compelling reasons to create an in-house team, despite the costs seeming high.
• You have no financial restrictions.
• You must have total authority over the development team.
• You possess all the knowledge required to lead an internal IT team.

When To Use Outsourced Development?

Outsource development is a better choice if you have the following business constraints.
• Have some financial restrictions.
• It is difficult to find qualified employees locally.
• The launch deadlines are short.
• You lack management skills for an IT department.
• You have a need to focus on your core activity.
• You consider fats scaling to new markets fast.

Tip: If you want to combine the benefits of both methods you can integrate hybrid options of relationship with the outsourcing team. When you don’t have a development team and outsource the full process to an offshore team start with smaller projects which can prove their value and then expand more. If you already have an IT department or a development team, you can attempt engagement models like staff augmentation or a dedicated team as alternatives to complete full process outsourcing. With these models, you can benefit from outsourcing routine or, on the other hand, specific parts of development while keeping core development operations in-house. Explore our full guide about different types of engagement models with software outsourcing partners Software Development Engagement Models and Billing Plans.

What are the Risks in Software Development Outsourcing and How to Minimize Them?

For more than a decade, we have worked thoroughly to recognize the factors that can put outsourcing projects at risk.
We have identified a number of recurring themes or “red flags”. By heeding these warnings and taking early steps to resolve the issues, you can lay the foundation for a safe and successful outsourcing arrangement and avoid troubled relationships and poor outcomes.

Risk Indicators in Software Development Outsourcing:

o Undefined Metrics

Do key internal stakeholders know what will generate a positive ROI from the software development project? Business metrics and goals should be clearly defined for the internal team. Both parties should know how to define, measure and understand the progress of the outsourced mission.

o Inconsistent Priorities

What are the key aspects of the software development roadmap? Is everyone informed about it? If the priorities are not properly set and communicated there will be communication obstacles among the team members which will affect the end results.

o Lack of Executives’ Engagement

Do the senior managers spend sufficient time on the project? Do they share the responsibility for the project’s success with the outsourced partner? Internal team members should be actively involved in the project.

o Not effective team Interactions

What procedures are in place to ensure that communication between team members is not disrupted? Were time zone differences, language barriers and differences in a culture considered?
Without establishing proper communication, it will be extremely difficult to create an efficient workflow between the customer and the outsourced development team. Key requirements, project details, and day-to-day tasks should be communicated effectively to ensure the end result is what you expect.

o Inadequate Skills

How do you assure that the outsourced partner team members have the right skill set and are properly trained? Are there standards for the software and are they properly recognized? Robust QA procedures and quality standards should be set and understood by both parties.

DevelopWay’s Approach to Manage Outsourcing Projects Successfully

Leveraging nearly 14 years of experience in outsourcing partnerships around the world, the DevelopWay team has developed our unique management approach that can help to address the critical factors that determine the success of your software development.

1. Get Prepared

This is a crucial step before starting a software development project with an outsourced partner.  Make initial assessments to see the potential risks in software outsourcing and especially the internal issues in your company that could jeopardize outsourcing. An action plan should be created to address the identified risks. Before going to set the risk mitigation process, rate your organization’s willingness to outsource. Consider in-house vs outsourcing and understand the hidden costs of each choice. Investing time and money in a risk mitigation plan will ensure the highest return from a software outsourcing relationship.

2. Select your outsourcing Partner

Thoroughly select your software development vendor. Set a due diligence process and have criteria for the assessment.
A poorly chosen vendor causes missed deadlines, dissatisfied users, deadly security breaches, and other issues.
There is so much to consider before coming up with a conclusion on the right software development outsourcing partner. From costs to communication, you should prioritize your project needs. You should carefully analyze all aspects and interview potential vendors before a decision.
Having worked in the industry for more than 13 years, we have prepared this guide for you to investigate the common steps and issues that you may have when searching for a software development partner.

Mobile App Developers Dedicated Team

3. Create a clear documentation

Have a complete document developed by your team or ask the vendor to create the technical specification document. This will help you organize the development of the project and will be your anchor point in the event of a dispute. Plan for multiple milestones. If a project lasts a few months or longer, it’s great to have multiple milestones so you can test intermediate releases and project direction-appropriate results in the early stages. Defining key performance indicators, milestones, and deliverables will help you track progress and measure project success appropriately.

4.  Launch the engagement process. Set explicit expectations and define objectives

Once the ideal software outsourcing partner has been selected, you’ll need to lay the foundation for a successful collaboration. You’ll need to bring your internal and partner teams together to align around expectations, roles, development approach, communication and other best practices that are vital to your engagement’s success.
It is not enough to assign a task and expect it to be completed if you want quality results and smooth collaboration between your organization and an outsourcing team. Offshore team management necessitates a significant increase in involvement and effort. Share a general picture of your product and explain your end goal clearly. Software engineers will be able to make more informed decisions during the work process and ensure the desired progress once they are aligned with all of the important details.

5.  Manage ongoingly to fully realize your business objectives

Actively communicate
Spending a lot of time on communication may appear unnecessary, but it will pay off. There will be no misconstrued tasks or architectural clashes. Whether you use Agile or not, regular meetings will help you speed up the project process, solve problems quickly, and generally learn to communicate better.

Have a responsible contact person
To have ongoing accountability and healthy work rhythms, invest in a good contact person/project manager. This person will serve as the liaison between you and your supplier. He or she will be the one who understands the project’s bottlenecks and can handle tight corners while ensuring flawless communication. Determine the reporting method to understand the dynamics of your project continuously and identify the top performers for future projects.

Keep your company attractive
Make your company appealing to new talented employees, and strive to establish trustful, loyal, and healthy communication between teams, which is essential for a successful partnership.
You will be able to keep a professional offshore development team motivated and upgraded by improving working conditions and providing professional growth, training opportunities, and fair compensation.
Both the internal workforce and outsourced professionals need the same level of incentives to demonstrate top results. Create your own motivational strategy. Whether it’s investing extra money on business trips to meet your newly hired employee to add a personal touch, private video calls with individual team members for strategic meetings or a corporate event to have fun after work, – go ahead and you’ll have results-oriented people who will be productive in the long run.

6. Protect your data

Ask to sign an NDA to protect your data. Include information about the data collection, transmission, and access process in your contract.

So, if you and your organization are considering working with an offshore development team for your software project, contact our experts to learn how your company can reap the benefits of working with an outsourced team 13 years in the market.