Software Development Outsourcing: All You Need to Know

The size of the global IT outsourcing market reached almost $100 billion in 2019, proving that software development outsourcing has become a widespread practice. What is software development outsourcing, why should companies adopt it, what are its main types and how to outsource effectively? With 27+ years of experience in IT outsourcing, we’re well placed to answer these questions.

What Is Software Development Outsourcing?

Software development outsourcing is the delegation of the responsibility for software development processes to a third party, which allows companies to redress their lack of expertise and internal resources, and enables business growth and digital transformation initiatives.

With an outsourced software development team, a company can effectively:

  1. create an outsourced team of experts possessing a particular skill set, so there’s no need to build and support one within the company
  2. extend an existing internal team to improve the project lead time or get access to expertise that an in-house team lacks

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Benefits of Software Development Outsourcing

Outsourcing IT operations to external vendors allows companies to gain immense benefits. These are:

  • Focus on core business objectives. Companies can focus on first-priority business objectives while IT becomes the vendor’s responsibility.
  • Deep subject-matter expertise. Developing the required skills may take months and years, while an outsourced team provides them in no time.
  • Cost-effectiveness. Building, training and supporting an in-house team as well as addressing related difficulties outstrip the cost of outsourcing, especially if a company needs a team for just a one-off project.
  • Short lead time. Businesses can kick off projects immediately and flexibly adjust to changing requirements, without having to build and train an internal IT team.
  • High competitiveness. Outsourcing allows companies to implement advanced technologies in their business operations that they are unable to do on their own. This results in highly competitive services and products.
  • Quick management of issues and minimal downtime. A professional team can fix problems more quickly and more reliably than an individual in-house support engineer.
  • High software stability and reliability. Rich experience of outsourced teams allows them to anticipate and proactively fix problems.
  • 24/7/365 monitoring and support. With an external IT team, a company can keep an eye on its workload without interruption.

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The Downside of Software Development Outsourcing

Software outsourcing services may also cause certain disadvantages to businesses. These are:

  • Communication issues. The remoteness of the client from the outsourced team and the consequent time difference hinder communications.
  • Cultural differences and language barriers. Diversity may significantly complicate work between the client’s and service provider’s teams.
  • Compromised security. Third-party access to a company’s assets and sensitive data may threaten security.
  • Lack of control. The remoteness of the IT team complicates monitoring and control.
  • Loss of time on adjusting to a company’s specifics. Even service providers that focus on a certain industry or business domain have to adapt their operations to a client’s specifics.

Also, the following processes may result in hidden costs in outsourced projects:

  • Benchmarking and analysis to make sure that outsourcing is the best fit
  • Selecting a business partner
  • Transfer of business processes and knowledge to an external provider
  • Staffing support

Operations and Business Processes to Outsource

IT outsourcing is a general term that describes processes ranging from the development of a specific piece of software to the execution of separate IT functions. Most frequently, companies rely on IT outsourcing providers to perform the following operations and business processes:

  • Project implementation — the development of new software, server and hardware optimization and software implementation in the corporate IT landscape
  • Maintenance and support — ongoing modification, bug fixing, functionality enhancement and performance improvement of new or existing software
  • Migrations and upgrading — one-off or serial upgrades and smooth migrations to new infrastructures
  • Quality assurance and audit — impartial source code audit and functional, performance and other types of testing
  • IT infrastructure outsourcing — data center outsourcing, cloud services, service desk, networking services, security operations and all-round infrastructure management
  • Outstaffing or team augmentation — filling in positions that the in-house team lacks

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Contracting Models

The right choice of a contracting model is an important part of financial effectiveness. Usually, the relationship between outsourcing service providers and clients relies on one of the following contracting models:

  • Time and materials (T&M). The name tells its own tale — payments are made based on the time and materials required for the project. This model is great for flexible projects whose scope of work is difficult to estimate or predict, as well as those that have many unknown variables.
  • Fixed price. With the price determined at the start of the project and paid only when significant milestones are achieved, a fixed-bid contracting model places the financial risk on the vendor. The partner must provide the required service at the promised price, regardless of the resources spent on the project. This model works well for projects with clearly defined requirements, scope and goals. However, a clearly defined set of acceptance criteria is a prerequisite — it allows a client to properly evaluate project deliverables.
  • Incentive-based pricing. Used together with traditional methods (fixed price or T&M), this model allows the client to encourage its vendor with financial incentives based on performance results. The vendor can be penalized if it fails to meet expectations.
  • On-demand pricing. Based on set rates for specific services, the client pays for the volume of the service that it has used.
  • Gain sharing. Payment to vendor depends on the volume of service or products that the client provides or produces.
  • Shared risk and reward. The client funds a project together with the external provider, which places the financial risk on both parties.
  • Cost-plus. The price consists of the actual cost of resources and a specified percentage of profit.

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In most cases, companies rely on T&M and fixed price contracting models.

Outsourcing Service Delivery Models

Depending on the remoteness of the outsourced team, software development outsourcing falls into the following delivery models: onshore, nearshore, offshore or a hybrid model and the offshore development center.

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Onshore Software Development Services

The onshore or local delivery model is based on engaging the local outsourcing talent pool. There’s no doubt that geographic proximity encourages smooth communication; at the same time, this delivery model is associated with higher labor costs and a limited pool of experts.

Offshore Software Development Services

When relying on an offshore software development team, a company can take advantage of their partner’s expertise and experience while ignoring its location. Indeed, offshore software outsourcing allows a company to choose from the global talent pool and have access to best experts at a reasonable price (this model is the most cost-efficient one). Moreover, in most cases, offshore IT outsourcing companies provide English-speaking experts, adjust their working hours to those of their clients or open offices in different time zones to enable 24/7 communication.

Nearshore Software Development Services

An intermediate option, nearshore development means that a company turns to third parties that are located in neighboring or nearby countries. The advantages of this model over onshore development are lower costs and a larger talent pool.

Exemplifying this service delivery model, SaM Solutions is a good choice of a nearshore software development partner for companies from the DACH region (Germany, Austria and Switzerland). The company has an office in Germany to settle urgent matters, the development center is located in Belarus, which is only a two-hour flight away, and the development experts are fluent not only in English but also in German.

Hybrid Software Development Services

A combination of offshore and in-house development, the hybrid model encourages scalability, enhances efficiency and reduces costs. Using this model, the onsite team works directly with the partner to provide consulting, management or development. Also, it interacts with the ultimate client, which isn’t done by offshore specialists.

The Offshore Software Development Center

In the offshore development center model, the client forms a development unit comprising the offshore vendor’s experts who have the required expertise. The outsourced IT department model ensures continuity and suits those companies that require long-term services. This model helps companies build a long-lasting relationship with their outsourcing partner.

How to Choose a Reliable Outsourcing Partner

Having a reliable, experienced and proficient partner is a must-have factor that drives success and enables the project’s efficiency. So, here are a few tips on finding the ideal partner.

  1. Look for good references. Ask your business partners, associates or acquaintances for recommendations — the grapevine is the best way to check reliability and reputation.
  2. Check listings and ratings. Sites like Clutch, Goodfirms, DesignRush and similar will provide you with an idea of the company’s background, experience, expertise, projects and client references.
  3. Make a benchmarking analysis. Time and money will be well spent on in-depth research on an outsourcing partner: the more scrupulous you are with your research, the more likely you are to find the ideal partner.

The combination of these three methods will give the best result — a service provider with the most relevant expertise, a positive track record and a work ethic that resonates with yours.

After you have picked a few potential outsourcing service providers, choosing the one that fits the bill is another challenge. To choose well, a client must have clear-cut selection criteria and project requirements. Also, it needs to answer the following questions:

  • Do you require industry-specific expertise or need comprehensive capabilities?
  • Which contracting model do you prefer?
  • What is your priority: saving cost or saving time?

Once you have outlined your specific needs, communicate with each company on your list of potential partners so that you can develop a full picture of each company. This includes the following important steps:

  • Reaching out. Contact companies on the list to learn firsthand about their experience and expertise; describe your project and gauge interest in a potential partnership.
  • Negotiate the engagement model. Decide on delivery and contracting models that work for both of you.
  • Request references. Ask for references and testimonials and contact referees to make sure your potential partner has what it takes.
  • Ask for the project estimate. Based on your project specifics, ask the potential partner for an approximate cost calculation.

The final step is to compare data that you have collected and choose the company that satisfies your requirements on budget, engagement models, expertise and internal culture to the greatest possible extent.

A Piece of Advice: How to Outsource Effectively

Drawing on our substantial experience, we’d like to share a few insights with those who are only starting their journey in outsourcing:

  • Don’t prioritize the cost. Choosing a partner based only on the cost is risky: low cost may signal low quality. The best way to make the decision is to consider a variety of factors, as an attempt to cut costs may compromise quality and cause other issues.
  • Set clear and measurable goals. You need to be clear on why you’ve decided to outsource, what your goal is, what you expect from the project and how you can measure its success. Also, you need to make sure your partner is aware of these.
  • Communicate effectively. Good software outsourcing companies provide smooth communication regardless of the time zone, language and other factors, so make sure that you have complete visibility of your project and you are on the same page with your partner.
  • Respect cultural specifics. Although business is business in any language, cultural characteristics must be carefully considered and anticipated — this is the key to successful cross-cultural collaboration.

From Something in Mind to Something in Kind: Meet SaM Solutions

SaM Solutions is a long-standing provider of software development services. Working for more than 27 years in outsourcing and IT, we have accumulated huge experience in a variety of technologies, IT verticals and business domains.

Over time, our company has grown into a large enterprise with offices in many European countries and the US and comprising various subject-matter teams — those that specialize in custom software engineering, e-Commerce and CX, IoT, embedded and mobile software development, and others.

With skills and competencies to serve companies ranging from SMEs to multinational corporations, we have gained the trust of Fujitsu, Siemens, Kaspersky, European Patent Office, the Instant Group and many others.

SaM Solutions is a Gold Microsoft Partner, SAP Silver Partner and a trusted partner of Oracle, Toradex, Coveo and FPX.

We provide first-class services to our clients in the most cost-effective way, which is why we continually invest in the development of expertise and know-how. As a result, we provide our clients with reliable, efficient and secure software that adds value to their businesses and ensures the success of their innovations.

To learn more about software development outsourcing, get advice or get more information about SaM Solutions, contact us.

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About the author

Yuliya Shaptunova
Yuliya Shaptunova

A content writer at SaM Solutions, Yuliya is anxious to create and deliver relevant experiences. She evangelizes corporate knowledge on expertise and innovations that the company provides.