To begin with, I ask you to stop confusing the concepts of “software development outsourcing“, “offshore software development”, “nearshore software development”, “low cost software development” and “IT outstaffing”.
In the last few years, a lot of confusion has arisen around using these terms.
How does “offshore software development” differ from “nearshore software development”?
Why “IT outsourcing” is not the same as “IT outstaffing”?
Let’s dig deeper.
This process takes place when you involve employees of a third-party IT company into your own IT department.
This is a kind of purchase of outside specialists: software developers, business analysts, UX-designers, project managers, etc. to perform a certain type of work.
Here customers pay not only for the service but for the fact that a specific person, for example, a developer, has worked for him for a specific time.
An outstaffing team generally works remotely, but it can also relocate to customer’s place.
That’s why IT outstaffing allows a customer to work more flexible during peak hours and reduce capital costs for infrastructure.
This type of outsourcing refers to an arrangement in which a business process is transferred to outside contractors (third party).
Let’s imagine, for example, that a customer from the UK needs to develop a software for his bank.
He turns to an IT company, which is based in the same business center on the floor below.
This company, in turn, models and writes the product completely from scratch.
The customer can also present already existing developments and employees of the IT outsourcing company will switch themselves directly to the development process.
According to a survey conducted by the consulting firm Bain & Company, by 2005, 82% of largest companies all over the globe have already used some type of outsourcing at least once.
Specifically, at least 51% of companies outsource to a totally separate organization in another country, known as “offshore outsourcing”.
Offshoring refers to the process of carrying out the business process in some other country.
It can be in context to either production or services offshoring.
For example, a web development agency based in the United States might offshore its coding IT processes to Eastern Europe, since the final cost of its goods or services will be significantly lower.
Mainly it happens due to lower taxes (for example, there are some significant tax benefits for IT-companies in Belarus) and a lower labor cost.
In this case, the company that received the order falls under the definition “offshore software development company“.
Almost the same as “offshore outsourcing”, with the main difference that a company has transferred its business processes to the nearest neighboring region.
For example, if a company from the United States moves its software development department to Mexico, this process is considered as nearshore outsourcing.
What’s attractive in nearshore outsourcing opposed to offshore outsourcing is that a company can still benefit from lower wages, while its nearshore department is situated close to the main office.
That’s why different work processes will not be affected by different time zones, for example.
In this case, the company that received the order falls under the definition “nearshore software development company“.
The term «outsourcing» was first used by the economist Ronald Coase in 1937 in his work on the organization of this form of business. According to the researchers, the history of outsourcing has two stages:
What concerns exactly the IT sector, according to Gartner, companies spent about $252 billion dollars on outsourcing services in 2012 and every year this figure continued to grow. Now we are going to talk about why outsourcing gained such popularity and try to list all the possible advantages of the outsourcing model, also not forgetting to mention the possible pitfalls that the customer of outsourcing services may face.
#1. Your company retains the compactness
Outsourcing is the best option if you don’t want to create a complex corporate structure. You can also optimize operating costs by transforming fixed costs into variable costs.
#2. Operational risks are decreasing
Having outsourced some of the functions, all you have to do is to monitor the contractor concerning meeting the terms of the contract.
#3. Operational costs are lower
Now let’s talk about one of the most important advantages of outsourcing. In addition to the fact that recruiting expenses in the US are very high, don’t forget about hidden costs.
According to the recent research by Oxagile, the average hidden cost per in-house team member in the US reaches $79.24.
If we include all the compensations, we will get an impressive amount of $1,050.26/hour for a team of 8 US specialists.
Now, let’s take a look at the amount you need to outsource to Eastern Europe.
We can observe now that hourly rates of both in-house and outsourced engineers differ by 3.5 times: $1,050.26 vs $300 (per team, per hour).
This is pure data, without any exaggeration. Quite impressive, right?
#4. You pay when required
When you outsource, you don’t pay someone for sitting at a table, as it happens with a staff member.
If you pay for creating a product, usually you pay directly for the product itself.
You shouldn’t pay for the time the employee spends on correspondence with other employees at the office during their regular working hours.
#5. Absence of tax payments from employees’ salaries
If you outsource in countries such as Belarus, you will save extra money since the High Tech Park resident-companies are exempt from corporate taxes, including VAT, profit, real estate, and land taxes.
#6. Absence of costs to provide workspaces for IT specialists (computer components, etc.)
You don’t have to rent an additional office and purchase expensive equipment.
#7. Lack of in-house expertise
When the internal resources of the company are not enough to face a new technology or globalize one’s business, outsourcing software development is the best option.
#8. You receive specialists in all areas of the IT field
It is almost impossible to implement this issue in your own IT department for small and medium-sized businesses. The costs will be too high and not equivalent.
#9. Delegating some functions saves time
Outsourcing helps to focus on key areas of activity. You spend human and financial resources on performing administrative and operational tasks.
#10. Access to a high-quality personnel
For outsourcing companies, their activity is business, not a profession. To remain competitive, they will track the quality of the services they have provided. If the work does not match the declared quality, the company will instantly lose customers.
It’s worth making sure by reviewing company’s portfolio and feedbacks on its activity on independent third-party resources, such as Clutch. For example, a UK-based minicab company AddisonLee decided to move a part of its IT processes abroad. They had two main candidates: one from Russia and one from India. Peter Ingrim, IT director at Addison Lee, said:
“We picked a team in Russia and a team in India and sent each a week’s worth of source code that needed to be written in a new language as a test.
The guys in India said yes to everything, copied the mistakes we had deliberately put in there, and didn’t ask us anything about the business – it was all very systematic.
The team in Russia looked at our proposition, asked if it was functional, noticed the mistakes and asked us why we did thing in such a way”.
AddisonLee and the Russian team now have a great working relationship and they also collaborate on further projects.
#11. You get new local market opportunities
As new markets emerge, you need ways to establish a presence before your competitors.
AstraZeneca tapped into the booming Chinese market by making offshoring investments and partnering with Chinese companies.
As a result, AstraZeneca has become the largest pharmaceutical multinational company in Chinese prescription drugs.
#12. You get to market faster and boost innovation
Bringing out new products ahead of competitors is critical in a rapidly changing market.
When Procter & Gamble outsourced some R&D activities it boosted its innovation productivity by 60%, which leads to more than $10 billion in revenue.
#13. You get the experience of software outsourcing company
The company you chose already faced a similar problem. Otherwise, why did you turn to them?
#14. Cultural affinity and lack of communication problems (due to a good knowledge of English).
It concerns the Eastern European countries, since a good level of English in the IT sector here is a “must-have”.
#15. No temporary loss during the holidays, vacations or illnesses of employees of IT department
You don’t have to look for new employees to quickly close gaps in the development process.
#16. You don’t waste time organizing and managing your IT department
Organizational and everyday issues always take a lot of time, preventing you from concentrating on the main tasks.
Software development outsourcing company, in turn, offers you a ready-made team.
#17. You don’t waste time and money searching, training and retaining new employees
During the production process, it turns out sometimes, that current capacity is not enough.
It will cost you $4,129 and take 42 days to fill an open position, according to the SHRM survey.
The headache of finding new employees again falls on the outsourcing provider and you will be able to focus on core activities.
#18. Reduction of the document flow
Choosing outsourced IT solutions and support, you rid yourself of an endless stream of documents, that will undoubtedly arise while hiring new employees.
#19. Strengthening your growth potential
An increasing volume of your business will not become such a problem for a software development outsourcing company as for your own IT department.
Moreover, such outsourcing companies are extremely interested in the development of your business and the long-term nature of outsourcing.
#20. Reduce management workload
The fewer tasks are performed inside the company, the better your management can concentrate on developing the main lines of business. Thus, costs are reduced (time costs of the company’s management, lost profits, etc.).
“If you’re doing well but can’t improve, you’re not doing well,” said Michael Abrashoff, former U.S.S. Benfold commander, and leadership speaker. That goes for team leaders too: “Micromanaging causes the best to leave and the rest to become brain-dead.”
However, not all so rosy as it might seem at first glance.
The software development outsourcing model has some shortcomings that can spoil your impression of this kind of services:
1. Chance of colliding with a low level of professionalism. As already mentioned above, it is worth sending a test task to outsourcing company before concluding a contract, as well as check reviews about company’s work on third-party services.
2. Risk of leakage of confidential information. To avoid such situations, it is necessary to conclude NDA immediately before the negotiations with your outsourcing partner.
3. A small number of control methods, which, in turn, may affect the effectiveness of software development processes.
4. Communication problems. This is usually due to a poor level of English proficiency, as well as cultural and mental differences. This problem is especially acute when you outsource to the countries of Southeast Asia. Belarus, Poland, Russia are much closer to Western European countries in mentality than India and Vietnam.
Generally, it is up to you to decide whether you need to outsource your software development or not. Weigh the pros and cons and make a decision.