What You Need to Know About Software Development Outsourcing

Published: March 02, 2022Updated: August 02, 2022
5 min to read
What You Need to Know About Software Development Outsourcing

Software outsourcing is a popular measure to optimize costs and get more development velocity. With the world as interconnected as it is now, a lot of companies turn to outside help, including contractors from abroad. Being experts in this niche, we at Aristek have written an article on various forms of outsourcing and what is important about such work.

Just to recap, outsourcing is using third parties for certain business processes. In our previous article, we dived into outstaffing. This post is a continuation of the series.

A Brief History of Outsourcing

Depending on how you look at it, contracting has always been around. However, in its modern form, it began to evolve after WWII when many companies started hiring other companies for non-critical things like cleaning.

Since the late 80s, when the world started becoming more and more connected, the term outsourcing appeared (derived from “outside resourcing”), and it became a popular strategy. Businesses started contracting out recruiting, IT support, accounting, security, and other activities. And once the Internet became a thing, outsourcing exploded. It was now possible to work with a reliable provider half a globe away.

Software development has been a prime candidate for outsourcing. Firstly, not many companies have the development capabilities and even fewer can afford an internal team. Secondly, the work can be sent from afar without much trouble, and rarely requires in-person presence. Finally, some of it was done on the internet, which means fully remotely.

Today the industry is rapidly growing, largely due to pandemic restrictions. Deloitte stated that 70% of businesses used an outsourcing partner. And the global market for such services is estimated at 92.5 bln USD.

Now we are in a time of strategic partnerships. Instead of keeping everything in-house, market leaders aim to network with reliable providers. Meta (ex-Facebook), for example, uses them for everything, from hiring to augmented reality technologies.

Types of Software Outsourcing

There are three main types of outsourcing.

Onshoring

This means contracting a local company (or at least one in the same country) for your work. Onshoring is not as common in software development but happens sometimes. For example, government agencies and defense companies have strict regulations regarding who they can contract. These laws often forbid them from working with foreign entities.

However, there are further benefits to this approach. Firstly, the geographical and/or cultural proximity. It is much easier to communicate with someone who understands your language and social norms. You also don’t have a large time zone gap and can schedule calls easier.

Secondly, it can be easier to meet regulations. Of course, experienced outsourcing providers with domain knowledge can reliably follow the requirements (e.g. Aristek regularly works on HIPAA-compliant software for US customers) but keeping everything within one country makes it simpler.

The cost savings are less of a factor here. The difference in service prices largely comes from different costs of living, so outsourcing within the same country doesn’t benefit from it.

Nearshoring

In this case, the work is outsourced to a company in the neighboring state (e.g. USA to Mexico or Finland to Russia).

It is similar to onshoring in regards to the benefits. The same cultural and geographical proximity, as well as ease of travel. The cost difference may or may not play a part. However, the specializations already will. Experienced outsourcing vendors now tend to focus on teams with specific skill sets and experience (e.g. Aristek created teams for logistical software) to bring more value to the client.

Offshoring/Farshoring

This is the most typical format for contracting software development services. It refers to working with a company that doesn’t border the host country. Common routes include America to Eastern Europe or Western Europe to India.

The main reason people cite for it is efficiency. You get a lot more bang for your buck when hiring an outside company. There are two major factors that influence the price difference. One is the above mentioned lower cost of living. The other is government regulations that favor outsourcing providers. Aristek, for example, enjoys relaxed document management requirements that allow us to offer lower prices without compromising the quality.

Another reason to go for it is availability. Companies in North America often experience a shortage of developers. Those available get hired by FAANG and other major companies. However, foreign companies have qualified people on hand.

The third reason is know-how. Knowledge of specific business domains (Logistics, eLearning, Oil & Gas, etc.) or technologies (AR/VR, Machine learning) is hard to get. Offshore vendors offer exactly that.

Co-shoring

Yes, we remember that we wrote about 3 types. Co-shoring means cooperation between in-house and outside teams on a single project. So technically, this is a combination of approaches, not a separate one.

This kind of cooperation can take many forms. For example, different teams building different microservices. Or an Indian company’s team working on the back-end, and a Belarusian one — on the front-end.

What’s Important in Vendors

Many companies have been burned by working with third parties. We ourselves had to face caution from customers who suffered this experience (although everything turned out great afterward). So no matter where you find your custom software vendor, there are common traits you should look for.

Firstly, reputation. A reliable vendor should have good reviews on independent services (e.g. Clutch) and, ideally, references from other current and past clients. The reputation is a safeguard in itself: as it is a valuable asset that attracts customers, companies will strive to maintain it. Moreover, it is proof of the vendor’s quality.

Secondly, specialized knowledge. This goes beyond understanding the domain and its standards (HIPAA, HL7, GDPR, IMS Global, etc.). Knowledge includes having proper processes inside the company and regarding projects, approaches to key project milestones (initiation, delivery, support, etc.), having ready-to-use components for specific software types, and more. You can find out about that by asking the right questions.

Finally, convenience. An outsourcing vendor shouldn’t make your life harder. On the contrary, they should deliver you success like a conveyor belt. And it is largely on them to organize smooth communication and guide you through the process, that’s what you’ve hired them to do.

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Conclusion

Outsourcing models aren’t “superior” or “inferior” to each other. Depending on the company, its goals, and its culture, you might choose one or the other. Some prefer the cultural proximity of a nearshore team that one can visit when necessary. Others go for more cost-effective foreign vendors. Still others get outside help for their in-house team. You have to try and figure out the best option for yourself.

And if you are looking for a reliable and knowledgeable software development company, shoot us a message!

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