What Is Software Outsourcing? (Pros & Cons, Tips For Success)

Nov 9, 2023 | Insights

Software outsourcing involves hiring a third-party service provider to handle your software project. 

This gives you access to specialized skills, massive cost benefits, and speeds up the development process. 

But how do you know which vendor to choose and what risks you may face?

To better understand software development outsourcing, let’s explore the different types, models, advantages, and more. 

Plus, discover how nearshore outsourcing with Distillery can supercharge your software development journey.

Further Reading:
Want to nearshore your software development? Here are a few compelling Reasons Why You Should and How to Find the Right Nearshore Partners.
Discover the 15 Best Nearshore Outsourcing Companies To Hire in 2023. 

This Article Contains: 

What Is Software Outsourcing?

Software outsourcing is the process of hiring individuals or a team through an external software development company to design, develop, and maintain their software applications. 

Outsourcing can be categorized into different models like offshoring, nearshoring, and onshoring, each with its own market dynamics and regional advantages. 

The worldwide IT outsourcing market offers options diverse enough to meet any business need. It is expected to grow at a CAGR (2023-2028) of 11%, reaching a total volume of over $777 billion by 2028. 

What Software Development Services Can You Outsource?

These are some of the typical software development services you can outsource instead of using in-house teams:

  • Custom software development
  • UX/UI design 
  • QA and software testing
  • DevOps and cloud 
  • IT maintenance and support
  • Blockchain consulting
  • Big data & analytics
  • IoT solutions
  • Web application development 
  • Mobile app development

When Should You Outsource Software Development?

You may need to partner with software outsourcing companies: 

  • When your current team is stretched thin, and you’re unable to meet your development deadlines.
  • When you need to recruit one or many tech specialists quickly to handle multiple projects. 
  • When expanding or upgrading existing software or applications.
  • When you require specific technical or domain expertise skills but lack them in-house.
  • For projects that are temporary or experimental and where it doesn’t make sense to hire permanent staff.

But before choosing a software outsourcing company, you must weigh the pros and cons of a few different geographical outsourcing models. 

3 Common Types of Software Outsourcing

You can either onshore, nearshore, or offshore software development. 

Let’s take a closer look at each model.

1. Onshore Software Development 

Onshore outsourcing is when a company hires a software outsourcing company located in the same country. For example, a Seattle-based company can outsource its IT services to a software development company in Chicago, Boston, New York, etc.  

However, onshore outsourcing has some benefits and drawbacks:

Pros of Onshore Software OutsourcingCons of Onshore Software Outsourcing
Real-time team communication, with no language barriers and time zone differences
Contributes to local economic growth and reduces unemployment
Onsite outsourcing teams are well-versed in the legal landscape of their country, ensuring compliance with regulations, industry standards, and intellectual property laws. 		High labor costs in developed countries. E.g. a US-based software engineer can charge $34-$41 per hour, which is costly compared to say, Mexico, where engineers charge $5-$8 per hour.  
Limited to the talent pool in one country only
Overhead costs like office space, utilities, and administrative overhead expenses can be significantly more expensive than in lower-cost countries like Mexico or Argentina

2. Nearshore Software Development 

Nearshore outsourcing is when a company outsources specific services to a nearby country in the same region. For example, companies in North America can outsource software development services to nearby Latin American countries like Mexico, Argentina, and others.

Pros of Nearshore Software Outsourcing Cons of Nearshore Software Outsourcing 
Cost-effective as countries in Latin America, like Argentina, have lower wages than in the US. For example, an Argentinian software developer earns an hourly wage between $2 to $4, while it ranges between $39 to $56 in the US. 
Similar time zones, which fosters real-time communication, faster decision-making. 
Cultural compatibility, a common understanding of work ethics, communication styles, and business practices. 
Geographical proximity allows you to have regular face-to-face interactions		Nearshore outsourcing regions, like Mexico, may offer a smaller talent pool compared to offshore outsourcing hubs like India, China, etc.
Risk of data breach and IP thefts when hiring nearshore outsourcing companies for software product development
Communication barriers could exist
Conflicts with the in-house team are possible when you outsource software development, if they don’t understand why you’re outsourcing development projects 

Thinking about nearshoring your software development tasks?

Partner with a Trusted Nearshoring Expert like Distillery

Distillery is a reputed nearshore software development company offering top-tier development talent and the engineering firepower to build and scale your teams. 

We provide access to a scalable, skilled workforce of senior software developers with advanced expertise.

Here’s the approach we use to deliver top-quality solutions.

  • Tailored Service Delivery Approach (SDA): Our SDA enables us to deliver value services faster and scale your business demands.
  • Top-tier technical talent: Our hiring process guarantees a development team of skilled professionals like the ones you’d find locally.
  • Scalability and flexibility: We provide the perfect team size with the relevant skills as per your business requirements. 
  • Cross-functional teams: Our cross-functional teams have skills ranging from cloud, UX/UI design, QA, and project management.
  • Collaborative client partnerships: We keep in touch with our clients to ensure everything is running smoothly. 

Get in touch with us right away! 

3. Offshore Software Development 

Offshore software development is when businesses outsource software development to a company located in a distant country. Popular offshore outsourcing destinations for US-based companies can include India, China, Philippines, Poland, Ukraine, Romania, and others.

Offshore software development also has a few advantages and disadvantages. 

Pros of Offshore Software Development Cons of Offshore Software Development 
Cost-effective as you’re outsourcing to economies where labor costs are much lower than the US
Access to a large talent pool 
24/7 support in software product development. While your internal team completes its workday, the offshore development team in a different time zone can carry on, ensuring progress around the clock.		Communication challenges and cultural differences are possible when working with software outsourcing companies in different time zones
Lack of control of the development process that can affect the progress of projects, adherence to timelines, and the overall quality of the software solution
Data security risks may arise if cybersecurity measures are not in place. Differences in data protection laws and security practices between countries can create loopholes.

As you can see, nearshoring software development offers the best of both worlds — by providing overlapping work hours, geographical proximity to the remote development team, and cost-efficiency. 

Now, let’s check out the three main software development outsourcing models. 

3 Operational Models of Software Outsourcing

Software outsourcing boils down to three game-changing models – each offering its unique blend of advantages.  

1. Staff Augmentation 

The staff augmentation model involves hiring a few third-party skilled professionals to work alongside your in-house team to improve the performance of your existing team and maximize their potential.

It benefits companies with fluctuating workloads and projects that demand specialized expertise.

You would incur lower up-front costs, and eliminate long-term commitments and overheads associated with permanent hires.

2. Dedicated Team

Dedicated teams are created to carry out specific projects or tasks from start to finish. Their composition and structure may vary according to your project requirements. 

These professionals work exclusively for you for an extended period, functioning as an extension of your in-house staff. 

The result?

You access specialized skills and focused attention, ensuring seamless collaboration and efficient project completion.

The dedicated team model is best for continuous long-term projects and is helpful for companies that don’t have the time or resources to hire specialists in-house.

3. Full-Cycle, End-to-End Custom Software Projects 

In a project-based model, you hand over the entire software development project to a software outsourcing company. 

The software outsourcing company has complete control over the software project — you only need to inform them about your requirements, and they handle all aspects of software product development from the beginning to the end.

Now, let’s focus on the advantages of software development outsourcing. 

4 Crucial Advantages of Outsourcing Your Software Development Services

Outsourcing software development has become essential for businesses aiming to innovate, scale, and stay competitive in the digital landscape.

Here are the top reasons why you should consider it.

1. Lower Software Development Costs 

By outsourcing to countries with a lower cost of living (like Mexico, Argentina, or India), US companies can tap into a skilled software developer pool at a fraction of the cost compared to hiring onshore in-house team members. 

Outsourcing software development services also means you won’t have to spend money hiring and training staff, purchasing licenses, or incur overhead costs like rent and utilities. The outsourcing service provider will have the necessary tools and resources.

Nevertheless, the cost of outsourcing services can vary based on the country, the project scope, the pricing model, and many other factors. 

2. Access to a Global Talent Pool with Advanced Expertise 

By outsourcing software development services to other regions or countries, you will have access to a much bigger pool of software engineering talent with skills than in your country.

Professionals from different backgrounds also typically bring unique insights, encouraging innovative thinking and problem-solving. 

For instance, a European company aiming to develop an app for a global audience, will benefit from outsourcing to teams in Latin America or Asia. The team can ensure the app resonates with a broader user base and meets different market needs.

3. Flexibility and Scalability

Outsourcing software development lets you easily adjust the size and composition of your software development team based on project demands.

You can seamlessly integrate additional developers into your existing team during peak periods or when tackling complex projects and downsize the team during quiet periods. 

4. Faster Time to Market

Outsourcing software development accelerates product development and expedites launches. 

How?

Software development firms maintain a dedicated, skilled development team with a proven track record, ensuring a high-quality software solution. Their expertise lowers onboarding time and development timeline, leading to a faster time to market.

Now, there are also some drawbacks you must consider before outsourcing software development projects. 

What Are the Challenges of Software Outsourcing?

Software development outsourcing can be tricky due to communication problems, quality concerns, cultural differences, etc.

Let’s look at five of these challenges.

1. Reduced Project Management Control 

Managing tasks remotely can make tracking progress, making timely decisions, and ensuring alignment with the overall software development project strategy difficult. 

So, you may not be able to manage a remote development team as closely as you would an in-house team.

2. Failure to Meet Quality Assurance Standards

Differences in coding practices, quality assurance standards, and understanding of project requirements can lead to subpar deliverables. 

3. Poor Communication Due to Language Barriers 

The developers in nearshore and offshore countries like China and India won’t be native English speakers. 

So, language barriers are quite possible and can lead to miscommunication and project delays, increasing overall project costs.

4. Reduced Productivity Due to Regional and Cultural Differences

Cultural differences can influence how workers interpret instructions and approach problem-solving, which might lead to conflicts or misunderstandings. 

Issues like varying work hours due to time zone disparity or holidays can also disrupt project timelines.

5. Security Risks 

Sharing sensitive business information with an outsourcing partner can expose you to cyber threats if their security protocols aren’t strong enough. 

This can result in financial loss, reputation damage, and legal consequences for your company.

Given that, we’ll tell you the most important factor that will make your outsourcing journey a success:

You must find a reliable outsourcing partner who can offer high-quality services while meeting your budget. 

So how do you do that?

Find out next. 

How to Choose the Right Outsourcing Partner

These steps will help you choose the right outsourcing partner:

  • Thoroughly research their background and credentials: Examine the company’s background, market reputation, and service quality. Review the company’s client testimonials page and online customer reviews. 
  • Consider cultural differences: Consider the company’s work ethics, culture, and values to ensure they align with your business requirements. 
  • Evaluate your budget: Create a comprehensive budget plan based on your project’s size and complexity and factor in all development and hidden costs. 
  • Assess the financial strength of the software development service provider: A financially secure partner is more likely to invest in technology, talent, and infrastructure, ensuring better service quality. Look into their financial track record, how many customers they retain over time, and their plans for long-term growth.
  • Be transparent about costs: Ensure you discuss the payment schedule and the breakdown of the expenses with your outsourcing vendor. This includes development, maintenance, and additional charges. Transparent pricing prevents disputes and ensures a clear understanding of financial commitments.

A crucial job is done once you’ve chosen the right partner!

But there are some proven practices you should follow to make your outsourcing partnership a smooth-sailing one. 

6 Proven Software Outsourcing Best Practices 

Follow these best practices to enhance your outsourcing experience:

1. Clearly Define the Services You Want to Outsource

Clearly defining the outsourcing services, project goals, and scope empowers your outsourcing partner to propose apt solutions and avert delays. It allows them to offer realistic proposals and prices as well. 

2. Identify the Right Outsourcing Model

Pick an outsourcing model tailored to your project’s requirements – whether it’s a dedicated team, staff augmentation, or end-to-end outsourcing. 

The right software development outsourcing models will ensure alignment with your requirements and optimize resource utilization.

3. Leverage Discovery Calls

An introductory discovery call helps you and the software development outsourcing provider get to know each other better and clarify project requirements. 

On the call, you can discuss their:

  • Work and development process
  • Communication channels 
  • Payment schedules, etc. 

You must also share details about your company, team, culture, and project vision.

4. Establish Open Communication Channels 

Ensure you remain in touch with your project manager and team by conducting regular feedback sessions and meetings. 

Plus, using the right project management software, instant messaging tools, and shared document platforms will foster real-time collaboration between in-house and outsourced team members. 

5. Encourage Your Outsourcing Team To Be Proactive

Involve your outsourcing partner in decision-making and problem-solving. Encourage the outsourcing team to ask questions, share concerns, and actively collaborate to enhance teamwork and innovation.

6. Monitor Progress 

Regularly monitor the progress of your outsourced services using key performance indicators (KPIs) relevant to the project. This could be the number of completed features, bug counts, or response times.

Establish a regular feedback loop with your outsourced team and ask the project manager to share periodic progress reports with you. 

You can also encourage your software development team to use time-tracking software, ensuring clearer visibility into project progress. 

You also should be aware of these top trends in the IT outsourcing industry if you want to maintain a competitive edge.

These five pivotal trends are reshaping software development outsourcing:

  • Rapid adoption of cloud technologies: The adoption of cloud technologies in software development outsourcing has led to more scalable, cost-effective, and flexible infrastructure solutions. A report by Statista suggests that the global cloud applications market will grow from $133.6 billion in 2021 to $168.6 billion by 2025.
  • Accelerated robotic process automation (RPA) and artificial intelligence (AI) integration: Incorporating RPA and AI into software projects is gaining traction, with benefits like task automation, efficiency, and precision. According to Statista, the global RPA market is expected to grow to more than $13 billion by 2030.
  • Cybersecurity takes center stage: Outsourcing companies are increasingly adopting stringent security standards, leveraging tools like encryption, multi-factor authentication, and firewalls to safeguard client data.
  • Unlocking insights through analytics and data science: There’s a rising demand for outsourcing companies specializing in data analytics and data science. Their expertise can help you gain insight into customer behavior, predict trends, and make informed decisions.
  • The rise of DevOps and Agile practices: DevOps and Agile practices foster collaboration and adaptability, accelerating product development and valuing customer feedback. Partnering with software outsourcing companies proficient in these methodologies ensures your projects meet industry standards, promising efficient processes and heightened customer satisfaction.  

Outsource Your Software Development Services Effectively With Distillery 

Software development outsourcing opens the door to cost savings, global expertise, and expedited project timelines. 

While onshore, offshore, and nearshore options each have their merits, nearshoring often emerges as a top contender. 

Its blend of affordability, geographic proximity, and cultural alignment with the US gives it a distinctive edge.

So what are you waiting for?

Contact Distillery to start nearshoring your software development services right away!