In-house development team or outsourcing - which is more beneficial for your business?
You've probably heard the advice that you should outsource your development work. But is it really the best option for your business?
It's a question that many companies ask themselves when they're trying to decide how best to build their product. And we get it—it can be tough to choose between the two options. There are many factors to consider when deciding whether it makes more sense for a company to hire its own development team or outsource certain work.
Outsourcing and In-House: What Are the Main Differences?
Outsourcing has been one of the most controversial topics of the last two decades. Yet, companies worldwide use this business strategy to grow by reducing operating costs and improving the service quality.
But while some entrepreneurs praise the benefits of outsourcing, others are sharing their bad experiences with outsourcing companies. Such a contrast in the experience of entrepreneurs cannot but confuse and very often prevents them from making the right decision.
Consider all the pros and cons of outsourcing to understand whether such a model is right for you. But first, let's look at the two models on the shelves and understand their differences.
Internal development or “insourcing” refers to creating software within your company. This process involves full-time developers with a fixed or fixed salary and other employment benefits. Developing software in-house also requires setting up an office or infrastructure with all the amenities (hardware and software).
Outsourcing, on the other hand, is the delegation of software development tasks to hired organizations with the appropriate specialization or individual specialists with the necessary skills. In this case, the hired software development team will work remotely or from an offshore location (country). With outsourcing, you can hire offshore staff hourly, on a fixed salary basis, or as per project requirements. Now that you have a solid understanding of the two concepts let's start comparing in-house versus outsourcing by looking at their pros and cons.
In-House Team
This option allows you to grow your team of specialists within the company. You get to recruit the staff and know these specialists from the first day. This can be beneficial when you are developing strategies and analyzing the results of your company. Everything from corporate culture to the pace of development is under your control.
Now you need to get started developing an efficient development department. First of all, you need an experienced development director. Choosing someone qualified and skilled would be best because this is an essential management function.
High Expenses
According to recent statistics, over 37% of startups and small businesses outsource at least one process, and 92% of the Forbes Global 2000 Companies all outsource IT operations.?
However, you need to be aware of the cons. And as we mentioned before, the biggest is cost. That's because the salary is just one part of employee compensation. You also need to pay taxes, onboarding, and skills training. You also typically need to cover benefits like health and life insurance.
According to the Small Business Administration, employment costs up to 1.4 times higher than the employee's salary. For example, the salary for a CTO in the US ranges from $251,647 and $330,771. The national average for Senior Developers in 2023 stays around $7,000. For comparison, a year's salary for a competent Junior Developer is $4500 monthly. Of course, prices will vary depending on the industry, tech stack, and the developer's country of origin.
Searching for a qualified development team can, on average, take 1-6 months. Therefore, at least six months will be needed to form a team. In addition, 1.5 months is usually spent on properly training employees.?
As a result, the in-house team is reliable, efficient, and stable but can be unreasonably expensive, especially for small businesses and startups.
?Outsource Development Team
These days companies are constantly outsourcing. While people associate outsourcing with large corporations, this can also be suitable for developing medium-sized businesses. Usually, the owner hires a development team that is already established. In addition, hiring a company designed for solving specific problems and building business strategies is also possible.
The Broad Price Range
Now consider the option of transferring the functions of strategic development to outsourcing. According to the Harvard Business Review, the cost of work on the initial audit, research, and development in the US will cost between $70K and $250K. However, software development costs in 2023 are greatly impacted by factors that make accurate pricing challenging.
While the ballpark can give you a subtle idea of the average software development costs, professional project estimating factors in clear business requirements within the approved schedules, budgets, and time frames. Therefore, accurate estimation is only possible with prior analysis of your project, business objectives, and other externals.
On the other hand, a complete development team in a different country can offer rather competitive prices. For example, outside the US, the same service can sometimes be 65% to 75% cheaper. Project-based fees in the digital development industry in the US tend to range drastically depending on these factors:
The global outsourcing market in 2022 has doubled in size. This shows that more and more businesses are willing to invest in outsourcing. Nowadays, it's easy to connect on a global scale. That is why US-based companies practice outsourcing development content creation. This allows companies to save money while still getting the desired level of quality that they want.
Hourly rates for freelancers from different countries vary between $17-$100/hour, according to a survey that included Eastern Europe, Latin America, Asia, Africa, and countries in Western Europe. So every hour spent on your project is still billable, regardless of the task performed. The downside is that the number of hours spent on your project could spin out of control if you don't watch the progress.
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Balance of Outsourcing and Inhouse Product Development
Sometimes a company prefers to develop IT products independently because it needs to learn how to build cooperation with an outsourcer. There are various concerns on the business side: For example, a product owner may think outsourcing is expensive. But, at the same time, to develop independently, a business must create an IT company within itself, investing money and time in it.
Businesses may be afraid that they will not be able to retain expertise. Understanding these fears, an experienced outsourcer helps the customer maintain control over the project and optimally organize the infrastructure. Our experience shows that companies from almost all industries outsource, including high-tech leaders with their IT departments. With the help of external teams, the business can find new technological solutions and accelerate development, if necessary. In addition, product teams sometimes need help in building development processes.
Whom outsourcing and in-house development suit best
The sacred idea of a complex technology startup, for which outsourcing is not profitable, or a startup of death, where the in-house team sucks money for years. We can immediately name as many concrete examples as we like from my practice of how a newly created in-house team drains half of the development budget. But on the other hand, we are sometimes approached by those for whom outsourcing could be more suitable since this will not benefit the project.
According to multiple studies on startup backgrounds, startups are more successful when founders with technical backgrounds hire people with business skills rather than the other way around.?
Founders with technical experience can always formulate a criterion according to which they can decide on the choice of a technical partner, and founders with no technical experience cannot do this, so it doesn't matter whom they choose: employees or an outsourcing team, it's still more difficult for them to make this choice. To become a full-fledged business, the product must be developed by a professional team. Coincidence or not, one of our best projects was founded by a candidate in physical and mathematical sciences.
One of the conclusions of the German study is that founders with business skills should carefully select colleagues who will make the product.
Project Innovation
It is important to understand what the innovativeness of the proposed business is based on. This is a tricky question if you are a beginner. A startup often thinks the software is the most important part of its project. However, in the vast majority of cases, this is not the case.?
The innovation lies in the business model, and it would be good for the founder to focus on it and entrust the rest to specialists. Before developing an MVP, it is extremely important to make a pilot, test the hypotheses of the pilot, and only after that decide which hypotheses you plan to test with the first version of the product.?
The Basic Criteria to Make Up Your Mind
There is a long list of reasons to outsource development. We’ve grouped the leading four:
You Lack Top Talent In-House
As the demand for technology grows exponentially, businesses, from startups to multinationals, need help attracting, hiring, and retaining top tech talent. From skilled software engineers to highly experienced project managers, putting bodies in seats from North America to Western Europe is a struggle.?
According to a recent survey of over 3000 technology leaders, 65% said hiring challenges hurt the industry (a 6-point increase from the previous year). Whenever demand far outpaces supply in the labor market, the best minds in the business will be snapped up by companies offering the most attractive remuneration and benefits packages.
This creates a situation where enterprises need more staff to focus on new and existing projects. There need to be more bodies in the building to get things done on time and within budget. Whenever this is the case, the time to hire will slow down projects while diminishing your competitive edge in the marketplace. In this scenario, outsourcing is a viable option that helps fill the gaps quickly. It also ensures that your business keeps pace with the competition.
Budget Matters
Before starting a software development project, choose your project management model. Fixed price, time, and material, or hybrid? In this scenario, you must consider whether your new digital product will succeed. So if you hire a whole new team of software developers, you’ll also have to consider the costs of employment contracts, equipment, and rent. So if things don’t go as planned, businesses stand to lose much more when they follow this approach.?
If we take the Time and Material model, for example, your company will simply agree on a partnership that can be scaled up or down based on present needs. In the early days, the primary idea behind outsourcing software projects and other business processes across continents was to cut costs. While it’s no longer the only reason we engage in this activity, it still plays a critical role in software development.
Access to Project-Specific Expertise
Established software development outsourcing providers have extensive experience working on various projects. As a result, these companies boast a wealth of rare expertise that you might need help finding in your local area. So if you’re building a unique and innovative product that demands highly sort after skills and experience, you’ll probably stand a better chance of succeeding by looking beyond your borders.
If uncomfortable with nearshoring or offshoring the entire project, you can also embrace an extended team model. With this approach, you can get your in-house developers to work with your outsourcing partner using the latest project management and communications tools. In this scenario, remote developers will be transformed into a full-blown branch of your company. At the same time, you continue to function as the head office.
Long-Term Strategic Partner
The problems with supply and demand regarding top tech talent aren’t going away anytime soon. So if you’re considering releasing updates, patches, and new versions of your digital product, it’ll make sense to get into a long-term strategic partnership with an outsourcing partner.?
This approach will help you hold on to many of the same software engineers who worked on the first incarnation of the product, so you won’t have to waste time getting a new software development team up to speed. When you get into long-term partnerships, it will also make it easier to ensure enhanced security and privacy.
Finishing Thoughts
An outsourced development team is a convenient solution that will likely cost you less in the long run. Yes, a downside is that you don’t control the process completely. You can only track the results on a daily/weekly basis. However, the probability of the performance quality is quite high because the team already has the experience and well-established methods. They also have a solidified name in the market that they don't want to risk tarnishing.
So, does the psychological benefit you get from knowing that your employees are closer to you outweigh the financial cost? This is solely for the business owner to decide. Unfortunately, mistrust of outsourcing seems prevalent in the business community. Because of this distrust,? smaller businesses tend to be more inclined to try to develop their own (possibly inferior) development team than hire an outside one.
Make your digital dreams come true, or make managing your workflow easier for your in-house development team by getting outsourced help. We are ready to discuss your project anytime you are ready!