The Benefits of Outsourcing a Software Development Company in 2021
August 06, 2021 / Katarina Rudela
Reading Time: 15 minutes
Remote work has become routine after the COVID-19 pandemic, causing organizations to embrace outsourcing more fully than before. Companies are more likely to look beyond their own staff to find the specialized skills they need at rates they can afford. Statista estimates that the outsourcing market was worth $92.5 billion in 2019, which will continue to grow as companies compete in an increasingly challenging environment. The trends in outsourcing for 2021 show that benefits such as cost reduction will become even more important for software development in the coming years.
Outsourcing is an approach to software development in which the client organization partners with a third party to develop the software, as opposed to developing it with and in-house team. US companies historically used outsourcing as a means of cutting costs by hiring workers in other countries to perform jobs requiring little skill for low wages. However, outsourcing has evolved since then to include skilled work like software development, such that sustained growth is now the driving factor. Cost saving still remains an important motivation of outsourcing, but it's no longer the only advantage. Software outsourcing strategies fall into three general categories, including on shoring, off shoring and near shoring.
On shoring is essentially a traditional business relationship between a hiring organization and a contractor or freelancer. Both parties work in the same country on a particular project, although they may still be based in separate geographic locations. In this case, the client is paying market rates, which can be quite high for specialized skills. However, the client may still save money since they're only paying for the services they need, as opposed to hiring full-time workers and paying for additional benefits such as training, insurance and stock options.
Off shoring is the traditional outsourcing relationship in which an organization hires a company in another country, most often India, China or countries in Eastern Europe. The hiring organization typically place much less than market rates in its native country, but it must also address challenges due to differences in time zones and culture that increase the risk of rework. Furthermore, off shoring tends not to support close collaboration, especially Agile development methodologies.
Near shoring is similar to off shoring, except that it involves working with outsourcing companies based in other countries that are in the same time zone. In the case of the US, this includes Canada and countries in Central and South America. Near shoring provides the advantages of lower rates without the disadvantage of different time zones, allowing problems to be solved quickly, rather than relying on e-mail. Cultural differences are still present but not as great as with off shoring, thus improving collaboration. In cases where the client must send representatives to check on project in person, travel costs are much less than with off shoring.
Tiempo Development's State of Global Software Outsourcing report for 2020 states that the greatest challenge with off shoring was a failure to meet deadlines for 31 percent of companies, while 29 percent of respondents indicated that communication problems where the biggest obstacle. Outsourcing to a team that shares some cultural affinity with the hiring organization can also help establish a bond between the two teams, thus facilitating team interaction. This benefit is particularly important for projects that require the internal and external teams to work closely together. The similar time zones that occur with near shoring allows the outsourced teams to follow their clients' business processes, helping to prevent deviations from the development plan. Furthermore, scheduling meetings and other group activities is less of a struggle with near shoring.
The COVID-19 pandemic strongly influenced software development in 2020, generally by accelerating existing trends. It has driven advances in technologies and markets, which will continue in 2021. Specific trends affecting software development this year involve cloud computing, programming languages and development frameworks.
Amazon Web Services (AWS) was the first public cloud platform that allowed businesses throughout the world to migrate their operations to remote servers. It still leads this market, although it doesn't dominate it as it once did. AWS, Google Cloud and Microsoft Azure are currently the three largest providers of cloud infrastructure services, accounting for the majority of this market. Google Cloud and Microsoft Azure have been gaining slightly on AWS, although the combined market share of these three providers has continued to increase. The following figure from a 2019 study by Canalys shows these details:
Java and C remain the most popular programming languages in the world, although their use is slowly declining. The biggest change in programming languages is the rapid adoption of Python, particularly since 2018. Python has risen from a comparatively low level of use during this period to become the third most popular language in the world. This programming language has proven to be highly suitable for modern software development, including full stack web development, UI/UX design, front end development and back end development. The chart from Tiobe below shows these details:
Enterprises are generally moving away from the large-scale adaption of hybrid cloud solutions. However, smaller organizations typically still prefer universal cross-platform development, especially start up. React Native has been steadily increasing in popularity over the past few years, surpassing Xamarin in 2019 to become the most popular hybrid solution. This trend is primarily due to React Native's greater ease of learning and code usability, in addition to its use on Facebook. The figure from Google Trends below shows these details:
The benefits of outsourcing include the following:
- Cost savings
- Maximization of resources
- Better access to the latest technology
- Recruiting top talent
- Strategic partnerships
The use of outsourcing to countries with the cheapest labor has traditionally been its greatest benefit. Cost savings is still a compelling reason to use outsourcing, but the landscape has changed dramatically in the last few years. Outsourcing now allows organizations to hire top-tier talent for below market rates in areas requiring a high degree of skill, including software development. Assuming that the hiring company is ethical, it will pay local market rates for skilled labor, making outsourcing a win for both the client and outsourcing firm.
Companies are now more likely to use outsourcing strategically as a means of optimizing costs. This process generally requires a careful assessment of costs, required skills, scope of work and stakeholder involvement before making a decision on whether to use outsourcing for that project. For example, a company could use off shoring for a project requiring little oversight since it's the least expensive outsourcing option. However, that same company could also use near shoring for a project requiring greater collaboration and stakeholder involvement. In this case, the company would be willing to pay the higher labor costs to obtain the greater oversight required for this project.
Maximization of Resources
Tiempo’s report for 2020 shows that 24 percent of companies believe labor and development costs to be the biggest challenge in scaling their operations. The potential for obtaining meaningful growth from a small budget is one of the biggest benefits of outsourcing software development today, especially for small businesses. These companies can use outsourcing to compete on a larger scale, provided it's done properly. Fifty-four percent of the respondents in the Tiempo Development survey indicated the reduction of development costs was a key advantage of outsourcing software development, while 38 percent said providing more value for their customers was critical to their decision to outsource. Additionally, 37 percent of respondents cited the increased functionality and features of software as a major reason to outsource development.
The potential for obtaining meaningful growth from a small budget is one of the biggest benefits of outsourcing software development today, especially for small businesses. These companies can use outsourcing to compete on a larger scale, provided it's done properly. A strategic approach to outsourcing can allow businesses to sustain their growth and expand their market penetration without major investments in hardware, software, infrastructure, development technologies and new hires. This process may involve a partnership with an outsourced development team to help internal teams improve their processes. A common example of this is using outsourced developers who are already experienced in Agile best practices to train in-house teams.
The ability to innovate rapidly without sacrificing quality is especially important for small businesses. Outsourcing software provides these companies with greater control over the speed of their software development by using outside talent to scale development speed as needed. In contrast, in-house development requires the available resources to dictate development timelines. Forty-eight percent of the companies surveyed in the Tiempo Development report cited the acceleration of timelines as a major advantage in outsourcing software development.
Better Access to the Latest Technology
Improved access to the latest technologies is another key benefit of outsourcing software development. In many cases, organizations simply don't have these tools in-house, so outsourcing allows them to use new technology without buying it and training internal staff in its use. Furthermore, the pandemic often forces businesses to respond to rapid changes in customer expectations, which can be particularly challenging when a company is already in the middle of a digital transformation. A common scenario of this type occurs when a business currently offers a few digital channels, but customers want a new channel that isn't currently offered. Outsourcing software allows businesses to quickly leverage technologies such as chatbots and virtual assistants to create a seamless omni-channel customer experience (CX). Artificial reality (AR) and virtual reality (VR) are also digit channels that companies may need to deploy in the near future.
Recruit the Best Talent
Outsourcing allows organizations to hire the best talent for a job when they need it. This approach eliminates the need to train in-house staff or hire new staff every time they need specialized skills for a project. 42 percent of the respondents in the Tiempo Development survey said that the ability to fill internal skills gaps was a critical benefit of outsourcing.
In addition to meeting new challenges in data privacy and security, outsourcing is helping organizations address increases in customer demands. This requirement often includes improving IT infrastructure, which may require third parties to assist with migrating infrastructure to the cloud. Additional skills that outsourcing can fill more efficiently include big data management and Internet of Things (IoT) adoption, which are often difficult to find directly by hiring locally.
More organizations are embracing outsourcing as a strategy for partnering with third parties that provide products and services that aren’t part of the client's core competencies. The ability to develop long-term relationships with these vendors can add value for the client, although not every outsourcing arrangement is suitable for this purpose. However, a specialized team with expert skills and knowledge in the client's target market can be crucial when outsourcing software development.
Furthermore, working with the same outsourced team allows both organizations to become more familiar with each other's communication methods and overall working style. In these cases, the outsourced team can feel like an extension of the in-house team. Such a close partnership can be difficult to achieve when the other team is halfway around the world.
CGS, an international outsourcing firm, reported in a recent study that room for improvement still exists in outsourcing, despite its increasing use. Organizations participating in this study said that the greater need for data security, lack of required skills, and poor communication continue to be major pain points in outsourcing. Most participants said that outsourcing reduced their overall costs, but failure to address these issues placed their organizations at risk.
Outsourcing software development has great potential for helping organization achieve their long-term business goals by solving significant challenges. However, realizing the full benefits of outsourcing isn’t as straightforward as simply hiring a good outsourcing firm. The best results in this process come from developing a close relationship between your in-house staff and outsourced developers.