The All-In-One Guide to Software Development Outsourcing

The All-In-One Guide to Software Development Outsourcing

Quick Summary: Explore software development outsourcing: an established business model with a growing IT offshoring market. Assess the potential benefits and drawbacks before diving in. This software development outsourcing guide offers insights into efficient outsourcing practices.


The practice of outsourced development is on the rise within the IT industry. 

According to reports, the software outsourcing market is projected to experience a Compound Annual Growth Rate (CAGR) of 3.69% from 2023 to 2028, potentially reaching approximately USD 701.88 Billion by the conclusion of 2028.

In the context of Software Development Outsourcing alone, recent research from Commit indicates that there is expected to be a 70% growth in this sector by 2023 end. According to ISG, IT services constitute 72% of the total value of global outsourcing contracts.

IT services make up 72% of all global outsourcing contract values

Developing software constitutes a crucial decision, which is why many companies understandably approach outsourcing such projects with caution.

Nonetheless, achieving success in software development outsourcing projects hinges on a thorough understanding of the process from inception to completion. Your Team in India has meticulously dissected these intricacies for you. This software development outsourcing guide aims to assist you in identifying the ideal software developer outsourcing company tailored to your specific needs.

Key Takeaways
  • Outsourcing software development streamlines business growth for faster results, sparing concerns about the technical side. First, understand what it entails, along with its pros and cons.
  • Enhanced productivity, superior product quality, and cost savings are advantages of outsourced software development. Yet, effective IT outsourcing necessitates meticulous planning, emphasizing the need for a robust outsourcing strategy.
  • With their adaptable pricing structure, outsourcing services cater to businesses of all sizes, from small ventures to larger enterprises.

Drawing from the essential insights from the aforementioned statistics, here are some noteworthy things to consider regarding offshore software development services and everything you need to know about them.

What is Software Development Outsourcing?

Software development outsourcing entails enlisting individuals or teams from external sources to manage some or all of the software development projects. Outsourcing Software Development decisions rely on varied factors. However, the initial selection is based on the types and models of outsourced software development services for your project. Let’s get acquainted with them first.

Software Outsourcing Types

Outsourcing can be categorized into three main types based on the location where the work is performed:

    1. Onshoring

In this collaboration, you transfer your software development to an outsourcing software development partner in the same time zone within your own country. 

    1. Nearshoring

Nearshoring means ‘near’ to home but not in the same area. For example, software developers in Los Angeles are quite expensive, and there’s no easy “onshoring” option. Dedicated Mexican software developers, however, work in a similar time zone and would have much lower costs.

    1. Offshoring

In this model, you build an independent software development team worldwide by setting up an offshore development center, and everyone on that team will solely work on your project. Simply put, an offshore team of software engineers is located in a different country, usually at a great distance, that solely works on your project. 

Software Outsourcing Models

The software outsourcing business model outlines how you partner with a vendor. Here's a preview of the three most prevalent software outsourcing models:

1. Time and Material Model

When the client cannot clearly define the requirements, a software development company would most probably prefer to implement this model. In this case, the client would pay as per the utilization of the resources (man-hours and materials). The mode is also suitable when the client needs to develop just a trial before full-fledged software.

Time and Materials (T&M) Model
Payment Structure Customers are billed based on the time the developer dedicates to the project.
Ideal for Long-term projects with unpredictable requirements and scope during the initial phases. Often preferred by businesses prioritizing adaptable development needs.
Important Note This model is not considered in "idle time" when developers await feedback from the client before proceeding.

2. Dedicated Team Model

The outsourcing company provides a dedicated team of software developers who seamlessly integrate with the in-house team, collaborating closely throughout the project.

Dedicated Team Model
Payment Structure This pricing model best suits hourly, monthly, or weekly payment structures.
Ideal for Long-term projects that demand consistent dedication and efforts from a specific development team.
Important Note Thorough preparation is crucial from the beginning. The company that hires the developer retains complete control. The dedicated developer works exclusively on the project assigned to them, much like an in-house developer.

3. Fixed Price Model

In a fixed-price model, the outsourcing partner and the client establish a predetermined cost for the entire project or specific deliverables, encompassing the scope of work, timelines, and expenses.

Fixed Price Model
Payment Structure Customers pay a predetermined total cost for outsourcing services.
Ideal for Projects with well-defined scope and objectives. Startups with limited funds seek to ensure work is completed within budget.
Important Note Thorough preparation is essential from the outset. The outsourcing company must gather comprehensive details about the technical stack, clearly understand milestones and deliverables, and possess records outlining the software's inclusions.

Why should you outsource software development?

Based on a report, 92% of G2000 companies utilize IT outsourcing services, and 37% of small enterprises outsource at least one business process.

While there isn't a strict rule about who should outsource and when, certain situations provide clear reasons for considering outsourcing development. Here are a few reasons:

1. Large enterprises facing a project surge

2. Rapidly growing company

3. Need for access to specialized skills

4. Cost concerns

5. Requirement for 24X7 development and support

6. Filling in in-house gaps

7. Need for swift development

8. Reduction of risks

However, to have a complete insight into when and why should you outsource development, don't forget to check this out.

How does software outsourcing work?

Outsourcing software development is a strategic business approach wherein companies delegate specific tasks or entire projects to external service providers. These providers, often situated in different regions or countries, possess the requisite expertise and resources for developing, maintaining, or enhancing software applications.

To delve deeper into the realm of software development outsourcing, it's crucial to grasp the workings of the process. This encompasses several key stages:

1. Vendor Selection: Companies meticulously assess potential outsourcing partners based on their experience, expertise, portfolio, cost-effectiveness, and alignment with company culture.

2. Contract Negotiation: Both parties engage in negotiations to establish terms, encompassing project timelines, milestones, deliverables, payment schedules, and the allocation of intellectual property rights.

3. Development Phase: The outsourced team assumes control of the development process, leveraging their skills and resources. Maintaining regular communication and providing progress updates are pivotal during this phase.

4. Quality Assurance and Testing: The software undergoes thorough testing to pinpoint and rectify any bugs or issues. This phase ensures that the final product meets stringent quality standards.

5. Deployment: Once the software achieves stability and fulfills all specified requirements, it is ready for deployment.

6. Maintenance and Support: Following deployment, the outsourcing team may offer ongoing maintenance and support services to address any future issues or implement updates.

Pros and Cons of Outsourcing Software Development

Outsourcing is an excellent option for businesses looking to achieve their digital transformation goals while maintaining a cost-savings and mitigating risks approach. These advantages influence more and more global companies.

We’ve outlined six top benefits of outsourcing your software development below.

1. Cost-Reduction

According to Deloitte findings, 70% of organizations are attracted to cost reduction when outsourcing their software development projects. The time and huge expenses associated with recruitment & training, and managing technology teams are major factors in these cost reductions.

Therefore, instead of hiring staff and resources, assigning this task to a specialized IT outsourcing company is more beneficial. In addition, employing IT talent from a software development partner helps maintain capacity levels aligned with budget and resource needs throughout the project or beyond. 

Outsourcing Cost Calculator

2. A Larger Talent Pool

One of the critical reasons why organizations outsource software development services is how challenging it is to hire software developers to work on a particular application development project, such as RPA automation or flutter app development, that needs highly specialized professionals. 

All that summarizes into a minimal talent pool when hiring locally, which gets even more challenging when other market players look for the same prospects.

3. Quick Time to Market

Outsourcing software development can leverage a huge pool of resources for software or app development. Customers can access all development resources quickly and hassle-free, allowing them to provide quick time to market for products. 

At the same time, a dedicated offshore software development partner ensures the implementation of the Scrum and Agile methodology approaches and sets the necessary priorities to achieve the customer’s desired result. 

This significantly lowers the Time to Market and meets the pre-defined parameters for providing the project to real users. 

4. Mitigating Project Risks

Developing and releasing new applications or software comes with several risks, such as code issues, pre-defined tight deadlines, and inaccurate estimations, to name but a few. 

Outsourcing software development can enable you to mitigate software product development risks. 

The dedicated offshore software development company provides a team that employs a high-quality project management system, comprises a well-established and smooth workflow, and has proven success in developing applications that ensure consistent business ROI. 

5. Focusing on Core Functions

Usually, businesses easily get distracted by dividing their time and efforts between activities relevant to the company’s operations but outside the core business goals. This is where outsourcing software development comes in and helps business leaders focus on their areas of expertise.

Simply put, businesses can focus on their core goals by hiring outsourced software development services providers. 

There are numerous advantages to outsourcing, and they extend beyond this. Alongside the full spectrum of benefits in outsourcing software development, corresponding drawbacks exist. Read now to have a complete set of information on the pros and cons of outsourcing software development.

Software Outsourcing Challenges and Solutions

In addition to the advantages outlined earlier, outsourcing can also address the most prevalent challenges confronted by CTOs and product managers.

CTO’s Challenges Problem Description How Software Development Outsourcing can help?
 Recruiting Tech Specialists  When seeking tech specialists in your city or country, you're constrained by the available pool of professionals actively seeking employment and, frequently, by their associated costs  Outsourcing provides the chance to tap into a global talent pool and engage skilled professionals at more cost-effective rates, particularly from regions with lower living costs.
 Ensuring Tech Innovation To implement innovations, the CTO’s team has to be technologically advanced, keep up with tech trends, and be able to generate new ideas. However, it might take time for the team to gain all that knowledge and skills. In the meantime, it will delay innovation. Engaging professionals from other countries facilitates knowledge exchange and provides access to fresh technological perspectives.
Meeting Project Deadlines Meeting deadlines can become challenging when managing multiple concurrent projects. Moreover, when deadlines are initially tight, unexpected developments can further strain the team's ability to deliver results on schedule. Outsourcing professionals can assist by either sharing the workload with your team or handling specific segments of a project, ensuring timely delivery without sacrificing quality. Additionally, it allows you to hire as many workers as needed to meet project deadlines.
New Digital Tech Requirements Achieving innovation necessitates familiarity with cutting-edge technologies like Artificial Intelligence, blockchain, the Internet of Things, and more. If these technologies are not prevalent in your region, mastering them could pose a challenge. Outsourcing provides you with access to a worldwide pool of talent, enabling you to onboard professionals who already possess the requisite technical expertise.
Technical Debt If your team is accustomed to developing a product using an older version of a particular technology, transitioning to the latest version may necessitate an adjustment period. The company might also face constraints in swiftly adopting the updated technology due to budget considerations. Consequently, this could lead to a slowdown in the development process, resulting in accrued technical debt. Outsourcing firms can expedite the process of updating your tech stack or transitioning to a new one, enabling you to promptly resume work on your projects without encountering substantial delays.

Since Software Development Outsourcing can resolve the challenges encountered by CTOs, similarly, there are some challenges faced by Product Managers that can also be resolved by adopting Outsourcing. Let us get acquainted with a few of them:

Product Manager’s Challenges Problem Description How outsourcing can help
Limited Tech Understanding Selecting the appropriate framework, library, or stack for development can be challenging if you lack familiarity with a specific technology. Companies can provide their technical expertise to expedite your proficiency in a specific technology, enabling you to quickly attain a higher level of technical maturity.
Inadequate Planning Embracing new technologies or projects may lead to insufficient planning, especially when the ambition to achieve results quickly doesn't align with the team's available resources and pace of work. Outsourcing companies excel in precise planning, accurately gauging the amount of time needed to accomplish specific objectives.
Managing Cash Flow It's crucial to ensure you have sufficient funds to initiate the project successfully and ensure its timely completion, accounting for any unforeseen potential costly complications that may arise. Through outsourcing, you gain a tech partner who can assist with financial planning. Additionally, you achieve cost savings by compensating the team solely for their working hours and by engaging professionals with more affordable hourly rates.
Inability To Scale Scaling can be intricate, particularly for startups and small businesses. It demands a wealth of expertise and resources. Outsourcing enables you to flexibly adjust team sizes based on the project's stage, whether you need to scale up or down.
Managing IT Infrastructure Managing infrastructure entails ongoing monitoring of the company's technological requirements and resources. This can pose a challenge, particularly for small teams and companies. Outsourcing places the responsibility of managing IT resources in the hands of dedicated IT administrators and specialists committed to round-the-clock monitoring, ensuring the prevention of downtimes.

What to look for when outsourcing software development?

Choosing the right company is crucial once you've determined the model and type of software development outsourcing that suits your needs. To do this, businesses should have specific evaluation criteria or a checklist to identify the best fit for their requirements.

When entering partnerships with outsourcing companies, they might make promises of delivering exceptional business benefits but may fall short when it comes to complex and challenging applications. Therefore, it's important to consider the following essential parameters during the selection process.

    • Assess Technical Expertise

When allocating resources to an offshore company, it's crucial to ascertain the technical proficiency and experience of the custom software development firm. Recognize that each project is distinct, tailored to specific business needs, and necessitates specialized skills. 

Evaluate the capabilities and experience of the potential outsourcing company to grasp what they bring to the table.

    • Verify Existing Client Relationships 

Client testimonials serve as a means to authenticate an organization's work. It's important to comprehend the nature of the client, their business offerings, and their track record with past clients. This can significantly influence the assessment of an IT outsourcing vendor. 

Additionally, independent platforms that feature client reviews and outsourcing company evaluations can be instrumental in making precise judgments. If necessary, reach out to current clients via email for a more comprehensive understanding.

    • Effective Communication and Transparency 

Establishing a foundation of trust is paramount when collaborating with individuals or organizations. Trust should be a cornerstone whether you're partnering with a nearshore or offshore business. 

Transparent communication is the bedrock of trust in outsourcing relationships. Therefore, if everything seems in order but lacks transparency, it's crucial to carefully weigh your decision before proceeding.

    • Team Expansion 

Scaling resources is a critical element in the software industry. When it comes to meeting deadlines or recovering from delays, it may be necessary to increase team size. A software outsourcing company should possess a sufficient pool of skilled developers who can be readily deployed to bolster resources and accelerate project timelines.

Considering Software Development Outsourcing can be beneficial in many aspects; however, businesses are frequently skeptical about choosing one out of Inhouse vs. Outsourcing. Read on to get clarity that may help make a more informed decision.

Inhouse vs. Outsourcing - what to choose?

The decision between in-house vs. outsourcing hinges on your unique business requirements, objectives, and resource availability. It is crucial to thoroughly assess these factors before arriving at a decision.

Here's a quick comparison between in-house and outsourced software developers:

Aspect In-House Software Developers Outsourced Software Developers
Cost Higher costs due to salaries, benefits, office space, and equipment. Potential cost savings, as you only pay for the services provided. No overhead costs.
Expertise Team members are dedicated to the company's projects and can develop deep domain knowledge. Access to a global pool of specialized skills and expertise.
Control & Oversight Direct control over team members and projects. Easier to communicate and manage tasks. Some degree of control but less direct oversight as they work remotely. Communication may require extra effort.
Flexibility Limited flexibility to quickly adjust team size or skills based on project demands. High flexibility to scale teams up or down according to project requirements.
Time & Availability Easier coordination and real-time collaboration with in-house team members. Time zone differences may require careful coordination for effective communication.
Speed of Development Potential for faster development due to the in-house team's familiarity with company processes and requirements. Depending on the outsourcing partner, development speed may be influenced by factors like communication, time zones, and project complexity.
Risk Management Direct control over security measures and compliance protocols. Reliance on outsourcing partner's security measures and compliance practices. Requires due diligence in selecting a reputable partner.
Focus on Core Competencies Resources, and efforts may be diverted to managing a larger team and technical infrastructure. Allows the company to focus on its core business functions while outsourcing technical tasks.
Geographic Location Team members are located on-site, potentially enhancing team cohesion and company culture. Team members may be located in different countries, potentially leading to a diverse range of perspectives and experiences.

Have you decided on what to choose? Well, after looking at this comparison, Outsourcing might be your choice. However, as mentioned above, the decision depends on the requirements and parameter analysis. 

But here comes another aspect that requires attention. Whether you choose for in-house or outsourcing, hiring a software developer could be a challenging yet daunting task. 

Worry no more!

We have compiled a complete, quick guide on how to locate a software development outsourcing company for your next project. 

How to find a software outsourcing company?

Embracing software development outsourcing can be a strategic decision for businesses aiming to access specialized skills while managing costs. However, selecting the right IT outsourcing partner demands thorough consideration and diligent evaluation. Here are the steps to guide you in identifying a dependable software outsourcing company:

    1. Clarify Your Project Requirements

Before seeking an outsourcing company, distinctly define your project's scope, objectives, and technical specifications. This understanding will facilitate effective communication with potential partners.

    1. Establish a Budget and Timeline 

Set a practical budget and project schedule. Doing so will enable you to pinpoint outsourcing companies that match your financial limitations and project deadlines.

    1. Explore Potential Partners

Explore the potential partners by:

    • Online Search: Make the most of search engines to compile a list of potential outsourcing companies. Focus on using keywords specific to your project requirements.

    • Industry Forums and Communities: Engage in online forums or communities related to software development. Seek advice and recommendations from industry peers or professionals with outsourcing experience.

    • Social Media and Professional Networks: Platforms like LinkedIn and Twitter can be invaluable for discovering and connecting with software outsourcing companies. They offer a platform for networking and exploring potential partnerships.

    1. Review Client Feedback and Testimonials

Take the time to explore client reviews and testimonials on independent platforms or the company's official website. This offers valuable insights into their track record, client satisfaction levels, and ability to deliver projects successfully.

    1. Assess Technical Proficiency

Examine the technical proficiency of the outsourcing company's team. Inquire about their experience with pertinent technologies and frameworks.

    1. Confirm Communication Proficiency

Effective communication plays a vital role in outsourcing relationships. Verify that the outsourcing company has established a clear and efficient communication protocol.

    1. Take Cultural Compatibility into Account

If relevant, factor in the cultural compatibility between your team and the outsourcing company. Shared values and work practices can enhance collaboration and workflow efficiency.

    1. Address Data Security and Privacy

Ask about the outsourcing company's data security measures and privacy policies. Ensuring the safety of sensitive information is of paramount importance.

    1. Engage in Terms and Contracts Negotiations

Once you've pinpointed a potential partner, engage in discussions about project specifics, terms, and contracts. Clearly delineate roles, responsibilities, deliverables, and payment terms.

    1. Start with a Small-Scale Project

Consider commencing with a smaller project to assess the outsourcing company's capabilities and working dynamics before embarking on a larger-scale commitment.

    1. Foster Transparent Communication

Sustain open and clear communication with the outsourcing team throughout the collaboration. Regular updates and feedback sessions are pivotal for a thriving partnership.

Choosing the appropriate outsourcing partner is a crucial decision that can greatly influence the success of your project. Invest the necessary time, conduct comprehensive research, and opt for a partner that resonates with your business objectives and values.

How much does it cost to hire an outsourced development company?

Providing an exact number without understanding the type of requirements and other contexts is challenging. However, from our experience, the estimated range for software development costs typically falls between $50,000 and $250,000.

The lower end of this range corresponds to a basic app with minimal user interaction and backend processing, requiring fewer development hours. Conversely, the cost is likely to reach six figures for a multi-platform app with server-side applications, intricate financial transactions, extensive user interaction, and integration with external systems.

For a broader perspective, refer to the table below, which illustrates the varying hourly rates for software outsourcing companies in different regions.

Best Software Development Outsourcing Regions
US $90-200 / hr
Western Europe $60-80 / hr
Eastern Europe $30-60 / hr
Canada $35-60 / hr
Asia $20-45 / hr

The above table clearly indicates that outsourcing software development to India can be one of the most significant decisions. Software outsourcing in India is not only cost-effective but also quality-assured and beneficial in many aspects.

Best Practices for Software Development Outsourcing

While there isn't a universal method for establishing an effective collaboration with an outsourcing company, several widely recognized best practices can enhance your partnership's productivity. However, click here to have a complete note of best practices for outsourcing software development.

    • Understanding when to opt for outsourcing is crucial. Identifying which aspects of the process should be delegated and which should not can result in time, cost, and stress savings.

    • Even after conducting thorough research, reviewing the company's portfolio, and being satisfied with what you've seen, it's still prudent to begin with smaller projects to ascertain if you and the outsourced team are compatible.

    • Whether you bring several professionals to join your in-house team or hire a separate team to handle your projects, these individuals will be integral to your company. It's essential to onboard them with the same diligence as your in-house team to guarantee seamless performance.

    • Numerous performance monitoring tools are available to track outsourced projects and their advancement. Employing these tools can assist in verifying that the team adheres to deadlines and progresses according to the established plan.

    • Transparent communication is key to a fruitful collaboration. To optimize your outsourcing experience, be prepared to provide feedback to the team and encourage them to share it with you.

Why choose YTII as your software development outsourcing partner?

There are several factors to consider when it comes to outsourcing software development, whether for startups or enterprises. From defining your project scope and determining the type of development needed to assessing the associated costs and choosing the appropriate outsourcing model.

We hope this comprehensive guide has given you a thorough understanding of software development outsourcing and how to harness its benefits. 

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Harjyot Kaur

Harjyot Kaur

As a technical content writer, my focus is on creating high-quality, engaging, and informative content that simplifies complex technical topics. Throughout my career, I have continuously pursued opportunities for growth and development, refining my skills and expanding my knowledge base.