Pros and Cons of In-House and Outsourcing Software Development (Updated)

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Emil Waszkowski
Project Management
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Do you want to launch a mobile or web software application that will be cost-effective, quickly implemented and of high quality? Are you wondering whether to outsource or create an internal development team? Read this article and learn the advantages and disadvantages of both solutions. Find out what works best for you.

1. Outsourcing and its types

  • Offshoring.
  • Nearshoring.

2. Building an in-house team

  • Benefits — guaranteed availability, better understanding of corporate culture and business.
  • Disadvantages — high costs, time needed for recruitment, onboarding and getting to know the team.

3. Cooperation with a software house

  • Benefits of working with an agency (nearshoring) — saving time, cost optimisation, limited risk, good communication, legal issues, no cultural differences.
  • Risks − control, availability.

Outsourcing and its types

'If there is something we can’t do more efficiently, cheaper and better than our competition, there is no sense in doing it and we should employ someone to do the better work for us.' — Henry Ford

Henry Ford, who was one of the greatest industrialists in history, perfectly captures the essence of outsourcing. It involves delegating certain tasks, projects or processes to external entities. There are several types of outsourcing, including offshoring and nearshoring. In this article we will focus mainly on the description of the second idea, but also briefly explain what offshoring is.

Offshoring

 

It involves the relocation of certain business units or processes beyond the borders of the country in which the company is located (offshore). Although offshoring is often used for repetitive tasks that do not involve the expert team assigned specifically to a certain project, it’s not always the case. It’s common to offshore even vital projects and transferring entire IT departments from the US to India is a good example. Offshoring’s main aim is to reduce costs, but in some cases, it’s a necessity: the global shortage of tech talent in Western countries is a fact and the number of unfilled programming positions is expected to grow. However, in addition to the measurable benefits, it is also important to mention the challenges that may arise while outsourcing services. Offshoring usually involves struggling with cultural differences, different time zones and language barriers.

Nearshoring

 

Nearshoring involves subcontracting projects or processes that are located outside the country but in the same region. For example, a German company undertaking nearshoring will be interested in Central and Eastern Europe, which is cost-effective but there are no common drawbacks of offshoring, such as different time zones, big distances and significant cultural differences Whenever there is a need for a meeting in person, flights from one European country to another are fast and low-cost. Another advantage of nearshoring is a similar legal environment. For example, the General Data Protection Regulation (GDPR) affects all the European Union, but it’s also understood in Switzerland, Norway and in the United States. Central and Eastern Europe is also in the rise when it comes to outsourcing - although China, India, and the Philippines are still the leaders, Poland, Ukraine, Romania, and Bulgaria are the next hot spots.

In short, even if the purpose of this type of outsourcing is to reduce costs, other problems, such as different time zones, cultural or legal differences disappear in this case. No wonder that nearshoring is used for complex and innovative projects that require specialised skills and a dedicated team that works closely with the clients and their co-workers.

In-house team building

If the digital product that you want to build is going to be your core business, you'll need an internal development team sooner or later. This team is always available and understands your company and its culture. Moreover, as the product develops, the internal team will be responsible for maintenance and updates and, in case of major changes, will be supported by a remote team. This solution is cost-effective because you don’t need many programmers working on the application every month. This way of product development is chosen by the best start-ups, such as Slack, as well as stable companies wishing to innovate.

Building an internal team and training it to work effectively takes time. According to a report prepared by Glassdoor, it takes about 30 days to hire a programmer and this number will likely grow: It’s estimated that in 2020, 1 million programming jobs in the US will be unfilled. For comparison, the Uber-like mobile application can be prepared in no less than 1800 man-hours (not including the servers and web applications). In 30 working days, 4 developers can work for up to 840 hours, which means they will be able to develop half the product within a month. What is more, additional time is also needed for a team that has never before worked with each other to learn to cooperate. An issue that is often overlooked when we have to choose the best solution for our business is the cost of renting a new office space, purchasing necessary hardware, tools, developer benefits, or managing idle time during project development.

Cooperation with a software house

By 'software house' we mean a specialised company offering a dedicated team of professionals working and closely cooperating with an in-house team. Such an agency should be located in the same time zone, because it enables easy communication. Ideally, the headquarters of the cooperating companies are located on the same continent. However, this is not necessary. The time difference between USA and Central and Eastern Europe is 6-9 hours. With a proper approach, it is possible to plan meetings and business talks when the representatives of both parties are at work.

Taking your goals into account, the key benefits of working with a software house include:

  • Time-saving. Recruiting, learning to cooperate in a team of local developers, takes time and requires attention that an agency can devote to product development. Developers in a software house follow the company's processes and have already implemented at least a few projects together, so they can immediately start working efficiently.
  • Cost optimisation. Nearshoring helps save money. Compared to working with a local agency or hiring your own programmers this is definitely a cheaper option. The costs of nearshoring are higher than offshoring, but still good. Here are some examples: USA 100-$150, Western Europe — 80-$100, Central and Eastern Europe — 40-$50, India — about $30.
  • Risk reduction. When you launch a new product you don’t know if it will succeed. Hiring a whole team of developers involves the costs of employment contracts, office renting and purchasing equipment. In case of market failure, this will be extra money that you can lose. In case of cooperation with the software house you don’t incur such costs. If you are working in the Time and Materials model, you simply agree on a partnership with a one-month notice period.
  • Good communication. In the nearshore model time zones do not interfere with communication because work hours of both sides overlap. Good software houses also use task control tools, which reduce the amount of time needed for meetings and results in more efficient work.
  • Legal issues. In all EU countries (or in the US) similar regulations apply when it comes to the protection of personal data, trade, taxation etc. Agencies in offshore countries can’t provide such standards. In the event of data loss or leakage, the initial savings may not cover losses.
  • Insignificant cultural differences. Culture and customs in the USA, Western, Central and Eastern Europe are not too different - people from Western countries are used to cooperate with each other and there are no significant barriers in communication. Different national holidays are probably the only bigger issue to take into consideration. Good English skills are also very important — fortunately, Poland is ranked 10th in the Education First world ranking in that category.

Collaboration with external suppliers also involves some risks. How can they be minimised?

  • Control. Replacing team members during project’s life cycle is a common practice among offshore suppliers. This can cause decreases in efficiency along with a risk that our product will be created by juniors instead of seniors. Nearshore vendors always offer dedicated development teams. Such teams are available to the clients, so they can get to meet people involved in the project, as well as evaluate the effects of their work, including specific team members, thanks to hourly reports. This kind of cooperation is very transparent.
  • Availability. Working with an external team you can adjust the conditions for cooperation so they can provide you with an experience similar to having your own team — such as flat rates or guaranteeing the availability of specific professionals within a set number of hours.

Summary

The strategy you choose to build a digital product depends on your goals, resources and priorities. We have outlined the advantages and disadvantages of different methods of IT product development. To make a good choice think about what is your priority — time, quality, price or communication.

If you want to quickly bring your product to the market and are concerned with high quality and low cost, consider hiring a nearshore agency. Here you'll learn what to consider when choosing a partner that will help you create a reliable product without any risk.

Editor's Note: This post was originally published in October 2017 and has been updated for accuracy and comprehensiveness.

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