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How to Outsource Software Development: The Ultimate Guide

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Plus how Iglu can be your outsourcing partner for software development

It has been an integral part of the business models of the majority of companies to outsource software development in recent years.

The events of the past year alone have conditioned companies from wide-ranging industries to endeavour into remote work, which consequently is a natural characteristic of software outsourcing.

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The now widely practiced strategy of outsourcing software development to fulfil project requirements is more popular than ever given the COVID pandemic, that has sprouted newly adopted work habits like working from home and  ultimately a remote-work-first strategy.

To the client, all outsourcing can be considered remote work given that the software outsourcing company in question will be operating away from the client’s work premises and more than likely in a different country.

The incentives of utilising an outsourcing company boil down to three big benefits:

  • Being able to streamline your internal business operations away from development to focus more on the business’s core competencies.
  • The ability to introduce highly skilled and reliable developers into your business operations that would otherwise not be possible.
  • A reduction of internal costs and a simplification of your budget planning.

So in addition to companies having to adapt to a majority remote workforce due to the pandemic, one can argue that this was inevitable given the benefits of doing so.

COVID 19 has accelerated digital workforce adoption by several years, and software development outsourcing is more popular than ever as a result.

This article will explain everything you need to know about software outsourcing, including:

  • The software development outsourcing models you can adopt and which type would be best suited for your company.
  • The benefits and risks of hiring the best software outsourcing companies, as well as how to avoid the latter by outlining strategies you can take to choose the leading software outsourcing company for your requirements.
  • The current global state of software outsourcing, and what continent / key countries offer in terms of financial benefits and skills.

This article coincides with another article by Iglu on outsourcing web app development; a subfield of software development that contains a lot of overlap with this piece. Read both pieces to get a complete picture of outsourcing. Read the article here: How to Outsource Web Development

Software outsourcing is not only trendy, it is fast becoming a necessity to stay competitive if the company is not technically capable of carrying out a development process they critically require.

And because there are no shortages of software outsourcing services to choose from, the bar will continue to rise for software quality and ultimately end-user expectations, whether we are considering in-house software or publicly available products and services.

State of Software Development Outsourcing

The State of Software Development Outsourcing and Current Trends

Digital transformation is a buzz word used by companies today that refers to the process of migrating company infrastructure to that of a digital one.

This could mean transitioning files from hard drives to cloud computing, adopting project management tools and communication software, revamping meeting protocols to an online-first policy, and more.

Amid a digital transformation effort, many companies will require their own software to be developed whether that be ad-hoc management software, a boost to their online web presence, mobile app development, or tooling suited for cloud computing that can streamline the day-to-day running of the company.

CEOs: A digital transformation strategy is vital to success

Digital infrastructure is now a vital component of running a company, and a CIO (Chief Information Officer) would have been the first person to point out that a digital transformation strategy is now critical to ensure the long-term viability of a business.

But now the majority of executives are also realizing this truth, with 8 out of 10 executives now agreeing that digital transformation is vital for the long-term success of their company.

Since the COVID pandemic began, the CIO-CEO relationship has strengthened by 66%, and 70% of CIOs are assuming leadership of high impact projects.

Furthermore, 80% of CIOs are educating other executives on the value of an IT initiative. These are dramatic numbers highlighting the importance of the digital transformation. (Data taken from KcKinsey Surveys).

In fact, the biggest threat companies now face is the lack of necessary skills available to carry out their requirements; this is especially true in the US.

So naturally, software outsourcing  interest is at an all-time high, even amongst the higher ranking executives of companies.

Software development services range in quality, professionalism, reliability, work ethics, geographical location, and more. Software outsourcing is trendy and there are an abundance of outsourcing firms to choose from, but this does not automatically suggest that an outsourced team is capable of carrying out tasks.

As the article explores later, there is a huge range between quality and skills amongst the software outsourcing market, and this is true on a global scale.

The supply gap for quality software developers

Digital transformation has never been so important but there is an evident lack of talent in the software development space.

This lack of talent is also becoming a greater challenge for software outsourcing services in terms of keeping salaries low to maintain competitiveness.

As a result, salaries for developers keep rising both in developed and developing economies, and this trend will undoubtedly continue until at least the end of the decade.

More than 80% of companies are now quickly moving with their own development initiatives, and this lack of skill is the main bottleneck to their efforts.

Concretely, software development is a term that encompasses a multitude of skills and disciplines that range from programming languages, development strategies like the agile methodology, fluency in specialised software, QA testing and deployment, and more.

There is no one size fits all with software development and digital solutions in general, and this can become problematic for companies that require a particular set of specialised technical skills when hiring software development companies for their outsourcing project.

Over 80% of companies are now actively pursuing development initiatives. Not only do there lie challenges for the company to find the right software development team, but also for the software outsourcing firm to offer the sought-after skills companies require – that often pertain to industry leading or cutting edge skills to maintain relevance.

The right outsourcing team however can dramatically boost a company’s prospects, making them more innovative, resilient and competitive in the market they are operating in.

The pandemic exacerbates this supply and demand imbalance

Now in mid-2021, the pandemic has exacerbated these problems as businesses have fought for their survival.

One of key survival strategies amid digital transformation efforts have been to outsource software development as a way of reducing costs and optimising productivity in-house.

As a result, software outsourcing and the accompanying remote work trend is unlikely to pass due to reported benefits of the model that include:

  • Workers feel a lot less stressed and overall more productive. Less time commuting and avoiding stress from the workplace play a big part in this improvement in mental health.
  • Happier and more efficient workers lead to a lower staff turnover that results in reduced office overhead.
  • The overall workforce of the company feels more job satisfaction as more gets done.
  • The model is proven successful and therefore promotes more workers to position themselves as remote developers, either as teams or individuals. The talent pool grows and competition flourishes.

An exclusively remote team is not the ultimate solution however – it is realised that at least some time at the workplace is needed for face-to-face meetings, access to hardware and equipment that can only be housed in the workplace, etc.

To meet the balance, hybrid work models are being experimented with, and the majority of companies are planning to continue to operate remotely to some degree indefinitely through 2021 and beyond.

Software Outsourcing Models

Software Outsourcing Models

There are 3 main models for software outsourcing that the majority of companies adhere to, although it is also possible to adopt a hybrid model where appropriate such as when managing multiple projects of different disciplines or of different scales.

Staff augmentation

The staff augmentation model is designed to maximise efficiency in your own workforce by outsourcing only the software developers that you require to fill the void of your in-house team.

Staff augmentation allows you to source developers of a particular skill set to complement an existing team. The project is still managed by an in-house project manager who should oversee the entire effort and direct individual developers as necessary.

Staff augmentation is best suited for scenarios where:

  • You have a reliable and competent project manager in place who is capable of taking the software development process forward, and who can manage internal and external developers who may be introduced to the development effort.
  • You already have a team of software developers at hand, but where a particular skill set or needed additional manpower is needed.
  • You do not have time to recruit, train or onboard a developer into the company and spend the needed resources to bring them to fluency in your desired skill set.
  • You need sudden or urgent help with a development task that your in-house team are not capable of completing.

Dedicated team

With a dedicated team model, an external development team of outsourced software developers (as the name suggests) work on your project as per your requirements, but report to their own PM (Project Manager) in the process.

It is the PMs responsibility of the outsourcing team to maintain communication with the client to report milestones and other notable events and issues along the development pipeline.

Likewise, as the client, the software outsourcing PM should be available to answer queries and react to changes in project development as they are reported.

A dedicated team is a good middle-ground between you having full responsibility for a project and a totally independent organisation building a project for you. A dedicated team works well when:

  • You have a highly experienced and competent manager who can advise and contribute to the software development effort being undertaken by the external development team. Your manager should liaise with the external project manager on issues and monitor the project to ensure it is on track.
  • You need to branch out into an entirely new area of software development, but have that branch be a part of your overall solution that you are overseeing.
  • You do not have the budget, time or resources to develop the solution fully in-house, but at the same time wish to maintain oversight and play a decisive role in the development process, ensuring the production-ready software is true to your original vision.

Project-based software outsourcing

If you do not have a team to get a project built or you are purely focused on other efforts and do not have the technical expertise to manage a software development project, then the project-based software outsourcing model is the most efficient approach.

With project-based software outsourcing, the entire project is managed by the outsourcing agency, who is responsible for the entire development pipeline, outsourcing team, and key decisions along the way.

Although software development companies need to stay loyal to a set of requirements laid out by the client, the methodologies of getting those requirements completed is up to the outsourcing vendor exclusively.

Although communication is still critical to any software development outsourcing effort, there will be less need for day-to-day communication between client and vendor here as the teams are not working so integrally together.

Project-based software outsourcing works well when:

  • You have a medium to large company that needs to maintain their core business operations, and wish to introduce new software into their own workflows. The process of getting this software ready is not as important as being able to implement a final solution into the pipeline.
  • The project at hand is straight-forward or small in scale, and could be completed by an external outsourcing company in a timely and efficient manner.
  • You are a small company and do not have the resources or manpower to oversee a development project.

The CIO’s role is more relevant and in-demand than ever, and if your business does have an acting CIO, they should be in the decision making process of which outsourcing model to choose.

Benefits of Outsourcing Software Development

The Benefits of Outsourcing Software Development

You may have already identified some benefits to outsourcing as well as the best suited model for  your particular business, but there are some general advantages to outsourcing development that fall into all the above practices.

Access to a growing pool of global talent

Outsourcing a top software outsourcing company need not be limited to your local geographic location; it is a global marketplace that is steadily growing in talent as more developers are incentivised to fill the highly skilled software developer talent gap.

There are a number of online services that act as aggregation platforms to streamline this discovery process that are documented in the counterpart to this piece.

Ability to outsource particular skills of interest to complement an existing team

Hiring a software outsourcing company can give you access to needed skills that were otherwise not available in your existing team, either due to the skill sets of your employees or because of finances and budget limitations.

Outsourcing development allows companies to pay only for the skills they require and thus keep the company lean and streamlined.

Cost savings versus hiring in-house

Not only can software outsourcing fill the void of skills, they can often do so at a cheaper rate than if you attempted to do so in-house through recruiting and bringing onboard a full time employee.

The highly skilled software engineers accessed through outsourcing development services can also bring a wealth of experience to your software development projects, resulting in a higher standard of software, quality assurance (QA) and bug management.

Experienced software engineers are also more likely to adhere to standard code conventions, making code more readable and maintainable.

Flexibility and reliability

Bringing in a highly skilled and experienced software development outsourcing partner will also bring desirable attributes to that team, including reliability and the ability to leverage their experience to be proactive when issues arise.

With an experienced outsourcing partner, workflows will be robust and efficient and milestones will more likely be completed on time.

Risks of Outsourcing Software Development

The Risks of Outsourcing Software Development

Along with benefits, there are also major risks that come with outsourcing software development. Be aware of the following risks, that can often be avoided by opting for a reputable and high quality outsourcing vendor.

Miscommunication and differences in expectations

Communication is paramount in any business partnership, and this is no different when outsourcing software development.

Time Zone differences, work ethics and cultural differences all can contribute to miscommunication that can cause slow-downs, tension in attempting further communication, and ultimately the project drifting in an undesirable direction.

It is undeniable that offshore outsourcing companies do offer valuable propositions (that will be explored further down), but doing due diligence on the work ethics, and expectations in terms of day-to-day running and favoured communication channels, will be invaluable for avoiding undesirable outsourcing firms.

Security of intellectual property and copyrighted materials

Intellectual property issues can be avoided with a thorough and well-worded contractual agreement, Non Disclosure Agreements (NDAs) and by choosing a professional and reliable outsourcing partner with a proven track record.

Software projects are extremely easily duplicated and copied, and it is arguable to what extent is classed as illegally taking code – one can imagine code is recycled or packaged at the function level for common tasks throughout a multitude of projects, for example.

Keep the level of confidentiality you require in mind when choosing your initial outsourcing partners, and ensure they are competent at keeping any accessed IP secure on their side.

Quality assurances and post-production issues

A lack of communication, or synchronisation, between the client and software development company can result in subpar code quality.

Features may not be as originally intended or simply not finished, and bugs may creep in as a result of a lack of clarity of those desired features.

A comprehensive business development plan and requirements document can avoid these issues. Testing both before and after deployment should be carried out by the vendor to ensure the final product is working as expected.

Unresolved disputes

Another issue that boils down to inadequate communication channels, disputes may arise between client and software development company.

These issues could arise from any number of reasons, ranging from the preferred communication tools, response times and schedules, quality of code, and overall direction of the project.

It is in the interest of both parties to ensure that disputes do not go unresolved for too long as to not let the project suffer and unneeded time and resources be spent.

Your in-house project manager should monitor any tensions or issues that arise, even if initially trivial, so as to avoid potentially more severe misunderstandings further in the development pipeline.

Cost misunderstandings (or even hidden costs) are another cause for concern that give rise to disputes. Either a fixed hourly rate or a fixed project budget should absolutely be agreed before commencing any software development.

Right Software Development Company

How to Choose the Right Software Development Company

97% of software outsourcing companies aren’t qualified to deliver the quality and outcomes that companies need. – Accelerance Insights.

The need to vet potential outsourcing partners cannot be over-started. The partner qualification process is where your potential software development partners are filtered until only the best suited candidates remain; candidates with the software development expertise you require.

The following pointers are critical in this process to maximise the chances of a successful, sustainable partnership for a software development project.

Carry out a rigorous selection process

Thoroughly carry out your selection process by considering a large number of candidates, and analyse whether they are well suited for your requirements.

Some background technical knowledge is very beneficial to have here, either by your CIO or technical advisors if you have access to them.

Check every aspect, from their portfolio and testimonials (internal and external sources), their advertised skill sets, the sizes of the projects they undertake and long-term viability.

Do thorough due-diligence on all candidates

Speak to candidates over meetings to discuss required working hours and any impact the timezone difference will have if the candidate is an offshore software development company.

Draw up a carefully considered contract

Once your best suited software outsourcing services are found, draw up a comprehensive contract that covers all the above mentioned aspects, in addition to insurance and contingencies, as well as liabilities the vendor would need to account for.

Proactive project control

Proactive project control and oversight

Being proactive in managing the partnership between client and outsourced software development team is paramount to success; regular communication is required to ensure the project is on track and milestones are met.

This back and forth should continue so long as the project is being maintained, and the software development company should be reliable as a long term partner.

Performance or fit issues have caused more than 50% of companies to end outsourcing partnerships – Deloitte Outsourcing Amid Complexity study.

iglu Outsource software development

Outsource your software development with Iglu

With over 10 years of experience in the industry, Iglu has a track record of attracting talented digital specialists from all over the world. 

Our employees range from senior talents with decades of experience to junior employees for more affordable solutions.

Not only are we experts with the mainstream tech stacks, but we also have specialists in some of the most exotic programming languages.

See our comprehensive list of services for more information and we will look forward to working with you.

region Outsourcing Software Development

Outsourcing Software Development by Region

Outsourcing is conducted globally and as such there exists a large variety of firms, and these firms vary widely in the offshore software development market.

This section overview the trending areas of outsourcing software development, and what to expect if you opt to outsource software development projects via an offshore software development outsourcing company.

2021 Outsourcing Rates

The first question that may come to mind is which country is the best value for money? A low hourly wage does not equate to the best deal, and the quality of the software project codebase is usually reflected in firms offering a low cost.

There is a balance to be had however, with some locations offering attractive rates with a large skilled developer workforce.

The following illustration sums up the software outsourcing rates for this year:

software outsourcing rates
Source: Accelerance Analysis 2021

The US carries the biggest gap between high and low rates

The US is by far the most expensive place to outsource software development, and Southeast Asia in comparison offers the cheapest rates. There will of course be variation in these rates on a per-company basis, but these figures are what to generally expect.

This large difference in rate ranges is due to job types and the complexity that various development roles consist of.

Opting to search in the cheapest location is not an optimal strategy; cost alone will not determine if a cheap outsourced team is the best suited partner for you.

  • Although the US is the most expensive region for software development outsourcing, the firms will be more in-touch with western values, working hours and quality expectations, and more up to date on the latest software development trends.
  • Southeast Asia and South Asia are cheaper, but cultural differences, work ethics, and expectations in terms of communication might make the partnership difficult.

Both Central and Eastern Europe and Latin America are seen as healthy middle grounds, where there is a growing high skilled workforce with hourly rates that are more affordable than the most developed economies.

Latin America

Latin America is a trending location

Due to small time zone differences (relative to the US), Latin America is gaining momentum as a hot software development outsourcing location.

There are cultural similarities, very similar work hours, and the nearshore location makes potential travel to the outsourcing company cheaper and faster.

Rates are creeping up in Latin America however, due to multiple factors:

  • Competition from US and Chinese firms to hire local talent there.
  • In an attempt to retain talent, bonuses are being paid out quarterly instead of annually, marking a shift in how developers expect to get paid and the perceived amount being higher.
Central and Eastern Europe

Central and Eastern Europe offer a large talent pool

Europe hosts more forward thinking developers who focus more on innovative technologies.

There is a healthy and deep talent pool to leverage in the region, and outsourcing companies are prepared to offer services and onboard clients in a quick and efficient manner.

  • European firms will be familiar with western culture and work values, and are generally skilled in English communication.
  • There are a growing number of specialist universities in the region that continue to train highly-skilled talent, making the region continuously more attractive.
  • Rates in 2021 have slightly increased, but overall the region is handling an increased demand, due to remote working and the digital transformation, very well.
South Asia resource pool

South Asia offers a vast resource pool with attractive rates

Although software developer demand is increasing in Asia, the cheaper rates offered are relatively stable.

South Asia, being the most densely populated region on the planet in conjunction with rapidly developing economies, offers exciting future prospects for companies with lower budgets.

  • India, Pakistan and Bangladesh are keeping rates low in South Asia due to the vast resource pool of developers in the region.
  • Most outsourcing firms are attempting to maintain current price rates to stay attractive amid competition from Central and Eastern Europe, as well as rising competition from Southeast Asia. Rates are expected to remain flat through 2021.
Southeast Asia

Southeast Asia have a rapidly expanding technology sector

Southeast Asia has experienced some of the highest economic growth and as a result has a fast growing technology industry.

There is a healthy pool of outsourcing business in the region, and investors see technology as a priority, particularly in FinTech.

The Philippines and Vietnam continue to be the most popular destinations for western companie’s outsourcing efforts, although Thailand is also picking up steam.

  • Although the rates in the region are very attractive, prices will vary as there will inevitably be a mix of talent between outsourcing vendors.
  • English proficiency is increasing as well as a desire to understand and attract western firms, especially amongst younger developers. Although Europe and Latin America are in the spotlight now for the perfect balance of talent, budget and cultural fit, competition is increasing in Southeast Asia.
Metrics

Metrics to Assist Choosing an Outsourcing Company

There are some quick and easy methods to dramatically reduce the huge pool of outsourcing companies that you could potentially work with.

Whether you quickly want to find a suitable firm or do not have the time for a lengthy selection process (but wish to maintain rigorous checking), the following resources can help you quickly filter outsourcing companies.

The EF English Proficiency Index

The EF English Proficiency Index is a reliable resource for researching how a country ranks with their English fluency. The full report can be downloaded for free, that breaks down English skills amongst countries, cities, genders and age groups.

The EF English Proficiency Index

These statistics could be a good indication of where to avoid software development outsourcing if you are pushed for time or do not have the resources to sort through many outsourcing candidates where a high percentage will not meet your English proficiency standards.

Browsing the home page will give you a general idea of the current state of English skill – it is worth consulting.

HackerRank Developer Skills

HackerRank

The HackerRank Developer Skills report breaks down the various generations of developers currently in the market, their attributes, working habits, education, and how they are hired.

There is also a famous blog post by HackerRank that ranks countries by their developer performance in various programming language challenges that may offer some more useful metrics.

The report is worth consulting if the reader wishes to understand the developer mindset, their priorities and motivations, and how much they expect to be paid.

Globally, 39% of developers feel they’re paid unfairly – HackerRank 2020 Developer Skills Report.

Accelerance – Global Software Outsourcing Trends Report

Accelerance-Logo

The 2021-2022 Accelerance report is another valuable report that provides a comprehensive breakdown of current software outsourcing trends.

This excellent report provided insight for this article, and is a recommended read for those who are interested in understanding exactly where the industry is heading.

woman on stool

Final Thoughts

This article has attempted to summarise the current state of software development outsourcing, and what you can expect if you endeavour into your own outsourcing initiatives.

Companies undertake an outsourcing project for good reason; a successful outsourcing strategy can lead to acquiring high-skilled developers at attractive costs.

Outsourcing services can work well for a wide range of software projects provided the outsourcing company resonates with your business processes and work ethics.

The outsourcing market was already growing at a healthy pace, but now with the pandemic changing the way we work, outsourcing has been given an added boost that it arguably did not need.

COVID 19 has speeded up the digital transformation that companies were going to have to undertake sooner or later to stay competitive – but that time is undeniably now.

This has lead to trends that are benefitting software development outsourcing companies, including:

  • A huge increase in remote working, a change that does look to recede in the long term. Remote working to some extent is permanently here to stay.
  • A renewed focus on technology for communication and project management, that companies will rely upon when conducting remote operations.
  • The overall huge focus companies now have on their own digital transformations.

Developing markets such as Latin America, South Asia and Southeast Asia are becoming more attractive prospects for a software outsourcing team as they continue to increase English proficiency, become more educated in western values and expectations, and ultimately level up their skills in an attempt to rival Central and Eastern Europe as the most innovative developer pool.

These developing economies are amongst the fastest growing in the world, and this will give outsourcing companies a better technological infrastructure at which to continue their growth.

Technology is also a priority for investors, which will also have a positive effect on the outsourcing market.

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