In-House vs Software Development Outsourcing

In-House vs Software Development Outsourcing Explained

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After much deliberation your organisation has decided to undertake a new software development project, and the time has come to choose whether to develop the software internally or outsource the development to a third party.

This critical decision will have huge repercussions on your company, so the risks and rewards from both strategies must be taken into consideration and examined in great detail.

This article will aim to answer the pivotal question of in-house vs outsourcing software development. It will cover where each model makes sense, as well as the risks and disadvantages associated with both.

Table of Contents

What is in-house development and software outsourcing?

The first question on one’s mind may be, what exactly are the in-house development and outsourced development models?

Let’s firstly concretely define the two at a high level:

  • In-house software development entails a company hiring the required personnel and carrying out software development operations themselves, taking full responsibility for the project. This encompasses the entire development effort, from the hiring process and skill sets being targeted, the chosen technology for the project, and the entire development and deployment pipeline of the project.
  • Outsourced software development, in comparison to in-house development, entails an external software development company carrying out a development project on another company’s behalf. This outsourcing company takes on much of the software development pipeline, with the client (or the company hiring the outsourced company), providing the project requirements.


You may immediately think that outsourcing software development sounds promising, effectively mitigating some of the common issues of in-house development practices: issues like the high salaries that software developers demand, additional office space and hardware requirements, insurance, competent project management, and more.

We will be discussing the pros and cons in more detail further down.

So is software outsourcing a viable means of avoiding these additional operational burdens of a company?

Or put another way, is software engineering actually being outsourced today? Unequivocally, yes.

Outsourcing the software development process is a big trend, and rapidly growing

Software development outsourcing is on an upwards trend with no signs of slowing down.

Some key statistics highlight the growth of the outsourcing market:

  • Revenue generated by software outsourcing is projected at $108.7 billion in 2021, up 7.6% year over year. This is expected to increase to $133.3 billion in 2025 from a 5.2% compound annual growth rate.
  • 60% of companies leverage outsourcing for at least some of their software development requirements, up from 56% in 2020.


Sources: Statista global software outsourcing data; and Computer Economics IT Outsourcing Statistics 2020-2021

The numbers are clear; outsourcing software development is a popular practice, and even the dominant method of getting software developed today for a range of product categories.

There are key reasons for this momentum, that give insight to why outsourcing is growing at such as fast pace:

  • There is an increasing gap in the supply of skilled software developers, leading to increased salaries that are simply not viable for many small to mid-sized companies.
  • The growing competition for tech talent means it is more difficult to attract specialists to lesser-known companies, with an increased risk of other companies attempting to lure employees away from their current positions.
  • Faster time to market: Outsourcing a dedicated development team can potentially get your project launched much faster than in-house efforts.
  • Flexibility and scalability: With the uncertainty of a market (especially amid the global pandemic), the ability to flexibly up or down-scale the team assigned to your project without having to layoff staff, is attractive and a risk mitigation tactic compared to the in-house development model.

 

According to CodinGames developer survey 2021, almost two thirds of recruiters cite finding qualified developers as their biggest challenge in 2021.

This further highlights the difficulty in finding (and then attracting) software developer talent in today’s market.

Software outsourcing is one means of bridging the gap between the rising demand and supply shortage of software developers; doing so provides access to a dedicated development team capable of carrying out a project to your requirements.

Even though the software outsourcing model can be hugely beneficial, this does not suggest the in-house model should automatically be brushed aside.

Let’s explore the key differences between the two to develop a better understanding of where they are most suited.

What is in-house development and software outsourcing

In-House vs Outsourcing Software Development

We’ve focused on outsourcing a lot thus far, but how does it fare against in-house development? Let’s compare the two models with their contrasting characteristics.

Cost

In-house software engineering can be very expensive to fund over the product development cycle.

Not only does the company have to pay full-time salaries to the engineers, but also consider their workspace, hardware, and other tooling required to carry out the project.

This often amounts to various licensing costs for miscellaneous software packages to stay in-line with industry standard infrastructure, such as cloud services, deployment tools, IDEs, etc.

Insurance, taxation, holiday pay, and company perks also must be considered to stay competitive in hiring the top talent to your project.

This commitment is simply not a viable option for many small and mid-sized companies.

Outsourcing a company removes the burden of many of the above-mentioned expenses, simplifying the cashflow into either an hourly rate (the most common payment structure) or a fixed project cost (less common).

So when does the additional cost of bringing in-house developers make sense?

If the company is well funded and working on cutting edge software, perhaps for research purposes and in partnership with a large industry player or academic institution, in-house development makes more sense than outsourcing.

Such environments often require specialised equipment and an intimate world-class development team required to work closely together.

For everyday applications though, such as your standard iOS / Android app development or web applications, outsourcing is the winner when it comes to cost.

Staff turnover

Good software developers are highly skilled with years of experience – the most highly paid having over a decade of programming experience.

These highly valued workers are aware of their value and the salary ranges they are able to demand.

The talent gap has led to occurrences of practices that negatively effect in-house development efforts:

  • Employee poaching, also known as talent or job poaching, is especially common with sought-after software developers. Common positions where job poaching happens include the full stack role, data science (encompassing the Machine Learning and specialised artificial intelligence fields such as self-driving cars), cybersecurity and cryptography, and programming language experts (knowledgeable of syntax analysis, functional programming, the compilation process, and other principles of how programming languages work).
  • Even with a strong mission statement and a great working environment, loyalty is a rarity in the software space. As a result of high demand, developers will constantly be monitoring the market for better opportunities  and a larger pay-check, or demand a higher salary if they feel it is appropriate.


Concretely, keeping a talented software engineer is a costly and uncertain endeavour for a company, and staff turnover is high.

What the outsourcing model ensures is that there will always be a team of engineers working on your project.

The stress of keeping staff happy in all the ways they demand will now solely lie with the responsibility of the outsourcing company.

Are there any scenarios where the in-house model is immune to such practices?

Much like the previous point, cutting edge research or working on unique propositions that are miles ahead of the competition will spark the interest of passionate developers.

These opportunities will lie in areas like quantum computing, rocketry and space exploration, cutting edge robotics, and academic research funding that only particular institutions are capable of carrying out.

Talent Pool

An area where software outsourcing shines is the sheer scale of talent available to hire.

A major drawback of hiring locally is the limited scope of talent available in your area, and the process of getting someone to your area if they are living abroad (with visa processing, accommodation arrangements, etc).

This geographic barrier is removed with outsourcing, with a global talent pool available anywhere where there is an internet connection.

It is good practice to consider a number of outsourcing vendors when vetting potential partnerships, and it is often the case that each candidate is situated in a different country or even continent.

Central and Eastern Europe and Latin America are trending locations for outsourcing software development, resulting from lower hourly rates for higher skilled engineers relative to the US.

The talent pool that the outsourcing model unlocks is undoubtedly a major attraction in adopting the model, making it an even more attractive proposition after the staff turnover and cash flow considerations we previously gauged.

Cultural fit & team effectiveness

Where in-house software development has an upper hand is in cultural suitability, with the development team often having time to bond through their employment at the company, and often living in the same area, familiar with the local culture and work ethics.

Face to face communication is the normality, which in-turn encourages more discussion and analysis on day to day tasks. Lunch breaks and social activities among staff further enhance this team effectiveness.

As outsourcing is dominantly an online and digital process, these benefits do not exist in such a partnership.

Timezone, cultural and language barriers may exist between outsourcing business and client, all of which should be analysed amongst outsourcing candidates before finalising a chosen partner.

Scalability

Scaling up and scaling down staff assigned to an application is a capability that an outsourcing partner should be capable of offering.

With highly skilled individuals available to drop into a project (with minimal onboarding required due to the familiarity of working with the outsourced development team), it is much easier to scale software development on an application.

Comparing this to the in-house model, introducing or dropping employees is by no means an easy or quick process.

The recruitment and hiring process will need to be revisited for the former, and firing or re-assigning employees would need to be worked out for the latter.

Firing employees also comes with a risk of dispute or losing company credibility, adding to the complexity.

Speed of project delivery

Outsourcing software development comes with the added benefit of a quicker time to market. With a capable outsourcing vendor, resources can be added to a software development effort as and when you need them.

The added manpower can dramatically speed up the software development time of an application.

Outsource Software Development with Iglu

Outsource 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 Enterprise-grade 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.

In-House Software Development Advantages and Disadvantages

In-House Software Development Advantages and Disadvantages

Advantages of in-house development

  • Having a dedicated environment for the entire software effort, that is very well suited for groundbreaking research projects that require intricate teamwork, or cutting edge development such as self-driving cars, robotics, a new programming language specification, etc.

  • Full oversight and control over every aspect of the development process, that could work well if a competent CTO (Chief Technical Officer) and accompanying executives exist to oversee the software development effort.

  • With a more intimate development team setup, in-house software development can produce very high quality software products and allow a focus on intricate details that may not be favourable for an outsourcing team.

  • High level of security. With total control over the development pipeline and work environment, it is easier to oversee and control confidential information.

Disadvantages of in-house development

  • Very high costs associated with hiring top talent in combination with an ongoing effort to maintain staff contentment and willingness to work for you throughout the duration of the development process.

  • Job poaching from larger companies may cause problems if key developers leave a project, with a period of weeks or months needed for the replacement to familiarise themselves with the project.

  • Lack of local talent compared to the global talent pool of outsourcing.

  • The time consuming process of recruiting and hiring must be undertaken by the company.  

  • Having to fire employees when they are no longer required or your budget dictates you to, that could cause disputes and ultimately damage the company’s reputation among the developer community.
Outsourcing Development Advantages and Disadvantages

Outsourcing Development Advantages and Disadvantages

Advantages of outsourcing

  • Outsourcing usually is billed at a fixed hourly rate, making expenses and cash flow projection more predictable and manageable. A single billing cycle per outsourcing agency is much more manageable than the complex  agglomeration of expenses that come with in-house software development.

  • Overall expenses can be reduced with the right outsourcing partner, offering high skilled developers at a reasonable wage. These optimal outsourcing companies are referred to as enterprise grade outsourcing partners.

  • Access to a global pool of talent, allowing you to leverage highly skilled developers from countries that are heavily investing in higher education of software engineering.

  • Along with a huge market of software engineers, a wider range of technologies becomes available to the client’s business, allowing the client to choose which of those technologies are best suited to the development process. This should also be discussed with the software outsourcing partner, who will be literate in a range of potential technologies for your project.

  • Easily scale your application as needed. Outsourcing vendors will have the ability to add or remove members to the team dedicated to your project. As such, if your product or service experiences a high rate of adoption or success, adding human resources to the project will be a frictionless decision on your end.

  • Faster delivery, with the ability to rapidly develop prototypes and test new market segments.

Disadvantages of outsourcing

  • Communication will inevitably have more friction than the in-house model. Cultural differences, time zone differences and work ethics may also add friction to the communication with an offshore outsourcing partner. English fluency should be a requirement to maintain adequate communication, with minimal misunderstandings towards the project goals and milestones.

  • A higher risk of security issues, including confidential information leaks. NDAs are commonly signed between client business and outsourcing vendors to legally protect IP, code produced for the project, app data, credentials, etc. It is the outsourcing partner’s responsibility to maintain a high level of security at their premises, of which the client has no control over.

  • Sloppy code. Hiring less experienced or less skilled outsourcing vendors may result in code that does not adhere to standard conventions, not adequately tested, commented or structured, and even be written in an older version of the programming language in question.
summary comparing in-house vs outsourcing development

Summary

This piece has acted as a comprehensive guide for comparing in-house vs outsourcing development.

Outsourcing software development is now a valuable tool and common business practice that the majority of companies are now utilising

Consider the risks involved of outsourcing software development before committing to a vendor.

On the business side, make sure milestones, deadlines and other metrics are clearly defined.

Ensure that you have capable executives to oversee the outsourced activities, and ensure that your in-house team sufficiently cares about the outcome of the outsourced project.

On the management side, set realistic expectations that are agreed by vendor and client business.

Also ensure that a realistic schedule is set up for the chosen communication channels and other interactions.

And finally, the outsourced vendor should be technically capable to carry out the development process; choose a partner whose previous work and history resonates with your requirements.

Ensure they can design a competitive system, with relevant modern frameworks.

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