Complete Guide to Software Development Outsourcing for 2024

Introduction

Today, technology runs the world. If you as a business don’t invest resources in developing and adopting technologies to streamline your processes, then you will be far behind (or even be out of the game). 

Take the classic example of Netflix and Blockbuster. While far ahead of Netflix, Blockbuster failed mainly due to its setback in innovating and investing in new technology such as digital streaming. Netflix, on the other hand, spent most of its money investing in new technology such as online streaming and data analytics to enhance its personalized movie suggestions which in the end enhanced customer satisfaction and retention. The results are clear: if you ask a Gen Z today they have no clue what Blockbuster is but they can’t live without Netflix. 

However, as software development comes with a hefty price, companies right and left are on the lookout to hire a third party to finish their projects. But why do businesses outsource software development? How do they successfully hire third-party contractors?

In this article, we will answer these questions thoroughly to prepare you with the up-to-date tips and tricks you need to outsource a software developer in 2024. 

Why Outsource Software Development?

As processes are digitizing in every industry, more and more businesses are investing resources in developing software. However, high costs associated with hiring a software developer are pushing businesses to outsource their projects.

This is because, on top of salaries and benefits paid to software developers, companies need a substantial investment in the infrastructure needed to support software development activities. Through outsourcing, companies pay for services only when needed. This flexibility in allocating resources allows them to manage budgets more effectively. 

Besides, outsourcing creates the opportunity for businesses to access a worldwide pool of talented software developers. Such global reach is particularly advantageous as the field is in constant demand for specialized skills and expertise. For example, outsourcing allows companies to tap into specific skill sets that may be scarce or unavailable locally. 

Types of Software Development Outsourcing

Today, the software industry is highly saturated. In a worldwide scale, the software development market capped $659.03 billion, a 36% increase from 2016. And, as the demand for software development technology keeps increasing, the projections are that by 2028 the software development industry will reach a cap size of $858.05, an increase of almost a quarter from 2023. However, as demand keeps rising, what solutions are software development companies offering? Let’s explore this in the following paragraphs. 

Onshore, nearshore, and offshore: what's the difference?

The highly interconnected world of the 21st century has given rise to the outsourcing industry. As a service, outsourcing is segmented into three main categories: onshore, nearshore, and offshore. When you have an onshore outsourcing partner, it means the software developers working on your projects operate in the same country as you. This model’s main advantage is minimizing cultural and time zone differences. This way, communication and collaboration are straightforward. 

On the other side, nearshore outsourcing as the name suggests, is a partner who doesn’t operate in your country but is still close. For example, your software developers operate within the same time zone or one with a minimum difference (you still both can do the online meeting within working hours). This model strikes a balance between cost savings and the convenience of proximity. They make traveling easy while offering a closer cultural alignment than offshore options. Nearshore outsourcing is an excellent strategic choice for businesses looking to extend their capabilities with fewer logistical hurdles.

Lastly, offshore outsourcing involves those across continents collaborations. This means that the hired company operates with a significant difference in time zone and cultural practices. This model has become a top choice for many due to substantial savings in cost. For example, a US business can hire expert software developers from India with 10 years of experience for a much-reduced price. And while this may have been difficult in the past, today’s advanced project management and communications tools make the process feel like a breeze. 

Project-based vs. dedicated teams

Geographical proximity is not the only detrimental factor of collaboration between a business and its hired software development partner. In this partnership, the operational structure also plays a role. 

One way to do so is by outsourcing a software development agency or freelancer for a single project. The hired partner will work on the project within the agreed-upon timelines and budgets. It's a turnkey solution where the outsourcing provider manages the entire development process. This approach is beneficial to companies looking to develop a single project and doesn’t need long-term engagement.

On the other hand, businesses can outsource a dedicated team which would act as an extension of their in-house team. Such an arrangement is a win-win for businesses with extended software development and maintenance needs. They don’t have to invest in salaries, benefits, and tools to support the work of an in-house team, but at the same time, they have a team that tackles various projects or ongoing needs of their software.

As these dedicated teams offer deep integration with the company's processes and culture, it ensures a high level of collaboration and alignment of business objectives with their in-house team. 

What to Look for in a Software Development Outsourcing Partner?

With such a big and saturated market, there is an offering for every business need.

No outsourcing company is the same: all come with a unique set of skills, experience, and capabilities. So, your homework should be to identify the key attributes that guarantee your outsourcing partner is reliable and effective. 

The first thing is to establish they have a strong technical foundation specifically for the needs of your project. You can do so by examining their portfolio to determine if their past projects tell you they have the capabilities to execute your project to the finest detail.  

Second, no successful project was ever executed without effective communication and collaboration. That’s exactly what you should be looking for. During the process of interviewing potential partners, you need to ask and understand if they have robust communication channels and practices in place. A partner who values transparency and openness in communication will minimize misunderstandings and ensure a smooth workflow.

Alongside communications, you need to make sure the hired outsourcing company knows how to manage their projects. Here you look if they have a well-defined development methodology such as Agile, Scrum, or Kanban. Such methods are proven to finish projects in time while being transparent and flexible. 

All these factors come together with the reputation your outsourcing partner has in the market. This is the main determinant of the quality of their work and reliability. Stalk the internet to find client testimonials, case studies, and independent reviews. Also, don't hesitate to ask them for references and hear about their past clients' experiences working with them.  

The Process of Outsourcing Software Development

Outsourcing a partner to develop software for your business is a strategic endeavor that requires careful planning. Here is how to do it: 

Identifying your project requirements

We mention how the first step in finding a reliable outsourcing partner is hiring one that matches your project’s needs. However, it is impossible to know your needs if you don’t have a clear understanding of your project’s requirements. 

Thus, you should prepare a document in which you outline:

• the project scope, 
• objectives,
• specific deliverables,
• a tentative outline. 

A big plus would be to add to this document the technical skills and expertise needed to accomplish your goals. When you do a thorough requirement analysis, it will be easier for you and your outsourcing partner to be on the same page. 

Searching for and selecting the right vendor

Now, with a clear picture of what your project is about and what it needs to be up and running, it is time to find and select the right partner. This phase involves going deep into the research to identify software development companies with the expertise, experience, and resources to meet your project requirements. 

To identify who is the best potential contractor, focus on their portfolio, client testimonials, technical proficiency, and communication practices. By ranking each potential outsourcing partner based on these factors you can create a concise shortlist. Then you can conduct interviews or request proposals to evaluate potential outsourcing partners' capabilities and compatibility with your project.

Drafting a contract and setting expectations

With the selection process coming to an end, the next step is to create a comprehensive contract. In this document, you include:

• The scope of work 
• timelines, 
• payment terms,
• quality standards, 
• confidentiality agreements,
• communication protocol, and 
• project management tools. 

Setting clear expectations from the outset helps mitigate risks, avoid misunderstandings, and ensure a smooth and transparent collaboration between you and your outsourcing partner.

Conclusion

Software development has been a key factor for many businesses aiming to scale their businesses. And now, with AI in the picture, the software development needs will keep going up and so will increase the market for software development providers. As such, outsourcing software developers will be one of the key investments for many businesses. Thus, careful planning of your software development needs and thorough research on the best possible outsourcing partner for your project is essential. 

FAQs

What is outsourcing software development?

Outsourcing software development entails hiring a third-party service provider, either domestically or internationally. The outsourcing partner will handle the software development process either through a project-based format or by becoming a dedicated external team. 

How much does it cost to outsource software development?

The cost to outsource software development depends highly on factors such as the project's complexity, the geographical location of the outsourcing partner, and the level of expertise required. However, typically outsourced software development companies charge between $80 to $200 per hour. 

What are the risks of outsourcing software?

Outsourcing software development comes with several risks, including cultural differences, communication challenges, time zone discrepancies, and concerns over intellectual property security.

What are the benefits of software development outsourcing?

Some of the main benefits of outsourcing software development include:

• access to a global talent pool,
• specialized expertise, 
• Cost savings, and
• increased flexibility and scalability of resources