This in-depth analysis of software development outsourcing covers the key traits of four different outsourcing models, provides a methodical approach to selecting the best software development provider, and identifies the best nations in which to hire software teams for your upcoming project. Additionally, we have included software development hourly rates with the most widely used programming languages and the competencies needed for contemporary projects.
In the FAQ area, we cover issues about intellectual property ownership and project cost prediction as well as the most important ones to ask when getting in touch with an outsourcing provider.
What is software development outsourcing?
A business technique known as outsourcing involves hiring a third party under contract to carry out certain activities or provide services. These activities in software engineering include testing, quality assurance services, app creation, and maintenance of older systems.
In the past, companies have mostly opted to outsource software development in order to execute their digital transformation due to cost considerations. The goal of outsourcing software development to a third party was to cut labor expenses, which included office supplies, overhead, and salary. But cutting costs is no longer the main goal. The main tactic used nowadays is to reduce the length of the recruiting process and get immediate access to the greatest technical expertise and cutting-edge technology.
Not only does outsourcing give access to developers with particular skill sets and experience that may not be easily found in the local market, but it also relieves the organization of the responsibility of onboarding new experts into the internal team and creating a long-term plan for their professional growth. Additionally, it frees up the internal team’s time for more strategic and core product development activities by taking on non-essential chores.
The market for IT outsourcing, which includes cloud services, software development, infrastructure management, and technical support, is expected to generate $512.5 billion in sales by 2024, making outsourcing a very prevalent and significant business activity.
What are the advantages of software development outsourcing?
Businesses choose to outsource in order to save development expenses, free up the internal team from unfinished work and backlogs, or get access to engineers with specialized knowledge that may not be easily found in the community. Furthermore, outsourcing is a versatile business strategy that works well when a project calls for specialized knowledge that the firm does not already possess and that knowledge is no longer needed when the project is finished. Let’s explore the benefits of outsourcing in more detail:
Availability of a large tale
Software development outsourcing entails reaching out to a wide range of potential candidates in order to find the best fit in terms of professional preferences, domain knowledge, and skill set. In order to locate the top applicants for the position or pre-vetted engineers who could have the necessary abilities for your project, the contracting firm usually employs internal recruiters.
Economy of cost.
Software firms use outsourcing as a way to save money on hiring and training expenses. Businesses may save a lot of time and money by partnering with organizations that have access to a large talent pool of experts rather than having to spend a lot of time and money looking for an experienced developer or someone with a highly sought-after skill set. Furthermore, since third-party suppliers specialize in certain jobs, they are able to do them more quickly, more efficiently, and at a lower cost than the employing firm.
Lastly, even if these expenses are included in the outsourced development rates, businesses may avoid the hassle of paying benefits, retirement contributions, and other costs related to recruiting and supervising an internal staff when they outsource.
Employing an outsourcing firm enables businesses to concentrate on their core competencies while delegating less important tasks to outside vendors.
Additionally, businesses don’t have to make the long-term financial investment of recruiting internal staff, which might take years to pay off, by stepping up their growth to meet the demand for the product. Because of this, outsourcing is especially beneficial for projects whose demand is erratic.
If a software developer hired via staff augmentation isn’t a good match for the organization, it’s easy to break up with them or find someone else to take their position. On the other hand, it is more difficult to fire internal developers as the organization needs to provide them early warning and severance compensation.
Using specialized talents without upskilling your own workforce.
Internal teams may need many months to become proficient in specialized fields like data engineering, machine learning, and extended reality (XR) technologies, or in particular services like cloud migration or manufacturing process automation. The door is immediately opened by outsourcing to experts with in-depth knowledge in these areas.
Put another way, businesses see outsourcing providers as hubs of innovation that have access to highly specialized technical skills and cutting-edge technology. Increased productivity and cost efficiency might result from outsourcing unnecessary tasks to businesses who have experience managing them.
When a business has to upgrade its legacy software, it is another instance of outsourcing. As such, it could need skilled contractors who are conversant with both the more modern tools and languages as well as the code structure of the old system.
A higher caliber.
The rules and processes for quality assurance are well-established in outsourcing organizations. Furthermore, outsourcing providers may provide a unique viewpoint on software development and assist businesses in coming up with innovative approaches to enhance their goods and services. Outsourcing might be a useful strategy to invest in a new project or pay off previous technical debt when an internal staff is overworked.
What are the disadvantages of software development outsourcing?
Language problems and a loss of control are often cited as the main causes of outsourcing mistakes:
A language barrier.
Programmers must be effective communicators with the ability to pose pertinent queries and, when needed, request clarification. Creating and managing a software product involves more than just creating a functional program. Making ensuring the product satisfies client needs while optimizing solutions for certain jobs is a more crucial responsibility.
Consequently, it is essential for software engineers to thoroughly examine the intricacies of the product and proficiently interact with other departments inside the company, such as the sales, customer service, and product teams. That being said, having a restricted vocabulary might make it more harder for a developer to see the whole picture and provide the appropriate answers.
Swapping developers midway through a project.
The loss of one or more team members may cause delays and subpar output if the organization has a clear process for keeping track of project documents.
Giving an outsourced team complete control over a project entails giving them total accountability for the project’s results.
The onus of knowledge transfer and efficient documentation falls on the business whether it expands an internal team or employs individuals via staff augmentation. Employing internal staff or full-time contractors also suggests that the business has technical managers on staff who are able to assess team output and track advancements in development.
If a corporation chooses to outsource a project in its entirety to an agency, however, it usually loses control over the project and the agency’s care is required to ensure that the final product complies with the customer’s needs and industry best practices.
A larger budget and lower expectations may arise from a failure to comprehend the project’s breadth.
Contracts with set prices are especially pertinent to this case. Prior to assigning development work to an external team, an organization must precisely specify the needs, goals, schedule, and project scope. Ignoring these aspects might cause scope creep and disputes about the intended use and operation of the product. Software engineers operate in silos when project-based outsourcing, thus the organization must specify all of the needed features and aspects in the specification in order to close the gap between expectations and actual output.
Software development outsourcing models
The most well-known benefits and drawbacks of each outsourcing agency collaboration model have been listed. This section enumerates the salient features unique to every model. It’s crucial to remember that every model has the same outsourced shortcomings and strengths that were mentioned in the earlier sections.
|Time and materials
|Fixed and pre-defined
|Dynamic and flexible
|Adapt as innovation progresses
|Adapt as innovation progresses
|Scope and resources
|Unclear or roughly estimated
|Unclear or roughly estimated
|Unclear or roughly estimated
|Zero to little
This contract includes a list of resources needed to finish the project as well as a clearly defined scope of work. The project deliverables, milestones, and any particular needs for the supplier are described in a fixed-price contract. Next, a predetermined, set fee is agreed upon between the outsourcing provider and the customer.
What benefits does the fixed pricing contract offer?
The stability of finances.
Customers are aware up front of the precise cost they would incur for an outsourced job. According to this price model, the parties decide on an approximate sum after the development business thoroughly examines the project specifications and work scope.
Well-defined deliverables and outsourcing provider responsibility.
The contract clearly outlines the deliverables and quality requirements that the outsourcing service provider must achieve, and it also imposes responsibility on them to complete the project within the predetermined budget and timeline.
What drawbacks does the contract with a set price have?
Lack of adaptability
Fixed-price outsourcing is a common strategy for well defined projects with few anticipated modifications. Because it may be difficult to calculate the time necessary for software development and to create proper pricing, particularly in the case of complicated projects, many IT outsourcing businesses steer clear of employing this strategy. In order to guard against potential project setbacks, the providers that do provide this model often incorporate a safety net, which may cause fixed rates to be overstated.
There will be extra expenses and effort involved in changing the original scope.
Modifications to the project scope will result in the signing of new contracts and the assignment of supplementary expenses. The parties will need to update documents, revise the contract, and arrange meetings in the event that there are major changes. In other words, since this model is tightly related to carrying out the terms of the signed agreement, changing modifications would not only raise the project’s cost and length but also involve a lot of paperwork.
It may be difficult to keep such an arrangement from becoming economically unreasonable and leading to issues. As a result, the hiring organization has to plan ahead for any development challenges and make sure it has the money to finish developing the program.
The outsourcing business and the customer may have conflicting interests.
A paradigm like this may result in conflicting interests and ineffective collaboration. Any new modification may be deemed by the developer to be beyond the project’s scope and to be a change request requiring more funding.
Furthermore, fixed-price contracts frequently presuppose different priorities: the client prioritizes the best quality outcome and is less concerned with the timeline because it does not directly affect the development cost, while the outsourcing company wants to finish the project as quickly as possible to maximize profits.
Contract for supplies and time
Regular payments for completed work are part of a contractual agreement known as the time and materials (T&M) outsourcing model. The customer pays for the real time that the contracted team members invested in development as well as project-related material expenditures like hardware, software licenses and subscriptions, or airfare.
Which benefits does the time and materials contract offer?
Flexibility for the outsourced provider and the customer.
The Agile technique, which is popular in the IT sector, is predicated on the idea that project requirements change as the product is developed. This idea is supported by the time and materials model, which enables teams to make adjustments and enhancements on-the-fly. This means that teams may add or remove features at any point throughout the project without having to waste time renegotiating the terms of the contract.
Well suited for tasks with changing specifications.
To elaborate on the preceding point, this approach makes it difficult for hiring companies to determine the precise scope of a project since it allows development teams to begin working on it even in the absence of any information beyond the business needs and essential functionalities. With the time and materials approach, digital goods are growing more and more complicated, and once their core is produced, their functionality may be changed.
The development process is broken down into brief sprints, with testing and compatibility checks with business objectives and concepts conducted in between each sprint. In order to let customers keep a close eye on development, providers must examine the performance of the development team and offer comprehensive data on hours spent.
What drawbacks are there to the time and materials agreement?
Sharing of risks.
Since the customer is effectively paying for the supplier’s time and competence rather than a predetermined scope of work, this model depends heavily on the client and development firm having a high degree of trust.
Still, this method transfers part of the risk to the customer, irrespective of the degree of confidence. Costs will go up if the project takes longer than anticipated or if the scope of work changes unexpectedly. This may result in a cash crunch and further delays in the project’s completion.
Vigilant oversight and control are essential to keep expenses within the client’s budget.
Due to the aforementioned rationale, company owners need to be actively engaged in the project’s development in order to prevent unfavorable changes to the original design. The T&M approach calls for intense project management rigor as well as ongoing performance and process monitoring. Examining the credentials and expertise of prospective contractors’ project managers is usually the first step in a thorough investigation of them. This evaluation involves examining their money management abilities, linguistic competence, comprehension of the task at hand, and capacity to inspire other members of the outsourced team.
Employing a committed group
When businesses need continual software development and maintenance, they employ specialized teams. In this method, the outsourcing provider creates a team that will be entirely focused on a single, long-term project with the client’s active involvement. They conduct interviews with potential hires, both internal and external, to see whether their qualifications and background align with the demands of the project. Throughout the partnership, the client may adjust the number of committed team members in accordance with the needs and objectives of the project.
What benefits come with employing a committed team?
High transparency and predictability.
Under this partnership approach, the outsourced provider assembles a group of tech experts, including project managers, developers, quality assurance engineers, DevOps, and others, to work only on the client’s project. The committed external team essentially serves as an extension of the internal team of the business.
With its flexible, transparent cost structure, team salary, and administration fee, this model suggests the greatest degree of control and guarantees predictable and transparent budgeting.
Workload flexibility and scalability for every position.
Throughout the partnership, the customer is free to adjust the team size as needed to meet the demands of the particular project. Because of its scalability, the employing organization may adjust its resources to meet evolving demands.
Furthermore, you are not required to utilize every member of a committed team full-time just because you hired them. There is a chance that some experts work in parts. For instance, a business may go to the software development service provider and include a clause in the contract stating that it only needs a quality assurance engineer for 20 hours a week.
Perfect for intricate tasks that need constant upkeep and assistance.
For labor-intensive projects that need specialized attention from developers, hiring specialized teams is perfect.
This approach suggests long-term collaboration, with the client choosing team members to make sure they are a good match for the business and keeping an eye on their work throughout the project. This methodology guarantees the utmost focus and dedication of developers towards attaining superior outcomes.
What drawbacks come with employing a committed team?
The employing company’s obligation.
Complete accountability accompanies complete control. The dedicated team model assumes that the customer controls the development process from beginning to end, in contrast to fixed pricing and time and materials contracts, where the client has less day-to-day engagement. As such, it is in charge of meticulously organizing and delegating responsibilities to every team member.
A conscientious, experienced outsourcing firm keeps a close eye on developer output and is very interested in jobs being completed successfully and on schedule. But under this paradigm, the customer is the one who establishes the objectives and oversees the team’s actions directly.
The process of forming a team might take some time.
This recruiting strategy may not be the most appropriate option for brief tasks with constrained deadlines. It might take time to interview and choose the best engineers for a project, particularly if a service provider doesn’t have all the necessary personnel pre-screened and ready to go right away.
Different time zones might make it difficult to collaborate effectively.
A committed group operates remotely or in several places. The client will need to plan the scheduling of daily stand-ups and retrospective sessions and take into account contemporary project management solutions for asynchronous work where there are substantial time zone discrepancies.
Model of staff augmentation
A business strategy known as staff augmentation involves hiring full-time contractors from an outsourcing company to do a certain amount of work directly under the client’s supervision. All of the communication problems that project-based outsourcing may bring up are successfully resolved by this method. Staff augmentation differs from dedicated teams in that it does not need hiring a project manager from an outsourcing provider. Both the benefits and drawbacks of the committed team model are present in the staff augmentation approach.
We should be clear about one thing: we indicated before in our discussion of the dedicated team model that the process of forming a team might take some time. The staff augmentation services provided by outsourcing firms fall under the same category.
However, since staff augmentation markets operate as networks of outsourcing businesses, they provide a considerably faster recruiting procedure. Therefore, since these markets have a large talent pool, it is much simpler to identify and recruit pre-vetted engineers.
Top destinations for outsourcing software development
When we contemplate outsourcing, we often think of nations with large expenditures in technical education and scientific research, as well as a rising pool of competent software engineers, such as Taiwan, India, Mexico, Poland, and the Ukraine.
Furthermore, these nations often offer cheaper outsourcing costs than Western Europe or North America, where software development services may run up to $100 per hour or more. Next, we will look at the best locations with a lengthy history of outsourcing, which are home to service providers with a wealth of software engineering expertise.
Eastern Europe is known as a “goldmine for tech talent,” producing fiercely competitive software engineers who are lifelong learners. With typical hourly wages of $35 to $75, the area is home to about a million skilled software engineers and offers an appealing cost-to-quality ratio.
Eastern and Western cultures have affected the language and cultural history of Eastern European nations. The majority of these nations are members of the European Union, with Ukraine standing as an EU candidate, and they have close cultural and economic links with both Western Europe and North America.
The area has long been known for its technical knowledge-focused schooling. This practice is still maintained in modern schooling, as computer scientists may get bachelor’s and master’s degrees in software engineering. Theoretical computer science, software engineering, distributed computing, telecommunications, and artificial intelligence are the main topics of these degrees.
Coursera’s 2023 Global Skills Report, which assessed the knowledge of 120 million enrolled students across 100 nations, places five Eastern European nations—Slovakia, Ukraine, Belarus, Poland, and Slovakia—among the top 25 in the world for business, technology, and data science. All around Europe, students place a high value on data science competencies like deep learning and artificial neural networks, which are essential in the rapidly developing AI industry.
Eastern European nations with highly skilled engineers that are proficient in a wide range of programming languages and frameworks, such as Ukraine, Poland, and Bulgaria, are well known as leading outsourcing destinations worldwide. Specialists in data science, deep learning, and cybersecurity are also well-known in the area. However, the Russian invasion of Ukraine has placed the fast development of innovation in the areas close to the war zone in jeopardy, putting pressure on Europe’s IT industry to preserve its status as a hot source of IT talent.
Asia India is the most sought-after location for outsourcing, mostly providing exported IT services to American and British businesses. The nation is home to a number of prestigious colleges that prioritize technological education in areas including computer networking, engineering, artificial intelligence, quantum physics, telecommunications, and machine learning.
More than 5 million software engineers are available in India, and they charge between $15 and $50 per hour for bespoke software development, which is comparatively inexpensive. But since their pay is so poor, Indian software workers sometimes resort to side jobs as a way to supplement their income. Seeking side projects might be motivated by a variety of variables, including growing inflation and entrepreneurial aspirations, in addition to poor pay. Their performance and agility may thus be impacted by working an extra four to five hours beyond their typical eight-hour workweek.
China is the nation having one of the greatest reservoirs of engineering talent, behind India. Nonetheless, Chinese offshore developers charge higher prices than their Indian counterparts; an hourly fee of $35 to $60 is typical for product development.
Employing a specialized offshore development team is also common in Bangladesh, Vietnam, and the Philippines. There are over 15 million developers in the Asian area.
The software development sector is expanding significantly in Latin America at the moment, with Argentina, Mexico, Brazil, Colombia, and Costa Rica being among the top destinations. Depending on their credentials, offshore developers in these nations might charge anywhere from $40 to $70 per hour.
The offshore software development businesses in the area have a strong awareness of the demands and requirements of their customers and specialize in working on North American projects. The good time zone alignment between Latin America and the United States is one of its main advantages. Closer proximity also makes it possible for software development teams to fully comprehend intellectual property rules in the United States. Data security and IP protection are often the top priorities for American companies of all sizes and sectors.
The area is renowned for its burgeoning startup culture, robust education system, and active tech groups. Tecnológico de Monterrey in Mexico, the University of São Paulo in Brazil, and the University of the Andes in Colombia are just a few of the respected colleges in Latin America that provide engineering and technology opportunities.
With more than 7,000 enterprises in the software development and production sector and more than 12,000 companies registered in the IT services category as of 2021, Brazil is especially well-known for its enormous talent pool.
A step-by-step guide for software development outsourcing
The following essential measures will assist you in selecting the best outsourcing partner for your project related to development.
Additionally, we think that hiring a business with a CTO or VP of Engineering who would oversee daily standups and keep an eye on commits and pull requests is the ideal situation for outsourcing software development. It will be much harder for the agency to convince him to hire an underperforming engineer since someone like him will pick up on even the smallest changes in performance and code quality.
Step 1: Identify the needs and objectives of the project.
Project planning and execution documents have to provide an overview of the goals, techniques, resources, and frameworks that will be used. They must to provide the ideal qualifications and background as well. Furthermore, performance-based criteria are defined by the company’s technical experts and recruiting managers in order to clearly outline expectations for the software development provider.
Documents outlining the project’s scope of work and charter are crucial. Your business objectives will be better understood by the outsourcing firm if you are more explicit about what you want to develop, which will improve outcomes.
Step 2: Roughly estimate the budget so that you and the outsourced company may talk about it later.
Determine the quantity of experts who need to be employed, their typical pay scale, and the commission that the outsourcing business will get.
Be cautious while considering reduced outsourcing rates. They may also suggest lower-quality work, as some organizations have been known to drastically reduce costs in the future in an attempt to boost funding. Because of the nature of outsourcing, the longer you collaborate with an agency, the more reliant on it you become and the higher the cost of replacing it. Thus, take note of an agency’s charges if they are noticeably less than the market without a clear explanation.
Step 3: Look into outsourcing-friendly nations.
Language proficiency, political stability, cost-effectiveness, overlap in time zones, personnel quality and expertise, and regulatory and compliance frameworks are some of the main factors to consider when selecting a nation for outsourcing.
In the next years, it is anticipated that the number of software development contracts in Eastern Europe and Latin America would increase. Popular outsourcing locations like Brazil, Mexico, and the Ukraine often have engineers willing to work for far less than their American counterparts. Even if it’s done indirectly via their job at agencies, these engineers have firsthand experience developing products for American businesses.
However, American software developers will still be able to progress in their professions. Consider outsourcing to U.S. software businesses if you would rather engage with a company that is experienced with legal and intellectual property protection standards in the United States and is situated in the same time zone.
Working with regional or international employment partners and marketplaces who are acquainted with reputable software providers and elite colleges in certain areas is also a smart move. They may provide helpful referrals.
Step 4: Select the ideal software outsourcing collaborator.
Depending on the needs and schedule of your project, you may search for contract software developers and development teams by visiting review websites and online platforms:
In addition, you may meet developers in person by attending tech conferences and software development events, or you can use LinkedIn to look for outsourcing providers by industry and geography.
Consider a development agency’s portfolio, industry experience, and client testimonials before choosing to get in touch and sign a contract. Additionally, you want to confirm whether an outsourcing provider complies with data protection and intellectual property transfer agreements as well as global security requirements.
Lastly, confirm that the outsourced provider can provide dependable systems that authenticate users, safeguard user data, and secure information shared inside the application, and that they adhere to modern software development best practices.
You will reduce the number of outsourcing firms on your shortlist by going over the previously specified criteria.
Step 5: Safeguard your information and creative works.
When a firm outsources a project, it has to provide the outsourcing partner access to private corporate data. In a world where data breaches occur on a daily basis, it is essential to handle sensitive data efficiently and restrict access to internal accounts to keep it out of the hands of rivals or bad actors.
Before beginning work together, outsourcing businesses must sign a non-disclosure agreement. You should also confirm whether the service provider regularly examines their workplace’s network and security.
Selecting a Development Partner: Comparing small-scale outsourcing firms with large outsourcing companies
Whether selecting a small, medium, or big outsourcing provider, you should take the necessary skill set and the extent of the task into account.
Some individuals think it’s preferable to contact a well-known company with extensive project management expertise when you have a modest job. However, since it works largely with bigger firms, such an agency is unlikely to embark on a modest project.
Small outsourced businesses, on the other hand, are often able to be more proactive and provide a more customized approach to customers. (However, it is contingent upon their level of project workload.) Furthermore, selecting a small, boutique software development business often gives you the chance to speak with upper management directly. This gives you the opportunity to consult with seasoned professionals for insightful guidance on your project.
Large outsourcing firms have the benefit of often making significant investments in security measures and closely adhering to industry development norms. This is especially important for businesses that value data privacy. Large outsourcing firms also have a diversified talent pool, which makes it more likely that they will locate experts who can fulfill specialized and difficult needs.
our A+ guide to outsourcing software development in 2024 equips you with the knowledge to make informed decisions. By finding the right partner and navigating key considerations, you can ensure a successful and efficient collaboration in the dynamic landscape of software development outsourcing.
Moreover, if you are looking for a company through which you can hire dedicated developers, then you should check out Appic Softwares. We have pre-vetted developers that can help you gain the most out of your software. So, what are you waiting for?