Types of Outsourcing – Software Outsourcing Business Models

By definition, the only real difference between each of the three main software outsourcing models, onshore, offshore, and nearshore, is location.

However, while technology has evolved to the point where global collaboration is “no big deal,” the question of “where” you ship your software development projects has massive implications that ripple throughout your entire business strategy.

In this article, we’ll dig into the different insourcing and outsourcing delivery model options and when it makes sense to use each one. We’ll then introduce the hybrid model–a strategy that leverages the best parts of each model by aligning them with the right goals–enabling companies to achieve ongoing innovation, rapid releases, and sustainable growth.

Insourcing

While outsourcing refers to an arrangement where a company partners with a third-party service provider, insourcing is a term used to describe a situation where a project is assigned to an individual or department from within the company.

Insourcing uses a company’s internal resources to perform a specific task or reach a particular goal. Essentially, insourcing just means you’re choosing to keep work in-house.

Though insourcing is technically the opposite of outsourcing, we’re starting to see more companies insource portions of projects–particularly those that involve sensitive data, IP, or their digital strategy–and use other software outsourcing options to maximize their resources.

Offshore

Offshore outsourcing is a business model where a company contracts a third-party service provider to complete a one-off project or supplement in-house staff on an ongoing basis.

The term “offshore” partnership is associated with an external service provider based in a far-off country–usually with an ocean and several time zones between client and vendor.

For example, a US company using offshore outsourcing might partner with a company in India, China, or Eastern Europe. Offshoring software development does pose some significant challenges.

Most notably, language barriers and time-zone incompatibility that make it difficult, if not impossible, to collaborate closely with external teams. In our 2020 State of Global Outsourcing report, 52% of client respondents who have worked with offshore teams found it difficult to communicate effectively.

While that number is high, it’s worth noting that nearly half of those participants didn’t report those issues, while just 21% said that code quality was “low” or “extremely low.”

Offshore companies often offer very competitive rates, and there are plenty of situations where it can work. For instance, if you’re outsourcing simple tasks that require very little back and forth communication or there’s no pressing deadline, it might be worth considering.

Onshore

Like offshoring, onshore software outsourcing is a business model where a company hires an outside firm to handle a project or supplement the in-house team. The key difference here is proximity.

Onshoring means outsourcing work to an individual or team based out of the same home country. In some cases, that might mean partnering with a developer that lives in your city who can come into the office for meetings or to collaborate with your in-house team in person.

Alternatively, a company might be looking for someone with a specific skill set and opens up their search to include remote developers from anywhere in the country.

In other cases, a big city firm might contract projects out to a developer in a smaller city with a lower cost of living to save on labor costs. That said, most of the cost-saving benefits of onshoring come from outsourcing projects on an as-needed basis, eliminating the need to hire permanent full-time employees they either can’t afford or don’t need.

Nearshore

Nearshoring also involves partnering with a third-party provider; only this time, the outsourcing company is based in a nearby country. For US-based firms, nearshoring typically means partnering with a company based out of Mexico or Latin America that operate within the same time zone, making it easier to connect and collaborate throughout the workday than is typical with an offshore arrangement.

Splitting the difference between the cost-savings of offshore and the ease of working with a remote onshore team, nearshoring occupies an in-between space. If you’re working with a reputable Mexican company, you’ll typically end up with a skilled, English-speaking team that follows Agile best practices and “gets” US company culture.

As such, this software outsourcing business model is ideal for projects where collaboration can happen remotely. In today’s climate, it covers a lot of ground.

In some cases–think complex DevOps projects–you may be better off with an in-house team or a local contractor that can meet in person, and in others–i.e., tasks where success is determined by a team’s ability to follow directions–it’s probably in your best interest to go for the lowest cost option.

Hybrid

Rather than an all-or-nothing approach, where companies either keep everything in-house or outsource to a single vendor, Gartner recommends that companies follow a “multi-shore,” or hybrid model, to leverage the advantages offered by the various software development outsourcing models.

Hybrid outsourcing or multi-sourcing is an outsourcing strategy where a company contracts development projects to multiple vendors–some offshore, some onshore, others nearshore.

In this case, the goal is to assemble a network of suppliers, each offering different services that contribute to the organization’s big-picture objectives.

The flexibility to innovate at speed and evolve products and services alongside customer expectations, as well as access to emerging technologies and top talent, are all advantages hybrid outsourcing provides.

It also helps organizations avoid some of outsourcing’s most notable disadvantages by optimizing labor costs, diversifying risk, and reducing dependency on individual suppliers.

The multi-sourcing model does present some risks if the business fails to coordinate between multiple suppliers, or if there’s a communication breakdown somewhere in the ecosystem.

How to Evaluate Insourcing and Outsourcing Delivery Model Options

Before you start looking at vendors, map out which activities to keep in-house and which ones to outsource.

The common wisdom surrounding the “insourcing vs. outsourcing” debate is that core business functions should remain in-house. The same goes for any projects where risk, compliance, or company culture, are at stake.

Outsourcing is best for projects that fall outside of your core business model but add value to the organization. Software outsourcing models allow companies to benefit from lower costs, skills they don’t have in-house, and the ability to scale up and down as needed.

That said, the idea of what’s “core” and what isn’t is evolving.

As McKinsey points out, outsourcing core activities allows businesses to access resources like new technologies, advanced skills, or insights that can enhance their core offerings and strategy.

Control over your strategy, data, and IP should always remain in-house, but internal employees can manage distributed teams and collaborate on core activities.

The Boston Consulting Group lays out a few different “distributed Agile” models that divide responsibilities between in-house and outsourced companies, based on factors like client involvement, resource distribution, and whether developers and quality testers need to occupy the same space.

Questions to Ask Yourself While Evaluating Software Outsourcing Models

When deciding which software outsourcing business model to choose, consider the following questions:

  • What is the deadline for this project?
  • What skills do you need?
  • What tools & technologies are required?
  • Do you need a team that can follow instructions or a team of active collaborators?
  • What risks are involved?
  • Do you need a team that works closely with in-house staff?
  • What will it cost?
  • Are you hiring an outsourced team for a core function?
  • If sourcing from multiple vendors, how will projects fit together to create a cohesive
  • experience?
  • What kinds of IP protections do they offer?
  • Do they provide flexible contracts?

Select a Model That Aligns With Your Goals

Done right, outsourcing can unlock access to the value offered by new technologies and critical, hard-to-find skills.

The challenge is that companies hoping to capture the value must become highly-strategic about which insourcing and outsourcing delivery model options they choose to achieve their desired outcome.

Tiempo’s nearshore business model and collaborative, results-driven approach is designed around client success. We’ll apply the technology and talent best-suited to your strategic goals and work closely with in-house teams throughout the typical workday.

You can learn more about our process and the advantages of nearshoring here.