What is Software Outsourcing?

Now that remote work is part of the “new normal,” companies are embracing the benefits of outsourcing. They are looking beyond the business park for specialized skills, at reasonable rates.

In 2019, outsourcing business process and IT projects grew to an estimated $92.5B in global revenue, a number likely to grow in the coming years as companies race to meet rising customer expectations, respond to changing demands, and compete in an increasingly challenging competitive landscape.

Gartner predicts that by 2021, at least a third of all enterprises will have launched a multi-experience development platform consumers can access via mobile, web, AR, chat, and voice. By 2028, the firm predicts a dramatic shift in the way consumers perceive and interact with the digital world, noting that rising AR and VR adoption suggests multisensory, omnichannel journeys could soon be the norm.

In another recent report, KPMG found that skills shortages have hit an all-time high.
Tech leaders reported big data/analytics (44%), cybersecurity (39%), and AI (39%) as being the “most scarce” skills. To address skills shortages and the shifting tech landscape, IT leaders need to rethink the talent ecosystem–using software outsourcing to supplement in-house teams with skilled workers.

Below, we’ll provide a software outsourcing definition, its key benefits, and then look at different outsourcing models and their associated pros and cons.

Software Outsourcing Definition

Software outsourcing is an arrangement where a company partners with a third-party company to develop software, rather than relying on their in-house team. Traditionally, US companies used outsourcing as a cost-cutting tactic, shipping low-skill, low-wage jobs with little responsibilities off to countries with the most competitive rates.

Outsourcing has evolved. The traditional outsourcing model was largely a means of slashing operational costs, whereas, among leading companies, software outsourcing’s meaning is a growth strategy that can power digital transformation. While cost-savings remains a factor, it’s far from the only advantage it provides.

What Are the Benefits of Software Outsourcing?

To keep pace with this rapidly changing tech landscape, companies are increasingly looking toward software outsourcing to access top talent, greater flexibility, fast turnaround times, and of course, cost-savings.
Here’s a brief overview of some of the primary benefits that outsourcing software development can provide.

  • Access to a diverse talent pool. The most obvious advantage of outsourcing advanced technical projects is, you’re no longer limited to candidates that live within driving distance or even in the same country.
  • Scale up or down quickly. Additionally, access to talent can be more of an “on-demand” arrangement. For companies that need a VR developer for one project, it doesn’t make sense to hire a full-time employee or invest in a bunch of new tools.
  • Vetted IT professionals. Another benefit of software outsourcing is, companies can save the time and resources needed to find and screen qualified developers. While you’ll still need to vet the outsourcing company thoroughly before you commit, it’s on the vendor to put together the team that best suits your goals. What’s more, outsourcing firms often allow you to hire a project manager or supervisor to lead the charge, ensuring that your in-house leadership team stays focused on the activities where they can provide the most value.
  • Cost-effective. Working with outsourced developers means you’re only paying for what you need vs. full-time salaries. Depending on where your team is located, you can take advantage of the lower cost of living.Keep in mind, you’ll want to make sure that the firm you partner with pays workers at or above local market rates. Otherwise, high-turnover or under-qualified workers could undermine your project. Worse, it could be a human rights violation; something that, apart from being unethical, could cause customers to abandon ship and call you out on social media.

Software Outsourcing Types

Software outsourcing companies fall into three main groups, based on location. We’ll cover these in more detail later in the series. For now, here’s a quick look at each type:

  • Onshore: Onshoring is similar to working with a freelancer or contractor. In this case, a company works with a remote employee or team based in the same country on a project basis.Here, you’re likely still paying market rates, and specialized talent can command some pretty high rates. However, you may save money because you’re only paying for what you need, as opposed to hiring full-time workers and paying for benefits, training, and resources you may not need in the long-term.
  • Offshore: Offshoring is an arrangement where a company outsources work to a company in another country. This can be partnering with teams based out of India, China, or Eastern Europe. While it often means that companies pay lower rates, it presents some challenges like opposite schedules, cultural differences, risk of rework/quality issues caused by misunderstandings. Additionally, because of the distance and communication barriers, offshore partnerships don’t support Agile methodologies, or really, close collaboration of any kind.
  • Nearshore: Nearshoring also involves working with an outsourcing company in another country, though in this case, the outsourcing company is based in the same time zone as the client. Think US companies working with a service provider in Mexico or Latin America. Nearshoring allows for the close collaboration you’ll get with onshoring at a lower rate.In a recent survey of Tiempo Development employees, one of our Engineers, Angel Moreno cited the following factors were most important to helping companies achieve the highest ROI from outsourcing initiatives:
    • Team Cohesion. In the nearshore model, cultural differences are relatively minimal. It allows for faster delivery times and effective collaboration between in-house and outsourced teams.
    • Time Zone. Working in the same (or similar) time zones ensures quick communication and immediate problem resolution. By contrast, communication with offshore teams is largely driven by email, which can cause significant delays to the project.
    • Travel Cost. For larger, strategic efforts, business leaders might travel overseas to check on a project in progress and meet with external teams. If you have a project that requires frequent travel, nearshoring to Mexico is much more cost-effective than flying to Asia multiple times a year. This is especially true when multiple stakeholders need to make the trip.

Strategic vs. Tactical Outsourcing

Beyond the basic definition, software outsourcing breaks into one of two main categories: strategic and tactical. The key difference between the two boils down to relationships and goals. We’ve broken down both outsourcing definitions and when you might use one approach over the other.

Tactical outsourcing. This term is used to describe a situation where companies outsource projects in response to changing circumstances. Often, tactical outsourcing is reactionary and focuses on short-term goals. For example, if a company needs help meeting a deadline or meeting a temporary increase in demand, they might contract out a one-off project to avoid falling behind.

Keep in mind, even if the plan is to pursue tactical, short-term projects, you’ll want to partner with a reputable company and ensure that the short-term goals move your organization closer to big picture goals.

Strategic outsourcing. Strategic outsourcing focuses on long-term goals. In this scenario, companies focus on building ongoing relationships with trusted vendors to help them achieve strategic goals. This approach offers several benefits. One, companies can take on more work; two, they can offer more products and services; and three, they can enter new markets. Additionally, in-house teams can spend more time on the projects that make the best use of their time.

We’re also seeing more companies combine outsourcing partnerships with services offered by on-demand gig workers and nearby contractors to achieve strategic goals.

Software Outsourcing Hinges on Relationships

Forrester recommends choosing IT partners that understand transformation and have technologies you can use as a catalyst for better outcomes.

In our developer survey, Angel Almada, Director of Solution Engineering at Tiempo, suggests that companies “focus first on cultural affinity. It should fit with the client’s core values and support the operational model they use.”

Once cultural compatibility has been established, companies should evaluate the vendor’s tech stack using an agnostic approach. According to Angel, that means “the focus should be on recruiting teams with a robust engineering mindset, able to move from one programming language to the next without any major hurdles.”

Paul Estrada, a Software Engineer Lead at Tiempo, says that one of the most critical factors to look for in an outsourcing partner is “people who keep learning, sharing, and are unafraid to fail.”

Like Angel, Paul advises companies to look for adaptability when evaluating solution providers.

Instead of focusing too much on finding the exact match for a specific skill or getting caught up in how many years of experience a developer has, it’s better to partner with people who embrace evolving their skills along with the tech landscape.

He also says, “look for people comfortable navigating unknown situations.” Often, they’re the most helpful when businesses are looking to grow or adapt to changing demands–a factor that has become increasingly important amid a global pandemic.

Final Thoughts

We’ve seen it play out many times before: business leaders prioritize the idea of innovation over their core business strategy.

While it’s critical to look for an outsourcing company with the resources and expertise to deliver innovative solutions, it’s people and relationships that power transformation. Software outsourcing is an extension of that. Companies need to look for partners that are up to the challenge.

Tiempo Development helps companies reach strategic software development goals by providing access to high-performing teams and a robust tech stack. Our Agile, nearshore business model allows for close collaboration and a tight focus on client outcomes.

To learn more about our approach to software outsourcing, contact us today.