Why Do Companies Outsource Software Development?

There are many reasons for outsourcing software development projects, from filling skills gaps and getting ahead of incoming cyberthreats to solving the rising customer experience (CX) challenge.

In 2016, the leading driver for using outsourcing services, according to business executives, was to cut costs. In 2019, a joint report from Harvey Nash and KPMG found that the main reason technology leaders outsource is to ‘access skills not available in-house.’

Another survey, CGS’ 2020 Business Process Outsourcing Trends (which covers IT/software projects, including accounting or manufacturing and beyond), found that 45% of executive respondents cited improving the customer experience as their primary motivation for outsourcing, while 36% said it was cost-cutting.

In this article, we’ll answer the question, “why do companies outsource software development” —which, by the way, is a lot more complicated than simply looking for “a deal” on labor.

Outsourcing is a Key Enabler for Digital Transformation

Big picture, outsourcing is a key enabler for digital transformation.

IDC predicts that by 2022, 80% of revenue growth will depend on digital offerings or operations. Today, this means that organizations’ survival hinges on how well they can deliver solutions.

KPMG’s Global Lead CIO Center of Excellence, Steve Bates, says, “There’s just strategy, and technology is driving it. The opportunity here for IT is to make it accessible to everyone, enable it without friction, and empower teams to harness technology to unleash creativity – without the burden of it.”

Regardless of reason, outsourcing, done right, could be the catalyst for “unleashing the creativity” offered by technology and removing the burdens that come with the territory. These burdens could be labor costs or a lack of in-house talent.

Still, outsourcing software development without a sound strategy in place won’t do you any favors. Tiempo Software Engineer Lead Julio Plascencia warns, “if IT goals are not aligned with and in sync with business goals, the impact is negative, no matter what development methodology you choose.”

The CX Factor

According to Adobe, CX leaders are more successful than their competitors by a long shot. They’re three times more likely to have exceeded their 2019 business goals than those who haven’t yet embraced “customer obsession.”

Data from Salesforce’s 3rd Edition State of the Connected Customer report suggests that consumer expectations will continue their meteoric rise for the foreseeable future.

A total of 75% of customers expect businesses to use new technologies to serve up better experiences, while 73% say a single “extraordinary” experience raises the bar for brands across the board.

While new technologies allow companies to understand customer intent, behavior, sentiment–and how they impact the bottom line on a granular level–the Adobe report also notes that customer-centricity is creating a sort of “digital inequality.”

Essentially, consumers’ high standards are magnifying the divide between the companies that can afford to evolve with their customers and the ones struggling to overcome the barriers and friction caused by inferior tech.

It’s worth noting that both Salesforce and Adobe published their findings just before COVID erupted into a massive global crisis and forced everyone online. For brands, ”great experiences” now must inspire, engage, and offer tailored insights with a dash of empathy.

Ultimately, it looks like we’re reaching a point where CX may be the most compelling reason for outsourcing, as technology and data are now essential for building direct, long-term relationships with customers.

Increasingly, we’re seeing companies look toward more sophisticated technologies, including AI-enabled applications, Robotic Process Automation (RPA), and intelligent chatbots to enhance the customer experience. However, in many cases, they lack the expertise to develop those solutions in-house.

Partnering with an outsourced team allows organizations to offer innovative solutions and capitalize on emerging trends–helping them evolve with customer needs and gain a competitive advantage.

The Growing Skills Gap

Per this 2019 SAP report, finding, retaining, and retraining the right talent is critical for developing new capabilities and staying competitive.

Obvious, sure, but the criteria for what it takes to “stay competitive” is rapidly evolving, and companies struggle to fill critical roles across several key areas, including:

AI & automation. According to Gartner, an estimated 85% of consumer interactions are predicted to be with a “non-human” within the next year. Leading companies in all industries are responding by reorganizing around a more automated environment; knowledge workers and machines are replacing admin staff.

Organizations need to rethink recruiting and build teams around a new set of strengths. That includes the developers & engineers who design, build, and train AI tools and the knowledge workers with soft skills like empathy and problem-solving that complement the speed, accuracy, & predictive power only a machine can provide.

Data science. You’ve heard it before–data is a business’ most valuable asset. That is, only if they have the skills, tech, and company culture that allows them to capture that value.

A recent Microstrategy report revealed that while there’s a stark difference between data leaders and laggards, investing in more intuitive and accessible self-serve analytics solutions could help narrow the gap.

While finding local data science talent (at least in the US) is often both difficult and expensive, companies might instead use an outside team to create a custom data analytics platform that enables better decision-making at all levels.

Cybersecurity. With the rise of big data and the IoT, and soon 5G going mainstream, cybersecurity is becoming more important and more complex.

Organizations face the challenge of trying to deliver more value to consumers while simultaneously responding to new security risks presented by the rapid shift to remote work. The World Economic Forum advises organizations to prepare for a “COVID-like global cyber-pandemic,” which could have a devastating effect on the global economy.

Companies are also moving away from on-site servers to an ecosystem of connected, cloud-based applications that require a new infrastructure, a new security strategy, and an experienced team to navigate new challenges–and of course, ward off potential cyber-pandemics.

According to KPMG, companies are responding to talent shortages by assembling on-demand networks of partners, providers, and in-house employees that work together to meet new demands.

We’re seeing something similar play out within our own client base, as well, as evidenced by these key findings:

  • 35.3% of survey respondents say their primary reason for outsourcing software development was filling “critical” or “hard to find” technology positions.
  • 28.4% of participants say they have ongoing relationships with dedicated external teams.
  • 25.5% reported using outsourced teams to augment in-house staff.

Outsourcing to Create Value

Generally speaking, outsourcing is a strategic move, one that allows organizations to use external resources to achieve key business objectives.

Those strategic goals vary by organization. The broader trend, however, suggests that more organizations use outsourcing services to generate business value using a limited amount of resources.

According to our survey findings, several respondents reported using outsourcing to overcome several challenges that could make it difficult to reach big-picture objectives: A total of 18% say labor costs are their biggest development challenge, 16% say it’s quality assurance, and 12% struggle to increase capacity.

Unsurprisingly, clients’ top challenges and their reasons for outsourcing appeared to be closely linked.

  • 36% aim to increase capacity
  • 36% hope to reduce labor costs
  • 36% are looking to improve service quality
  • 35% want more time to focus on core business activities

With more hands on deck, you can get more done in less time by working with outsourced teams. Sourcing talent from abroad could mean bigger returns on your software investments.

However, achieving these goals takes a considerable amount of effort and coordination.

In our recent employee survey, Tiempo’s Director of Software Delivery, Angel Almada, advises that companies looking to speed up time-to-market and reduce costs should look for a provider that has mastered the methodology they use internally to build products.

Let’s say you’re used to using Agile. You’ll want to work with a team of experienced Agile practitioners. Otherwise, you may inadvertently partner with a company committed to outdated (slow) waterfall practices that can cause delays, quality issues, and financial losses.

Whatever Your Reason for Outsourcing, Tiempo Can Help

In the end, companies still rely on external service providers to help them save money. The reasons for outsourcing are increasingly related to the biggest challenges of the modern business landscape.

From meeting rising consumer demands to creating seamless, omnichannel experiences, to protecting consumer privacy and system security, outsourcing software development is the only way many organizations can compete in the digital world.

That said, not all outsourcing companies are created equal. Businesses must focus on selecting partners that align with the big-picture strategy and continue to deliver value long-term.

Tiempo Development can help you navigate this space and find a partner with the tech savvy, communication skills, and resources that get results.

To learn more about our process, capabilities, and collaborative, nearshore business model, contact us today.