What is Software Outsourcing? Pros and Cons of Outsourcing Outline
With computer chip sizes getting down to less than 10nm (greater processing speed for your favorite computer/smartphone) and more appliances connecting to the Internet, the needs for software integration have become more relevant than ever. When a company decides to have digital transformation, they could either develop the product in-house or software outsourcing.
This article examines the fundamentals of software outsourcing, from which you could lift the burden of “to outsource or not to outsource”.
What is Software Outsourcing?
Generally, outsourcing is hiring a third-party contractor to perform the in-house tasks of a company. A software outsourcing company is delegated to create, update, and maintain software-related services, which are normally managed by the company doing the hiring. Kodark was probably the first company that used software outsourcing, which subcontracted IBM to build and operate Kodak’s data centers in 1989.
Why Do Companies Outsource Software Development?
There are many reasons why businesses are increasingly outsourcing software development to third-party companies. Outsourcing is a tried-and-true option to reduce various expenses; These include but not limit to the personnel costs (project manager/employee), human resources department, office spaces, in-house equipment and other maintenance costs.
For example, a thriving book-selling business can outsource the overhead of creating and maintaining low-level technical details of their high-traffic e-commerce web application to a software company. Maintaining a website with thousands of requests per second would be challenging if the business mentioned didn’t have a skilled team of developers. In contrast, outsourcing software companies have dedicated personnel to tackle software problems not central to the companies outsourcing. Therefore, the latter wins by incurring less cost when hiring out a third party contract compared to retaining an in-house army of staff for software development work.
Revisiting our earlier example about the book-selling business, we can infer another benefit of outsourcing. The business, taking one task off the plate, now has time to focus on their core product/service. Having more resources available at their disposal to put on developing their product will give a business an edge over their competitors that are trying to keep software development in-house.
It also turns out that maintaining a team of talented software developers is no easy task. Simply put, it’s hard to hire and then retain a star software engineer alone. However, when a business decides to outsource software development, the choices of developers are virtually unlimited. Why? Because unlike manufacturing outsourcing, software development can be outsourced either onshore or offshore. In turn, there’s a much wider pool of software developers (teams) to tap in. Thus, outsourcing offers businesses more flexibility and ease when it comes to software development costs.
Software Outsourcing Models
Suppose you are a business representative who’s in charge of software development, and you have decided to contract software development to another company. Now you want to learn about different kinds of software outsourcing models in order to pick the best one that suits your company’s needs. Typically speaking, software outsourcing models are structured around the price of the outsourced product/service. Therefore, a company outsourcing needs to weigh carefully between needs/wants and budget to select an appropriate model. Without further ado, below is a brief introduction to the four most popular software outsourcing models.
Fixed Price Models
As the name suggests, the outsourced product has a fixed price and paying timeline. In short, you only have pay after receiving your desired product. Therefore, in this model, the company outsourcing need to have a long-term vision of the software product/service. All requirements should not be changed so often because arising new requirements can accumulate additional expenses which are not in the contract could cause difficulties to negotiate down the line.
For a company outsourcing, this model has the advantage of transferring the risks of the tardiness of project management, and/or inadequate outcome to the outsourcing company. As a result, the company outsourcing can keep the project within budget, and there’s no fear of out-of-control budget for rising costs for “feature creep”, for instance. On the other hand, fix-priced long-term projects incentivize outsourcing companies to do well to meet the contractual obligations, so it’s a win-win for both parties.
Time and Materials Models
This term is originated from construction. In Time and Materials Models, the company contracting out is billed on the time; and materials the contractor took to complete a project. Consequently, the requirements and estimation need to be as comprehensive as possible. Sounds like a worse deal than Fixed Price Models, right? We often use these models when the scope of the project is not easily estimated, or the requirements change later.
Incentive-based Pricing Models
Incentive-based pricing models are one of the newer pricing models. This model offers incentives for the outsourcing company if they meet certain goals in the project. For instance, the company contracting can promise extra payments if the project completes early and/or exceeds expectations. As you can see, this model is a great choice to motivate the outsourcing company to perform better and more effectively. Since the pricing is not fixed from the outset, Incentive-based Pricing Models are a great fit for projects whose requirements differentiate over time. The downside for the company hiring out is that there’s more cost to assume.
Shared Risk-Reward Pricing Models
Another flexible pricing model, Shared Risk-Reward Pricing Models have both fixed and bonus payments. What’s innovative about this model is that part of the cost of development is born by the outsourcing company. As a result, part of the product profit also belongs to the outsourcing company for a defined period of time. Since the outsourcing company has greater control over the finished product, the company hiring out risks being not aware of minutiae details of the product, which makes it hard to measure the former’s progress.
Cons of Software Outsourcing
Of course, like everything else, software outsourcing is not all rosy. First of all, it can be difficult to find quality outsourcing companies. What’s more, when you’ve found a suitable contractor, then there’s possible communication overhead (time-zone, cultural value differences) especially when the contractor is overseas, making communicating correct requirements a challenge. Furthermore, no matter how much oversight the company hiring has and how detailed the requirements are, they can’t control the specifics in the development process of the contractor. Finally, as the old adage goes, “What you pay is what you get”, the personnel of the outsourcing company might not be as good as when your company has a dedicated team for software development.
How to Outsource Software Development Effectively
Understanding the problem well is the first step toward solving it. We can mitigate the disadvantages of software outsourcing by handling in the right way. Here are some tips.
First things first, the more thorough the project requirements are, the easier it is to measure the contractor’s development process. Excellent outsourcing companies will have excellent communication.
Thus, it’s important to select established outsourcing companies that have a track record in delivering high-quality software services. You should set up communication protocols to ensure there’s less miscommunication. One last suggestion: Outsourcing is a partnership, so you need to choose an appropriate pricing model and respect your partner company to ensure success.
There is also How to Choose a Software Outsourcing Company? Best Guidelines in our blog.
About Designveloper
Founded in 2013, Designveloper is one of the key software development players in Ho Chi Minh City, Vietnam. It is the first Vietnamese software firm to be ranked among Top Web Development Companies 2020 of topdevelopers.co, a leading directory of IT service providers. Contributing to the success of Designveloper so far is a team of talented and professional web developers, mobile developers, UI/UX designers and VOIP experts resulting from a strict recruitment process. Designveloper has developed quality software products for clients from a wide range of industries: energy, finance, healthcare, education, etc, and received valuable feedback from and recognition from partners.
