Outsourcing or In-house Development: How to Choose Wisely

In product development, one critical decision you'll face is whether to choose outsourcing or in-house development for building your product.

Even adding a single new member to your team can have a profound impact on the team dynamics. Outsourcing amplifies this effect and can even be a determining factor in your project’s or product's success or failure.

This post answers some key questions about outsourcing:

🌟 What are the benefits of outsourcing software development?

⚠️ What are the risks and how to mitigate these risks?

🎯 What are example scenarios where outsourcing is a good strategic choice.

Key Benefits of Outsourcing Software Development

Outsourcing software development is a strategic tactic where a company engages an external organisation to manage some or all of its software development activities.

This approach can range from crafting a single application to overseeing the entire development lifecycle for multiple projects.

Some benefits of outsourcing are undeniable:

• Quick access to specialised skills: When you partner with a software development agency, you get more than just support with development; you also avoid the hassle of recruiting. This is especially useful when you need a team quickly for a new project, particularly for roles requiring specific expertise or advanced technical knowledge that your company may lack.

• Cost efficiency: Outsourcing can be a cost-effective solution, though this varies based on the agency and its location. However, it's not just about saving on development costs. Outsourcing also cuts down expenses related to recruitment, training or maintaining an in-house team, which can add up significantly over time.

• Flexibility to scale up and down: Consider a scenario where you're starting a new project that requires additional capacity but you don’t expect this to be a permanent expansion of your team. Outsourcing offers a practical advantage here, allowing you to expand your team temporarily and scale back easily once the project completes.

Risks of Outsourcing and How to Mitigate Them

Despite the significant advantages of this model, there are risks that should not be overlooked.

Risk 1: Low quality due to lack of accountability

When not managed carefully, outsourcing can lead to compromises in the quality of the final product due to miscommunications or differing standards. The responsibility here lies with both parties.

Often, software development agencies simply follow what the client requests. It's not uncommon to see software lacking quality standards, such as basic automated unit-level testing. When inquiring why such testing is missing, the typical response is that these were not specified in the requirements.

Mitigation strategis:

• Select a reliable partner: Choose an outsourcing partner known for maintaining high-quality standards that align with your project’s needs. If quality is ingrained in the external company's processes and culture, high-quality outcomes will naturally follow.

• Integrate internal roles: Include some internal team members in the external project team to maintain control over the project's quality. A balanced team with diverse roles and perspectives, both internal and external is good for better project health and quality visibility.

• Define explicit quality standards: Clearly define and include quality standards in the contract. This approach may not always be feasible, so carefully assess when it is appropriate. For external teams working fully independently, contractual quality standards can help ensure the software meets your expectations.

Risk 2: Differing interests leading to low productivity

Even the most trustworthy outsourcing partner will have different interests than your company. Your company's goal is to build a lean, high-quality product to minimize development effort and maximise value. Your partner’s interest might be contrary—more features mean more billable hours, and less automation and lower quality can also result in more development work.

Imagine you need to entrust key responsibilities, such as interviewing internal and external hires, to an external team member. Without having a trusted relationship, these tasks may not be handled fairly and objectively, leading to tensions and reduced productivity.

Mitigation Strategies:

• Trust and open communication: Start by selecting the right partner, one you can trust and who values long-term relationships and satisfied customers. Invest in the relationship through transparency and regular communication to build trust.

• Contractual alignment: Structuring the agreement to align the interests of both parties can also work well in some cases. Consider fixed-price contracts when the scope of work is clear, with clearly defined outcomes and high-quality standards. This discourages unnecessary feature creep and ensures both parties are working towards the same goals.

Risk 3: Limited influence on working methods

An outsourcing agency comes with its own working methods and quality standards. There won't be a lot of diverse perspectives within the team to bring new ideas. And isn't that the whole point of outsourcing—to delegate some responsibility and rely on another expert team?

This isn't necessarily a disadvantage in all cases, but it's something to be aware of. Influencing these methods can be difficult or even counterproductive. If you need to implement significant changes in your company and the way it operates, you might find this challenging.

Mitigation Strategy:

• Cultural integration: Facilitate workshops or joint training sessions to align methodologies. Make the external hires feel as being part of the team. Encourage knowledge sharing between team members, both external and internal.

• Strategic delegation: Clearly define areas where the outsourcing team has autonomy and areas where your company maintains control.

Risk 4: Over-reliance on a single outsourcing partner

If the success of your entire product or project relies on one outsourcing partner, this is a critical risk. Even with a great partner agency and excellent people, unforeseen circumstances could force you to terminate the contract, disrupting your project and endangering the continuity of your product.

The likelihood of this risk occurring might be low, but the impact is huge.

Mitigation Strategy:

• Hybrid Teams: Ensure knowledge is shared among both internal and external team members. Critical software components should not be solely owned by an individual or by the external team alone. While this might be necessary in some cases, it should be a temporary measure. The longer this situation persists, the greater the risk.

• Limit the Risk Duration: When exploring product-market fit for a new product, it’s common to rely fully on an external agency. However, as the product becomes a key asset for your company, it’s crucial to diversify the team. Integrate internal team members to reduce dependency on the outsourcing partner and ensure the continuity and security of your strategic assets.

Risk 5. Cultural and communication barriers: Differences in language and work culture can also pose significant risks. Additionally, if time zones are not aligned, the challenges increase, potentially leading to delays and low-quality outcomes. Outsourced teams can sometimes feel distant due to their external status, which can affect the dynamics of teamwork and execution.

Mitigation Strategy:

• Cultural compatibility: Choose partners with similar work cultures or those in similar time zones to ease communication.

• Team integration: Involve external team members in company events and regular meetings to encourage a sense of belonging and improve collaboration.

Risk 6. Security risks: Sharing sensitive information with an external party can lead to data breaches or leaks. True, the risk is the same for your internal employees, but outsourcing adds an additional layer of reliance on the security measures integrated by your vendor, over which you have limited control.

Mitigation Strategy:

• Security alignment: Ensure the outsourcing partner adheres to your company’s security protocols. Consider formalising this in your agreement.

• Regular audits: Conduct periodic security reviews and audits to ensure compliance and address vulnerabilities.

Ideal Scenarios for Outsourcing:

Let’s explore some example scenarios where outsourcing is a good strategic option.

When project requires specific expertise

Professional development services are inherently service-oriented rather than product-focused. They excel with clear requirements and milestones.

Consider, for example, a data migration project involving a complex software landscape. It requires specialized expertise beyond your team's training. Hiring an external party specializing in data migration could be advantageous. Naturally, there are challenges in integrating another team to learn your product, but none of the other scenarios in this case will be easy.

In situations with limited internal expertise and capacity

If you're a startup lacking the resources for a full-scale development team, outsourcing could bridge these capacity gaps.

For instance, imagine you're testing a new idea and need to build a small MVP, but lack the required expertise in-house. Outsourcing development could be a viable option, especially since the success of the product remains uncertain. However, it's crucial to select a development partner specialised in MVP development, as the approach differs significantly from traditional development methods.

When software isn't core to your operations

Consider a manufacturing company that wants to create a mobile application enabling its clients to track the production status of their orders in real-time but lacks a software development department.

Since this task isn't a core activity for the company (yet), outsourcing the mobile app development to a tech company enables the manufacturer to offer value-added services to its clients without diverting focus from its core competency in manufacturing.

However, even for a manufacturing company, digitalisation and tech products may become part of a new strategy. When this shift occurs, building an internal team would be a wise move. This trend is increasingly common for many non-tech companies.

When team dynamics are high

When there is a high dynamics in the team and the team needs to scale up fast, or potentially scale down tomorrow, outsourcing can also be a good option.

But here you need to be careful. Excessive dynamics can disrupt the entire team, regardless of whether outsourcing is involved. It's crucial to ensure that knowledge remains within the team, that product quality isn't compromised, and that the team's well-being is maintained.

Final thoughts

The choice between outsourcing and building an internal team remains pivotal. But the success depends not only on the decision itself but also on how effectively you manage these risks and you leverage opportunities.

Every risk is worth taking as long as it's for a good cause and contributes to a good life. - Richard Branson

P.S. Stay tuned for the upcoming article on this topic: How to choose the right roles to outsource?