October 2021

Love it or loathe it, software outsourcing has become a prominent feature of business life today.

As per Statista, the IT outsourcing market size reached a staggering $92.5 billion in 2019. Not only that, currently, the market size of the outsourcing industry in the US is $132.9 billion and is expected to increase by 1.6% before the year ends.

Why? From lower prices to access to the top talent around the world, IT skills shortage in some regions, and globalization, multiple factors contribute to the growth of IT outsourcing or the outsourcing industry in general.

However, the top reason for global outsourcing is that many business activities can be managed more efficiently by experts in a particular domain. And globalization has made it easy for businesses to connect with skilled professionals across the globe.

Why Choose Software Outsourcing?

Even though many entrepreneurs have long seen outsourcing as a strategy used by big businesses, technology has made it more accessible for small businesses and startups alike. For some small firms, outsourcing has made a powerful impact on growth and productivity.  

Outsourcing is leveraged by many businesses ranging from multinational firms to small and medium-sized enterprises. It offers limitless possibilities to C-level executives of both SMEs and big companies.

However, finding expert developers in a limited time is only one side of keeping software development moving forward. Moreover, due to the recent pandemic, maintaining an in-house team has become much difficult and far less effective.

dedicated outsourced team will help improve cash flows and increase work efficiency by allowing you to scale up and down whenever you need it, without firing or looking to hire new team members.

But outsourcing isn’t as straightforward as it seems. If you are looking to outsource software development, you must have some knowledge of what’s and hows of outsourcing. This is why we have developed this comprehensive guide to software outsourcing.


Starting with the difference between in-house development and software outsourcing, different types of software outsourcing. The article will highlight phases of selecting a software development company; different pricing models, what to look for before signing the contract, things to consider when the project is in progress. And what you should do when the project is delivered.

Let’s dive in.

Difference Between In-House Development and Software Outsourcing

Custom software development is an immensely complex process and there are two ways you can approach it: in-house development and hiring a software development company. In-house development is a conventional and extensively used approach. Hiring a software development company, on the other hand, is relatively new and has seen a significant boom in the last five years. Software development outsourcing is projected to reach a revenue of $220 billion in 2020.

But what exactly are software outsourcing and in-house development?

What is in-house development?

In-house development refers to conducting software development operations within a company by hiring a team of software engineers. A firm uses its employees for development purposes instead of outsourcing to a software development company.

What is software development outsourcing?

Software development outsourcing is a practice for businesses and organizations to handle some or all of their software development needs to a third-party vendor. This could be an individual freelancer or a software development company.

Two Types of IT Outsourcing: Nearshoring and Offshoring

Normally, there are two ways to outsource software development; Outsourcing overseas versus outsourcing to domestic companies. These two are named offshoring and nearshoring respectively.

While offshoring, factors like culture, time zone, and language barriers are not much important. You don’t care if the company you are outsourcing to operates from the other side of the globe. The only thing that matters is the expertise they provide. However, in nearshoring these factors are taken into account along with data protection laws.

Now that you know what software outsourcing is, here’s a question that usually follows;

Should I outsource software development?

Outsourcing can improve the productivity and efficiency of your business by reducing development time and cost. Outsourcing does not have to be difficult if you follow the outlines highlighted in this article for selecting and working with a software development company. It saves time and cost that you can reinvest in your business.

Here are the rules to outsource software development projects by protecting your business from the most common mistakes.

First, you need to compile a list of IT and software development companies suitable for handling the project. Do this by searching for software development firms online and comparing their offerings with your requirements.

Most software development companies offer 3 engagement models. You need to identify which of these models best suits your business needs. 

3 Software Development Pricing Models

Here are the 3 popular software development pricing models:

Staff augmentation model

It is not just about hiring people for your company, it’s also important to find the right fit. Hiring staff augmentation can be a way of doing that because they’ll come into an office and work with you on projects while providing their own unique skill set- which could help improve productivity by taking some pressure off! These services are typically offered as time/materials contracts where clients pay based on how many hours or task completions each specialist works per day; so there’s no risk involved if something goes wrong during this period since companies are already been paid fees upfront.


Dedicated development team model

In this model, you hire a remote team of software developers from the software development company to work on your project entirely. In most cases, it’s a team that dedicates themselves fully and completely to one client at once while the client (you) monitoring daily activities as well as measuring overall progress throughout each phase of development. This process allows both parties –the customers and engineers–to stay aligned with changing requirements when needed because they are able to interact directly without having any middlemen getting involved.

In many ways this approach has been proven effective: Clients get exactly what they need fast; save time by hiring fewer people but receive higher quality output every time.


Fixed-price model

A fixed-price contract is based on an estimate of the amount of work that needs to be done. Project requirements need to be written down in order for developers and designers to define this scope, which helps them figure out how much time they’ll spend implementing features while taking care not to overstep their boundaries.

The benefits are obvious: there are no surprises when it comes down to what was agreed upon at first because anything more than basics has been negotiated beforehand so nothing changes unexpectedly during deadlines or days left before completion.

Infographic: Fixed price vs Time & Material Contracts 

What to Examine Before Building Cooperation With a Software Development Firm?

This advice is helpful if you have compiled a list of software outsourcing firms.

1. Look for companies providing comprehensive services

Find out the services offered by the company. Companies providing full-stack development services normally put; business analysis, prototyping, design and developmentquality assurance, project management, and support services at your disposal. If a company isn’t offering full-stack development, chances are you have to recruit multiple resources for completing your project. 

2. Check if the company has a strong client portfolio

Look for companies that are veterans in software development. The software development companies build their engagement models according to the location of the client. Most experienced software development companies already know how to work across various time zones, understand cultural differences, and are well versed in handling these situations.

3. Search for recommendations

Read the clients’ testimonials of software development firms on reviewing platforms like clutch and learn about their experience working with the company. You can also ask the company if they have worked with clients from your country. In such cases, it would be easier for them to work under the same time zone and collaborate with your team easily.

4. Ensure that the company has the expertise you need 

Ask if the company has talented and experienced resources you need in your team. Else you will have to find off-site experts for the job.

Things to Look Before Signing the Contract

Once you find the right company to outsource software development projects; it’s time to make sure everything is clear before cooperating. Here are some important things you should take care of:

1. Sign non-disclosure agreement

When you involve an outsider in your business, even if it is a new employee, your confidentiality risks increase. Outsourcing is no exception. Some entrepreneurs or businesses do not want to share confidential data about their technology. That’s why they are afraid of hiring dedicated technical teams.

However, the easiest and most common method to mitigate these risks is to sign a nondisclosure agreement (NDA). Such agreements set out terms and conditions under which proprietary data is to be kept confidential. This data usually includes the development process, source code, and any discussions related to the product. The agreement specifically highlights the consequences of disclosing confidential data to any third party. A signed agreement is necessary to ensure that your data and project information is secure.

2. Check company’s awareness with risk management

While choosing your technology partner, think about the risks and problems that might pop up during the development. And ask the vendor if they have the resources and experience to manage these problems. Because it is important to conduct a risk analysis of every project to identify and manage risks.

3. Set up communication channels

Ask your team about the communication channels they use. You can create your own communication channels as well. For instance, your Slack channel or maybe weekly phone calls.

4. Ensure you are acquainted with the pricing

You do not want your project to stick in the middle because of disagreements over finances between you and the partner. Different companies offer different pricing models and you need to identify the models that best suit your needs. You also need to find out the additional expenses that might occur and who will be covering those costs.

5. Develop trust with your software development partner

When you hire professionals to do some work they will need the liberty to do things their way. Micromanaging and over-controlling them can destroy their productivity. So you must trust your team and let them work their way and keep you informed about the development of the project.

What To Do After The Development is Started

Once you sign the non-disclosure agreement and your collaboration on the project starts, here are things you need to do:

1. Document your requirements

Ensure that your requirements are thoroughly documented. Proper documentation reduces the labor intensity and the duration of your project. Precisely formulated requirements help developers to better understand the scope of work and can save your cost.

2. Engage with your team

Doesn’t matter if you are working with an in-house or an outsourced team, for the whole period of your project you are one team. And it is equally important to get acquainted with your team. Set up a meeting with your team and get to know the individuals who will work on your project. For long-term projects, it’s better to meet the team in person. 

3. Follow up with the development process

If you want your final product to meet your expectations never choose to completely subtract yourself from the development process. Participating in the process and controlling the product quality at different phases increases the chances of success. It also helps you push the project forward. 

4. Be aware of the unexpected costs

It is no secret that technology evolves rapidly. There is a possibility that things that were innovative at the beginning of the project might start to lose ground in between the development. This inability to adapt to changes may result in business failure. So you may need to change the scope of your project. And these changes could lead to extra tasks and extra tasks equal extra expenses. Even if you agreed on a fixed price, the outsourced company will charge for any task outside the scope of outlined work requirements.


Work To Do After The Project Is Completed

Completing the product development does not always mean the end of the collaboration. You should keep the outsourced agency close at hand because you may need product development in the future. Check the software you are given is well documented and make sure that it has been handed over to your internal team. Also, ask the outsourced firm about the support or maintenance support your product requires.



Over the last few decades, multiple world-renown startups have become successful by outsourcing their product development. Some of these companies reached enterprise-level while others became renowned brands. Billion-dollar companies like Skype and Slack did it, Million dollar organizations like OperaGitHub, and MYSQL did it. 

These successful examples prove that outsourcing your software product development to an offshore software development company can benefit your business. The evaluation steps highlighted in this article can give you an edge while partnering with a software development company.


Fahad Ali, Author

Fahad is PM at ARFASOFTECH but has a knack for writing. He enjoys writing about the latest technologies and evolving trends. Most of his writings revolve around trending technologies and their integration into operations.

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