What exactly is outsourcing in business, and specifically in the tech industry? We list the pros and cons of delegating tech development to remote software engineers and take a look at the most common outsourcing types and models. Here are the main themes Daxx covers in this article:
- What Is Outsourcing?
- What Is IT Outsourcing?
- What Is Software Outsourcing?
- The Most Commonly Outsourced Services
- IT Outsourcing Examples
- Examples of Сompanies That Outsource
- Reasons for Outsourcing
- The Advantages and Disadvantages of Outsourcing
- Types of Outsourcing
- IT Outsourcing Pricing Models
- IT Outsourcing Models
- How to Choose the Right Outsourcing Model
Outsourcing is the process of engaging a third party individual or organization outside of your company, either locally or internationally, to handle certain business activities for you. It is a common business practice that allows companies of all sizes to grow as and when they need it, without major risk or investment.
IT outsourcing is the practice of hiring resources outside of an organization to handle certain information technology functions. Companies often outsource data storage because it is cheaper to contract a third party than to buy and maintain their own data storage devices and facilities.
What is IT Outsourcing
Software outsourcing is a practice in which a company delegates software development functions to a third-party vendor. The qualified software outsourcing vendor carries out the programming services and related functions by using the in-house talents and resources. In this way, the software outsourcing vendor saves the resources of the client by paying lower developer salaries.
What Is the Meaning of Project Outsourcing?
Project outsourcing is an approach within which a client fully transfers the responsibility for the product to the vendor. Clients refer to project outsourcing meaning that they would like to delegate either just tech team management or software development and team management to a vendor.
What Is Outsourcing Information Systems?
Outsourcing information systems means that business delegates the data storing to a third-party vendor. A company can consider outsourcing information systems to reduce data storage costs and ensure data security. Data storage centers located in outsourcing destinations charge lower prices for managing, configuration, and actually storing data which makes outsourcing information systems one of the popular approaches in the tech sphere.
What Is Outsource Staffing in IT Outsourcing?
Outsource staffing in IT outsourcing usually refers to practice when a company externally hires talents to fulfill some crucial functions. The main benefit of outsource staffing here is that a company can save on expenses without losing the high quality of work.
- Web development
- Software and application development
- Website/application maintenance or management
- Technical support
- Database development and management
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The individual or company that becomes your outsourcing partner can be located anywhere in the world — one block away from your office or on another continent.
A Bay Area-based startup partnering with an app development team in Utah and a call center in the Philippines, or a UK-based digital marketing agency hiring a Magento developer from Ukraine are both examples of outsourcing.
IT outsourcing is a strategy that helps even the world-class companies grow faster without losing the quality of development. Here are some good examples of companies that benefit from outsourcing:
- Curiosity Stream
BaseCamp is one of the most popular project management tools known across the world. When the product was only becoming popular, it was being developed by four in-house programmers. Things were going great for the company but in a while, the influx of new clients has caused a great mess in development processes for the very BaseCamp.
It was then that the company decided to expand the development department by outsourcing a part of tech functions to foreign vendors. After they hired several more remote developers, the team could both fix bugs and implement new functionality faster which, eventually, brought worldwide fame to the product.
Curiosity Stream is a rising star in the streaming services arena. The company focuses on the distribution of documentary films for the audience all around the world. The primary functionality of the streaming platform has been developed by the core development team located in the US.
At some point, the development team was no longer capable of fixing bugs and the speed issues were negatively impacting the user experience. To power-up the team, the company started by hiring four software engineers from an outstaffing vendor and gradually grew an entire remote dedicated development team.
Speaking about good examples of outsourcing, it's worth mentioning Google — the most renowned tech companies in the world. Interestingly, Google is also known as a good example of outsourcing software development functions and virtual assistant work. In 2011, the company had at least a thousand remotely working employees from 60 different countries. In 2020, the company is very likely to reinforce its business and optimizing IT costs by outsourcing.
Another example of companies that outsourced successfully is Pricena. Prior to outsourcing software development, the business was using a mobile app as the main revenue generator. After the customer database started growing, the product founder Haneen Dabain decided to improve the functionality of the mobile app and construct the web platform with the help of remote developers hired through an outsourcing vendor. As a result, the rebuilt Android and iOS apps have gained great popularity and got more than 50K downloads on Apple Store and Play Market.
Widely used in our day-to-day communication, Slack is one of the brightest outsourcing business examples. Back in 2013, the core tech team of four engineers developed the first version of their communication platform. Yet, before the product was released to the public eye, its design was delegated to the outsourcing design vendor. The Beta versions of the design and copy were tested outside their company and that's how they received important feedback from users. As a result, the company launched a tool that has outdone the market several times over.
Reasons for Outsourcing
1. To Reduce Cost
More often than not, outsourcing means saving money. This is often due to lower labor costs, cheaper infrastructure, or an advantageous tax system in the outsourcing location.
2. To Access Skills That Are Unavailable Locally
Resources that are scarce at home can sometimes be found in abundance elsewhere, meaning you can easily reach them through outsourcing.
3. To Better Use Internal Resources
By delegating some of your business processes to a third party, you’ll give your in-house employees the opportunity to focus on more meaningful tasks.
4. To Accelerate Business Processes
When you stop wasting time on mundane, time-consuming processes, you’ll be able to move forward with your core offering a lot faster.
5. To Share Risks
When you delegate a part of non-focus functionality by outsourcing it to a third-party vendor, you give away the responsibility and related risks.
Why Do Companies Outsource in 2020?
The unprecedented economic recession in Q2 caused by the spread of coronavirus has stimulated businesses to seek new tech talents outside their countries. Not only companies continue outsourcing software development function to optimize costs but also to grow through the recession. Many businesses embrace outsourcing because it helps them work with vetted specialists for a perfect quality-cost ratio.
The downfall is leaving a footprint on many small and middle-sized businesses across all industries. Curiously, those companies that have undergone digitizing report lighter impact from an economic recession. So do the tech education, pharmaceutics, and medicare are gaining momentum and even growing their businesses by outsourcing software development. Meanwhile, tech travel and many other businesses choose to work in a safe mode.
The Benefits of Outsourcing
1. Reduced Expenses
You get to enjoy significant cost savings when you outsource to a country with lower production costs: a lower cost of living for employees, meaning lower salaries, as well as lower infrastructure and operational costs.
2. Access to Global Talent Pool
Outsourcing allows you to reach professionals that may be in short supply or unavailable locally.
3. Significant Time Savings
When you partner with an outsourcing vendor, you don’t have to advertise for, interview, select, and train new in-house employees, all of which can be very time-consuming.
4. Ability to Upscale Fast
You’ll be able to work with new clients and take on new projects without having to spend time on the processes described above.
5. Uninterrupted workflow
Your business will function round the clock thanks to the time difference between the in-house team and the outsourcing vendor’s team.
The Disadvantages of Outsourcing
1. Time Difference
This can be a curse as much as a blessing, and in the worst cases it can significantly hamper the communication flow between you and your outsourcing partner
2. Language Barriers
The language barriers can result in miscommunication and wasted effort unless you and the vendor you partner with have at least one language in common.
3. Different Work Habits
Different Work habits can be the result of different cultural environments, can interrupt your established workflow, and will definitely need getting used to.
4. Long Distances
Extremely long distances between you and the outsourcing vendor can turn business trips into an expensive and tiresome experience.
the CIO at Lamina Technologies
"When evaluating a country for outsourcing, I will first consider the ability to communicate well with the remote team. This is related to mentality issues and the ability to understand each other well."
Outsourcing is an umbrella term that encompasses a few more specific definitions. Offshoring, for one, often comes up as a synonym for outsourcing, even though the two terms are not exactly interchangeable. So what is offshoring?
Types of Outsourcing
Also known as offshore outsourcing, it means outsourcing IT services to a distant location to benefit from lower labor costs, more favorable economic conditions, time zones, or a larger talent pool. Time differences we are talking about here are at least 5 or 6 hours.
Extreme time differences can definitely come in handy for companies that need to provide uninterrupted tech or customer support, and for those who run constant updates and maintenance work.
Example: a US-based Interactive Marketing Agency outsources web development to a Ukrainian company.
globalHMA/Workhorse Development Owner
"When we come to the office in the morning, we check on what Tetiana has done. It’s really very efficient because it gives her solid time to work on her own. It also gives us some time to sort through everything that she’s done and see if we have any questions. There’s no interfering in each other’s work or getting in each other’s way."
Nearshore outsourcing is very similar to offshoring, albeit with one important difference: this is that nearshoring means outsourcing software development or other IT functions to a location that is much closer to your home — usually in the same time zone or one within a couple of hours of it.
Nearshoring enables much smoother communication compared to offshoring. What’s more, countries that are located close to each other share cultural crossovers that can simplify communication.
Example: a startup based in the Netherlands hires a development team in Ukraine.
Also called homeshoring refers to delegating a number of business processes to a different location within national borders. Usually the chosen location has lower labor and operational costs.
While cost savings are the main reason to onshore, skill shortages can also drive businesses to look for talent in alternative locations.
Occasionally, the term “homeshoring” is also used to describe a situation in which employees work from home.
Example: a company based in Washington engages IT security experts from Texas.
This term describes outsourcing business processes to multiple vendors, thus diversifying the risk in vendor operations.
Example: the main development capacities of a German software development firm are located in Munich. Occasionally, the company works on projects that also require design services, and when this happens, they contract a small design agency in Hamburg. Later, the company lands a major long-term project that requires skills the Munich team doesn’t have, which is when they partner with a development company in Ukraine to help them complete it. A few years later, the company releases its own product which they want to market in China, and for this purpose they engage a Chinese marketing agency with a much better knowledge of the local market.
Time Differences Between the US and Popular Outsourcing Destinations
|California (West Coast)||New York (East Coast)|
|Mexico||2 hours ahead||1 hour behind|
|Costa Rica||2 hours ahead||1 hour behind|
|Colombia||3 hours ahead||—|
|Argentina||5 hours ahead||2 hours ahead|
|Brazil||6 hours ahead||3 hours ahead|
|Poland||9 hours ahead||6 hours ahead|
|Ukraine||10 hours ahead||7 hours ahead|
|Romania||10 hours ahead||7 hours ahead|
|Bulgaria||10 hours ahead||7 hours ahead|
|India||13 hours 30 min ahead||10 hours 30 min ahead|
|China||16 hours ahead||13 hours ahead|
|Phillipines||16 hours ahead||13 hours ahead|
Time Differences Between the UK, the Netherlands, Germany, Switzerland, Denmark, Norway, Sweden, Finland and Popular Outsourcing Destinations
|UK||Netherlands, Germany, Switzerland, Denmark, Norway, Sweden||Finland|
|Poland||1 hour ahead||—||1 hour behind|
|Ukraine||2 hours ahead||1 hour ahead||—|
|Romania||2 hours ahead||1 hour ahead||—|
|Bulgaria||2 hours ahead||1 hour ahead||—|
|Egypt||2 hours ahead||1 hour ahead||—|
|South Africa||2 hours ahead||1 hour ahead||—|
|India||5 hours 30 min ahead||4 hours 30 min ahead||3 hours 30 min ahead|
|China||8 hours ahead||7 hours ahead||6 hours ahead|
|Phillipines||8 hours ahead||7 hours ahead||6 hours ahead|
Within the Cost Plus pricing model, you pay the developer's monthly salary as well as a fixed fee for your vendor. The vendor's fee includes payroll, office infrastructure, fees, support staff, and workstations.
Time and Materials
T&M, short for Time and Materials, is a pricing model in which the client only covers the hours that developers spend working on the project. This pricing model is very popular in IT outsourcing practice because it grants the client flexibility and ease of adjusting requirements without paying additional fees.
According to the Fixed Price contract, the vendor has to complete a project within fixed time and budget. The client makes a one-time payment and cannot change any specifications and requirements unless paying additional fees.
Billed each month, the rate card payment model allows clients to cover the monthly rates for developers involved in the project. Using this model, you save up time on recruiting necessary developers and go with the ones pre-hired by the vendor.
The most popular IT Outsourcing models of cooperation between the client and IT outsourcing vendor are workforce augmentation, project outsourcing, and opening a dedicated development center.
1. Workforce Augmentation
Also known as staff augmentation, is a strategy for filling skill gaps that allows businesses to hire top-level specialists for short- or long-term projects while also being able to avoid the costs of hiring new full-time workers.
Workers added through the staff augmentation model are employed by the staff augmentation vendor, which means you don’t have to worry about infrastructure and other costs related to having full-time workers, nor do you have to spend time on recruitment. However, the new staff members act like your employees, meaning you’re the one supervising, leading, and managing them.
Oktopost Co-Founder and VP Product
"By creating a development hub remotely we get exposed to a much larger pool of quality talent. Nowadays, I can either search the Israel or Ukrainian market as I have functional teams in both. This way, remote cooperation brings flexibility to business owners."
2. Project Outsourcing
Clients refer to project outsourcing meaning that they would like to partner with vendors that have exclusive expertise that is lacking in-house and delegate a part of functions to them.
Project outsourcing works best if the type of work you are outsourcing isn’t the core function of your company. It is also a good solution if your project’s requirements aren’t likely to change during the development process.
Example: a Dutch food delivery service partners with an app development company in Macedonia to have their app developed. The food delivery service provides the requirements but doesn’t manage the development process directly.
3. Dedicated Development Center (DDC)
DDC is an outsourcing model in which a company locates its dedicated resources in a different country in order to gain access to larger talent pools and benefit from lower labor costs and/or taxes, while maintaining full control over the work process.
It is possible to open a dedicated development center on your own, but this has obvious disadvantages. For one, you’ll have to do the recruitment in a largely unfamiliar locale and also learn the ins and outs of local labor laws and taxes. The alternative lies in partnering with a company that provides recruitment services, office facilities, and keeps your developers on their payroll for a fixed fee.
Because of all the risks involved, opening a dedicated development center on your own is only worthwhile if you are going to hire at least 40 new people at the outsourcing location. Otherwise, partnering with an outstaffing vendor makes a lot more sense. Another less risky option lies in partnering with a vendor who assembles the workforce, then buying out the team and opening your own office.
Example: a Dutch company partners with an outstaffing vendor in Ukraine that recruits and hires an Agile software development team for the client. The developers work directly with their Dutch management while being on the Ukrainian vendor’s payroll.
"If we see that something is wrong or want to change the direction, we can do it easily and quickly. We don’t have to explain it, negotiate new prices, etc. If we decide to go “left”– we go “left”. I also like that our Daxx team is really dedicated to our project. They don’t have multiple projects in progress, so they don’t need to prioritize."
Each software outsourcing model has its own strengths and weaknesses, and the choice you make will depend on a number of key factors. The following questions may help you figure out which model works best for you:
Do you have an in-house specialist with the requisite technical background to supervise and manage the development process?
|Yes — Staff augmentation/DDC||No — Project outsourcing|
Is the project long-term?
|Yes — Staff augmentation/DDC||No — Project outsourcing|
Are project requirements likely to change significantly during the development process?
|Yes — Staff augmentation/DDC||No — Project outsourcing|
Versatility of Modern Outsourcing
As you can see from this article, modern outsourcing comes in all shapes trying to meet the needs of businesses all around the world. Modern outsourcing is a set of flexible approaches that allow even a short-term collaboration between businesses in different locations. The worldwide shutdown in 2020 has proven that not only we can put entire companies on remote but also, we can easily handle work with teams located in different countries and all this is possible only thanks to the achievements of modern outsourcing.
Jan Willem Bergsma,
Managing Partner at Xuntos
"After cooperating with an offshore developer, I learned that our onshore developers are more emotionally attached to the team. Because of the distance, it’s harder to communicate about simple everyday topics. To promote better emotional attachment, employers could invite remote developers to work at their offices at least for a week."
We offer a hybrid of the staff augmentation and dedicated development center models. We connect businesses in search of top engineering talent with skilled software developers in Ukraine, and organize their workspaces in our fully-equipped offices located in the country’s largest tech hubs — Kyiv, Dnipro, and Kharkiv.
Throughout 20+ years of commercial experience, Daxx has developed an efficient services system, which ensures support on each stage of the development lifecycle.
Whether you’re interested in hiring just one developer, or want to set up a fully-fledged development team, we’re ready to help.
Learn more about our services, or head over straight to the contact form below to tell us what skills you’re looking for.