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Quick Stats on IT Outsourcing
Every tech startup faces this problem: should we outsource development or keep it internal? There is no simple answer, even though IT outsourcing will increase by $98 billion between now and 2024.
Companies of all kinds are outsourcing their IT requirements to countries like Ukraine, Poland, and Romania in increasing numbers.
According to a report for 2023, Ukraine's market for IT services will reach $6.7 billion, more than double what was seen in 2022.
Nonetheless, rapid expansion does not automatically make IT outsourcing your best choice; many factors must be considered before making this decision.
In-House Development: What is it?
Your team may be assembled internally; positions will be filled based on experience and skill levels necessary for creating the product.
Amazon and Paypal employ in-house programmers for complete project control at high costs.
In-house development can be as cost-efficient and effective as hiring permanent employees for your organization.
When recruiting and onboarding IT team members, however, recruiting services must first go through an intensive recruitment, interview, and onboarding process before being selected as members of their IT teams. Incorporating their skills if only developing IT-based products would make sense.
Pros Of In-House Development
- Build a team aligned with your company culture. A high-spirited team that reflects the core values of the business is what drives successful companies. In-house development gives you a chance to select team members who are in line with your startup's values. You'll get better results when a team works together. This is not possible when you outsource your project.
- Direct Communication Is an obvious benefit to having a team in-house. A team that is dedicated exclusively to your business and works in a physical location. You don't need to send emails back and forth to communicate with the team. Face-to-face communication can speed up the process, especially when finalizing project requirements.
- Immediate Support is an advantage of in-house development. Some bugs will inevitably appear after a product has been released. An in-house team can perform investigations immediately and apply fixes without delay. Outsourced teams may take longer to respond because they are busy.
The Cons of In-House Development
- It's costly. Hiring an internal team is expensive. A report shows that the average US salary for an IT developer is $71,508. This does not include the costs of recruitment and onboarding, sick leave, vacations, insurance, Social Security, or social security. Even if the team has a lull between projects, their salaries will still need to be paid.
- It is possible to have a high turnover rate. The easiest problem is to get the best people in your organization. You'll find it difficult to keep IT talent from being poached by recruiters and competitors. Your developer may accept a counteroffer with better benefits. This will increase your payroll. You'll end up losing the talent in your team if you don't.
- You are responsible for the upskilling of your team. With the constant introduction of new tools, technologies, and languages, there is constant change in the IT industry. It's important to keep your staff up-to-date, particularly if the change affects the growth of your product. The bottom line can be significantly affected by investing in tools and training.
How to Use In-House Development?
Even though it may seem expensive, building an in-house staff has many benefits:
- Budget is not a concern. Hiring an internal team is the best option if you don't have a limited budget and can afford to hire one.
- It is important to have full control. It's not worth the risk of a problem arising, nor is it possible to mitigate them. You and your team make all the decisions that will affect the development of the product. All problems are dealt with immediately.
What is Outsourced Development?
Outsourced development refers to outsourcing the building of products or services by contract.
All details related to each contract agreement should be communicated directly to an agency for execution, with IT accounting for 72% of global ISG contracts for outsourcing contracts.
IT outsourcing is often preferred over in-house development due to its lower costs and more scalable nature, providing a suitable alternative.
IT outsourcing became an international trend that generated $66.5 billion globally by 2023 - companies like Google, Slack, and other well-known entities have employed outsourcing for IT development purposes.
Pros Of Outsourcing
- Improved control of cost. Outsourcing is a good option if you operate in a place where the local talent costs a lot. It is possible to hire an IT company in a country where salaries are lower and the level of expertise the same. Eastern European countries have become popular destinations for IT outsourcing.
- A large pool of talent. Outsourcing means you are no longer limited to the candidates in your immediate area. With an enormous global talent pool to choose from, you'll have a plethora of choices. You don't have to spend time looking through resumes to find the perfect programmer.
- No technology constraints. It can be hard to find people with all the skills needed for certain projects. You can work with IT companies that are experts in the different technologies required to create your solution.
Cons of Outsourced Development
- Full control is not possible. An outsourced team, instead of an internal one, doesn't work exclusively for your project. You have less control over the project's development, progress, and troubleshooting. You may not be aware of what is happening to your project if you don't have direct contact with the team. Your emails may not be answered for hours or even days. Bug fixes are also delayed.
- Time zone differences can make it difficult to arrange a meeting with an IT company halfway around the world. If the leader of an outsourced team cannot understand your concerns, a language barrier can also be a problem.
- There are trust issues. Outsourcing confidential data to third parties is a risk. It's possible that you are concerned about the privacy policies of the agency and whether it would take on future projects by competitors. It's, therefore, important to check the track record of an agency and to sign an NDA to protect yourself legally.
Outsource Development: When to use it?
Outsourcing development makes sense if you fall into the following categories:
- A tight budget. Like many startups, you're on a limited budget. You can have more flexibility with your cash flow by outsourcing. The commitment to a monthly salary does not bind you.
- Talent shortage You can't seem to find any talent within your city. You'll save money by hiring an IT provider to do the work rather than spend months training someone.
- Tight launch deadlines. You may be surprised by obstacles if you don't have prior software development experience. You can't risk delays when you are under a tight deadline.
- Clarity is lacking. Even with a small team, it won't be easy to create a complex IT system. It isn't easy to translate business requirements into detailed technical specifications. A business manager is often available at an outsourced vendor who will mediate between you and the developers.
Get the Best Of Both Worlds: In-House and Outsourcing
Finding an equilibrium is difficult between internal and external development; to reach that objective, you may wish to combine both approaches by maintaining only a small team that handles core requirements while outsourcing other features.
By working together, vendors can gain access to an expansive pool of talent without taking on too much risk themselves.
You'll enjoy reduced fixed costs and greater autonomy in delegating resources. Finding an appropriate software partnership partner is vital in successfully merging internal and external development - here is how you should select one.
Outsourcing vs In-House Developers: What to Consider
1. Recruitment
Time for Recruitment
Many articles analyzing hiring and outsourcing have pointed out that hiring a developer can be long and expensive.
Will it be worthwhile to hire someone new? Details are important. Let's start by looking at some data:
- It takes an average of 51 days to hire a person in the IT industry. There are typically 24 candidates who qualify, and 15 interviews are required for every position.
- According to reports, it takes an average of 42 days to fill a position in the world. The average time to fill a role in engineering is 59 working days.
- In March 2023, the research showed similar results: it takes 42 days to fill a position globally in the IT sector.
Workable provides data comparing the average times it takes to fill various positions across Europe, the US, and the UK by comparing average hiring processes across them all.
Although specific details depend on the research undertaken, one month should suffice as the minimum hiring process length, with additional consideration given for notice periods when necessary.
Developers typically leave their previous company after three months (although this varies based on location or contract terms).
Why does hiring quality employees present such difficulty for organizations? This report explores three of the primary challenges involved with recruiting excellent talent.
The Cost Of Hiring A New Employee
The report shows that the average American company spends around $4,000 hiring a new employee. The report shows that the average cost per hire in the United States was $4,129.
The cost of recruitment can be linked to the following:
- Internal/external HR teams (interview costs, recruitment).
- The cost of job boards.
- Cost of onboarding and training.
According to a report, finding talent has long been one of the main challenges for managers across industries. With talent shortages increasing across sectors and disciplines, managers face great difficulty recruiting workers into their businesses.
Caution: Recruitment can require time and costs that you are unprepared to foresee, making the investment hard to justify.
Is recruiting worth it if it only lasts temporarily or if your demands change drastically? Yes; otherwise, no.
Perspective of Outsourcing
How long will it take me to find an outsourcer? Unfortunately, this question cannot be easily answered. Companies usually investigate several top candidates before conducting phone calls to narrow the field down even further.
A week may pass with this process being fully implemented. In most cases, multiple days suffice - the decision itself is just as critical, and time will need to be spent meeting and researching before selecting someone as your outsourcer - no hidden costs associated with integration and training.
Knowledge transfers must also be factored into your budget since external developers require time for knowledge transfer to your team (estimated at 2-3% of the project's total cost); hiring external developers generally speeds up the project timeline and saves money upfront by outsourcing development work to third-party vendors.
Considerations:
- How long is the project expected to last?
- How long do you expect to need the team of developers?
- Does your demand change over time?
- What is your desired start time?
This is a very difficult situation to decide. Outsourcing has objectively more benefits. Finding and hiring developers is easier and more affordable than contracting a firm.
Read More: What are Different Types of Software Outsourcing in 2023?
2. Cost Comparison Between In-House Development And Outsourcing
We'll dive right into the heart of this topic.
Salary Range
Your salary will depend on the location of your company, your industry, your project, as well as your previous experience.
We'll look at some statistics—the salary of IT professionals in the United States.
It would help if you also considered the employee costs:
- Employee training is important.
- Taxes
- Insurance
- benefits
- Rent
- hardware
- Software licenses
- Equipment, furnishings, and office supplies.
- Non-billable Hours (organizational, meeting, training, trips for business, events to integrate teams).
Data from the United States indicates that hiring in-house developers could cost 2,7x their base salary due to employment taxes, benefits for employee workers, and costs associated with office space and equipment acquisition.
As always, hiring is not free and may incur expenses; these investments should eventually recoup their cost. However, if your project only spans one year or less, additional office space or equipment won't justify themselves.
Outsourcing Costs
Outsourcing services make your costs transparent; hourly developer rates differ by region.
What are the true total costs involved here? Toptal has developed an online tool that calculates both an employee in-house and one who is outsourced - thus giving a true indication of the total costs associated.
Experts conducted extensive research comparing employee and outsourced programmer costs; employees will see their hourly wage double when all expenses are considered, while outsourcing will only increase by about 20% on their salary.
Experts also examined in-house versus outsourcing costs, with contract creation being an often forgotten cost when outsourcers choose this route (and should always check or create one with expert input before signing off on it), server management fees also being an additional consideration when hiring one for project work.
Considerations:
- How long would you like to have an in-house staff?
- Is this development project the main activity for your company?
Outsourced developers have a lower average cost per unit of time than in-house developers. Additional costs are similar to recruitment costs but on a larger scale.
They will eventually pay for themselves.
3. Talent Pool
Finding local specialists may prove challenging if you lack knowledge about a certain technology and know nothing about verifying their expertise.
Your location could play an essential role here; certain technologies might not be readily available nearby, and some developers differ significantly between countries - look at this map below as evidence.
Locations are a good place to outsource:
- With a limited number of developers.
- Where big companies that offer competitive conditions are located.
- Where developer wages are high.
Outsourcing allows you to access skills for whatever duration or scope suits you best; alternatively, multiple companies could pool together for this endeavor if one company alone doesn't possess all the required talent.
Word of Advice: The fewer technologies a company employs, the greater its probability is of possessing true expertise and experience in them.
You're almost certain they have used those same technologies across several projects with various profiles, maybe even built similar apps/features.
Considerations:
- Where are you located, and how likely is it that you can find talented people to hire?
- What is the average rate in your area?
- What are the most popular technologies in your area? Are there niches or any specific markets for these technologies?
The global talent pool is accessible through outsourcing; software developers who work for large companies usually possess more experience.
In some places, it cannot be easy to find talented people with experience to hire.
4. Outsourcing Vs In-House Development: Flexibility And Speed
Once your team has been scheduled for several months, starting a project can be challenging. Their limited flexibility restricts your options for expanding or contracting them out as needed; recruiting and training new staff takes time; when necessary, when the number becomes excessive for certain tasks, then downsizing may need to take place (even though that means firing colleagues).
Remember: The flexibility of an internal team and the speed at which in-house development can begin are limited.
Increase or reduce the number of employees you outsource as easily and rapidly as you would with on-demand services, often immediately or within several days - usually faster and cheaper than hiring developers to join firms for short-term, unstable projects.
Considerations:
- What is your desired start time?
- Are there any resources you can use for free, or do you need to hire a new team entirely?
- Your demand change within the next few months?
In this case, outsourcing is the clear winner. Outsourcing is faster than setting up an in-house team. It's easier to change team size and speed of development.
5. Communication
Find out the option that promotes productivity and is frictionless.
A Great Language And Cultural Fit
Employing local workers increases your odds of working with people who speak your language and share a similar cultural background.
At the same time, outsourcing may expose you to people from varying cultures who do not share these attributes.
If English is your native or second language, and if it comes easily for you, that bodes well; most reputable service providers speak it fluently despite possibly coming from different cultures than your own.
Outsourcing Tips:
- Communication is key to success. Friction may cause unexpected problems.
- Check the English proficiency of any outsourcing partners you are considering.
- Misunderstandings can be caused by cultural differences. You may want to consider outsourcing from a culturally similar location that is not so far away.
Hiring allows you to hire people that fit the culture of your business. Outsourcing should follow the same principles.
Companies' cultures differ, including shared goals, values, attitudes, and best practices.
When searching for the perfect partner, keep this in mind.
Considerations:
- Do you feel comfortable communicating in English with others?
- Do you think it would be difficult to only communicate in this language?
- What makes your culture unique?
- Are there any significant differences between certain countries and you?
In-house teams rarely show any language or cultural differences. It is harder to find an outsourcing partner with English fluency and cultural awareness.
Prone to De-Focusing
Fear of managing and communicating with remote teams is one reason companies prefer in-house development over outsourcing or working directly with an internal team.
What are the differences in communication when working with either option?
Face-to-face communication can be simpler; you can always catch developers at their offices when needed and micromanage as necessary.
While face-to-face conversation might lead to off-topic chatter and reduce efficiency, face-to-face is also ideal for building relationships among coworkers and between you and the rest of the team.
Working with an outsourcing team requires online communication; however, this interaction often creates more issues than expected, particularly during the coronavirus outbreak.
Remote workstation access was necessary due to this outbreak. Still, in most instances, discipline and the right tools must be available to progress smoothly.
Online communicators come in different forms, and each individual can find one to meet their particular needs. Building genuine and personal relationships among team members may prove challenging; thus, online communication's primary benefit lies in increasing productivity.
Communication online generally doesn't allow employees to discuss unrelated topics; thus, defocusing issues can affect both online and office teams; quality and engagement are at stake here.
Considerations:
- Face-to-face interaction is important to you.
- What do you think about online and remote communication?
- Do you want to micromanage your team by micromanagement?
- Which is more important to you? Maximizing productivity or maintaining close and friendly relationships within your team?
In-house is the best option if you are looking for close relationships and a more natural environment. Outsourcing is a great option if you are looking to increase productivity.
Conclusion
As stated at the outset, there's no simple black-and-white answer here. Even though your in-house team might understand your project and its values and culture perfectly well, they may lack certain capabilities when unexpected circumstances arise - making talent acquisition challenging while rapidly starting projects quickly.
Your software company could operate in another time zone or speak another language entirely yet still be easily reachable remotely for communication and meeting current needs.
They provide cost-cutting, flexible services that quickly begin projects while giving access to talented individuals from niche technology fields.
