Outsourcing is a path not commonly explored by business owners. This is because the real and perceived threats that come with this hiring model are barely known to many.
And while there are many negative stereotypes about outsourcing such as loss of managerial control, this business model has been widely adopted by both private and public entities.
For starters, it enables enterprises to achieve their business objectives cost-effectively due to the low labor-costs in foreign markets. Moreover, it makes it possible to tap into expertise and productivity on a level that an in-house team may not be able to match.
In this article, we are going to look into the general outsourcing market, distill factors that have led to the spiking growth of the industry, and outsourcing tips for a software development project.
What is Outsourcing?
Outsourcing is a business practice that entails a company hiring a foreign or local individual or company to provide services that are normally done or had previously been executed by an in-house team.
In such a working arrangement, the hired service provider remains in charge of their workforce and computer systems to deliver the expected services either on-site or at an external location.
Although interchangeably referred to as offshoring and nearshoring, there is a fundamental difference between the three. A closer look at the nearshore outsourcing definition will reveal some glaring differences.
Nearshore outsourcing is a “young offspring” of offshoring as it involves hiring a service provider a little bit closer to home, even though they may still be domiciled in a different country or region.
On the other hand, offshoring refers to the transfer of business processes to a distant location.
Now that we have managed to iron out the major differences between the three, let’s briefly take a look at the IT outsourcing market.
Brief Outsourcing History
Developed countries like America and those in Europe have been outsourcing for the past decades in developing countries like the Philippines and India.
As international telephony became mainstream, companies suddenly realized that their call centers in America and Europe could be seamlessly managed by individuals sitting halfway around the globe, at a lower cost.
As time progressed, basic telephony was eventually replaced by the Internet. And the expansion of bandwidth and increased Internet penetration also meant the growth of outsourcing applications.
2019 IT Outsourcing Market Overview and Stats
During the initial stages of outsourcing, outsourcing and all its whims were strictly limited to Fortune 500 companies. The infrastructural and setting up costs were so high, that companies would need a massive scale in order to justify the ongoing costs.
Today, companies are able to outsource virtually any task or service you can think of. Whether it’s programming, app development, or even database management, everything is possible.
To this effect, the outsourcing market has continued to see unprecedented growth. In fact, according to a 2019 report by Outsourcing Insight, it is estimated that close to 65% of small businesses are currently engaged in outsourcing.
In terms of revenue, the global outsourcing market hit the $85.6 billion mark in 2018.
Compared to process outsourcing, IT sector contributed a much bigger revenue proportion of $62 billion compared to the $23.6 billion from BPO.
Different Types of Outsourcing
One of the most common types of outsourcing is IT services offshoring. It entails a company partly or completely contracting technology-related services to a service provider. Every business, whether small or big has various IT needs. In case they face skills shortages within the in-house team, they may choose to outsource to bridge the gap.
When running a business, there comes a time where complicated tasks can’t be accomplished by an in-house team. This could be as a result of different factors such as limited training, lack of time, lack of tools and technology required to complete the task.
In such a scenario, it makes economic sense to outsource qualified professionals as a company is able to save on the overhead costs. Some of the most commonly outsourced professional services include accounting and legal services.
Although mostly used in IT services, multisourcing is also applicable in many other business areas. Multisourcing simply means contracting IT services outsourcing and other business functions to external service providers like Develux. Multisourcing helps create the best-of-breed team to undertake a task and achieve business goals.
Business Process Outsourcing
Business Process Outsourcing (BPO) is another biggest and common form of outsourcing. It generally deals with contracting specific or multiple business processes to a third-party provider.
BPO is especially common within the manufacturing industry, whereby manufacturers outsource important business operations to achieve high-quality results.
Pros and Cons of Outsourcing
There is a myriad of factors that have compelled businesses-both big and small- to outsource. They include;
The cost-saving aspect is probably one of the biggest and most obvious nearshore outsourcing advantages. Compared to western countries where salaries are high, some geographical locations like Eastern Europe have lower rates and you can get software engineering nearshore outsourcing services at a much lower cost without compromising on quality.
Partnering with an outsourcing service provider helps bring years of experience and expertise to your project. This means that your job is done by people with a deeper knowledge and understanding, hence efficiently done.
Focus on Core Areas
Outsourcing non-core business processes allow you to focus on core business activities. As a result, you are able to invest your energies in R&D and building your brand, which eventually broadens your bottom line.
Save on Infrastructure and Technology
Both offshore and nearshore outsourcing companies heavily invest in infrastructure and new technologies. By working with such a provider, the need to invest in a similar infrastructure is eliminated as the service provider is responsible for the same.
Access to Skilled Resources
Access to skilled resources is another important aspect of investing in outsourcing. It’s important to note that recruitment, training, and onboarding are resource-intensive processes. Outsourcing service providers are required to take care of all the resourcing needs, plus they have a large pool of skilled resources.
The Downsides of Outsourcing
As much as outsourcing comes with a manifold of benefits, it does equally bring a fair share of challenges. Some of them include;
Loss of Confidentiality
As earlier indicated, most activities in an outsourcing arrangement are spearheaded by the service provider. As a result, there is minimal confidentiality and the risk of losing sensitive intellectual property data cannot be downplayed.
Therefore, it is important to shield yourself against such unforeseen circumstances by having checks and balances in place.
Losing Management Control over your Project
Delegating important business functions simply means that you have minimal operational and deliverables control.
To avoid this, ensure you have a contract in place that clearly stipulates in cases where the provider defaults on their side.
Quality Control Issues May Arise
If the service provider doesn’t have the prerequisite experience, skills, and technology to deliver in an outsourcing relationship, quality and adherence to standards issues may occur.
Cultural and Language Barriers
Many companies looking to outsource are often struggling with cultural and language barriers. Although these barriers can be overcome, they can significantly impact a company’s brand and the success of its offshoring ventures.
13 Key Tips When Outsourcing IT Services
Here is the distilled checklist of outsourcing tips, which you need to follow to avoid a potentially detrimental situation.
Clearly Define the Objective and Scope of Your Project
This may seem like a no-brainer suggestion, but it is important.
If your project is to run successfully, you need to have a clear statement precisely stating what you want to achieve. By clearly defining the requirements of your project upfront, you eliminate deviation from the intended purpose.
Additionally, be sure to outline the expected deliverables to their last details as it can significantly impact the overall project.
Choose the Right Service Provider
Thoroughly searching and vetting your potential software development partner will save you future challenges. While evaluating the potential service providers, ask as many questions as possible, check their references and request feedback from their previous clients.
When dealing with an outsourcing company for the first time, it’s reasonable to divide your project into relatively small and simple sub-tasks.
This not only helps you in establishing their mode of operation but also their capabilities before entrusting them with the “mission-critical” project.
Value Comes First
Although it may be tempting to select a provider using price as the only parameter, it could set you up for challenges at a later stage. It’s always recommended to choose a vendor who is capable of striking a balance between quality results and good value.
Peg Payment to Pre-Defined Milestones
Having clearly defined milestones gives you an opportunity to set up scheduled checkpoints to review the status of your project as rolls toward completion. As the client, always peg the service provider’s payment to these milestones.
As a general rule of thumb, you shouldn’t pay more than 30% of the total project cost upfront. The other payment package should be based on the subsequent milestone completion.
Communication is Key
One of the trickiest aspects of outsourcing is effective communication. This is because of major hard-to-control aspects such as the difference in the time zones and different work schedules.
However, with a little effort and the right communication tools like Skype, there could be a tremendous communication improvement.
Have a Project Manager
Always have a project manager for your outsourced software development projects. He/she helps oversee the small moving parts and ensures everyone is within the loop.
Additionally, involving a project manager in communication with the team helps establish the problem they are going through. Some teams will spend countless hours dealing with a problem not because they lack the resources, but simply lack the know-how.
Try to visualize your project from the beginning to the end-product and imagine all manner of challenges that may occur in between, and list them.
Ask as many questions about these challenges and request for straightforward answers. The last thing you want is to commit to a company only to be met with surprises later.
Here are some questions that you may want to ask the service provider:
- What technologies does the team specialize in?
- What similar projects have you worked on in the past?
- How many (technology’s name) developers do you have in your entire team? And how many of them are senior developers and junior developers?
- Will I have access to the files in the course development?
- How do you communicate in the course of the project?
- What role do you see me taking up in this project?
- Will you allow me access to the source code via GitHub?
- What is your price tag for this project?
- What exactly am I getting in this project?
- Do your services include support, consultation, design, development, licenses, or something else?
- How long will it take for you to deliver the project? Naturally, some projects may take longer than others and you should give the development team enough time to do their magic, without taking their sweet time.
- What happens if you don’t deliver to my expectations? The sad reality of software development is that you may not get 100% of what you want especially if you don’t have metrics to measure success. How the team deals with such a scenario should give you an indication of what happens in case they don’t deliver as expected.
- What sets you apart from the rest?
Only Pay For What You Need
Outsourcing service providers have a large pool of skills that can always be deployed to work on projects. Unfortunately, some of them will try upselling some of these supplementary services in a bid to bolster their contracts.
In the course of your working arrangement, it’s always paramount to remember that you only get to pay for the services you need. Avoid the supplementary offerings that won’t contribute towards achieving your current objectives.
Negotiate Ownership Up-Front
When working on an outsourced software development project, ensure that it is explicitly stated that you own the final product plus any other components of the product.
Additionally, make it known to the service provider how you intend to use the product they have agreed to deliver.
Concerns About Sensitive Data
If the service provider is going to require access to some sensitive data, it is recommendable to raise privacy and security reservations that you may have.
In such an instance, it’s best to avoid a private freelancer and choose a company-type solution.
Although a freelancer may be truly honest and trustworthy, their systems and networks may not be as sophisticated as those of a fully-fledged company.
Don’t Forget About Post-Development Support
For software development projects, it’s always a good idea to have a support clause or a warranty if you are to be assured of continuing support from the service provider after the project’s completion.
As a general rule of thumb, always negotiate the post-development support clause before the work begins.
Lastly, you need to specify whether future modifications will come for free or at a discounted fee. This saves you time, money, and unnecessary headaches later on.
Have a Contract
Never leave yourself exposed whether it’s during service engagement, project development, and delivery period.
Ensure you are shielded from potential losses by signing a legally binding document clearly communicating the scope and terms and conditions of your project.
Here is a list of important documents that you may need the software development provider you are working with to sign:
Service Level Agreement (SLA) – This document clearly lays down the project’s scope, turn around time, and reports.
Software Requirements and Specifications(SRS)– This document lists all the specifications and requirements for your software product.
Key Performance Indicators (KPI) – Help in evaluating the progress of your project at the different phases of development.
Non-disclosure Agreement (NDA) – Unfortunately, we are living in a world where data theft, is a norm. For this reason, you need a legal document to protect your project’s data.
Similarly, keep track and record even the slightest agreement changes agreed upon and save copies of digital communication exchanges like emails. They could come to save you in the future in case the unexpected happens.
Useful Tools When Outsourcing Software Development Projects
When outsourcing a software development project that utilizes the agile method, it is paramount for you as for the product owner and service provider to maintain an effective and efficient mode of communication and project tracking system.
In this regard, there are a couple of project management and communication tools that you will find useful.
At the very minimum, you should have Skype and a G Suite (Gmail, Google Drive, Google Docs, and Google Calendar) for communication purposes.
However, because email inboxes tend to get cluttered and Skype may not be ideal for conference calls, some supplementary tools must come into play.
GoToMeeting, UberConference, and Join.me are some of the best conference calls tools on the market. They allow you to communicate with your offshore developers as a team.
Slack is another excellent addition that you should consider for purposes of communication and team collaboration.
Keeping everything and everyone on the development team on the schedule is important in meeting deadlines. For this reason, you need to have a tool like Google Calendar to keep everyone in tabs although you may need other tools too.
A robust and comprehensive project management tool is a must-have if you are to succeed in your outsourcing venture. For this, you can use Basecamp or Trello as they have intuitive features that allow you to seamlessly manage and keep your project on schedule.
Depending on the payment terms agreed, you may often find yourself working under hourly payment terms. And for this, you will need a tool like Time Doctor as it gives you accurate measurements of the amount of time each team member spends on your project.
Above all, such a tool saves you money as it helps avert slacking.
And, of course, since you are working on a software development project, you can never overlook the importance of having GitHub.
This tool is not only important for the development team but to you as the business owner. It gives you real-time feedback on the progress of your project, access to source code, and every manner of control over the code.
When is the Best Time to Start Outsourcing?
As a business owner, it’s your responsibility to see that all the client’s demands are met on time.
But, how do you know that you need an extra pair of hands? Is it when things start to get a little bit overwhelming? Or when you can’t seem to balance between time and work?
Below are signs that you need to outsource:
Your In-house Team Appears Worn Out
In the software development world, having a motivated team is important as it also trickles down to how creative they are in the course of their work.
Plateaued creativity and a tunneled vision among team members is an indicator that perhaps it is an apparent time to consider outsourcing.
You Can’t Keep Up With The Workflow
Having plenty of work is an excellent problem for any business. However, it can also turn out to be a curse, especially when you have more work coming down the pipe.
Once missed deadlines become a perennial occurrence, you may need to consider hiring a contractor to help out.
You Want To Scale But Solo Can’t Just Cut It
Almost every business has a growth period where everything seems to move in an upward trajectory.
However, if you are working with a small team, it means that they have to put in extra hours to accommodate the extra workload. As a result, productivity per employee is affected eventually stifling growth.
For this reason, you may need to bring an extra pair of the hands-on board to assist in offsetting the backlog so you direct your energy and resources towards growing your business.
Looking To Spread Certain Risks
Sometimes, as a business owner, you may occasionally come across minor day-to-day stuff that you don’t like executing. However, if they’re a technical task that you have no knowledge about or utterly loathe, you can try outsourcing it.
There is a high probability that such a task will consume much of your time and energy, which would have otherwise taken a qualified person less time.
The world is rapidly becoming a grand marketplace. The Internet and all its technological interfaces have made it easier to merge different marketplaces eliminating the need to operate as multiple fragmented marketplaces.
As a result, the employment landscape has continued to see dramatic and sweeping effects like the emergence of many computer-based roles.
One of the areas that have seen a major overhaul is the software development world, where companies outsource workers.
Contracting software development allows businesses to enjoy quicker, cheaper, and easier product development.
However, you need to define a coherent outsourcing strategy and a clear understanding of the risks if you are to be successful.
With the above-outlined tips, you should be able to avert most if not all the outsourcing mishaps.
About The Author:
Anastasia Stefanuk is a passionate writer and Information Technology enthusiast. She works as a Content Manager at Mobilunity, a provider of dedicated development teams around the globe. Anastasia keeps abreast of the latest news in all areas of technology, Agile project management, and software product growth hacking, at the same time sharing her experience online to help tech startups and companies to be up-to-date.