Why Do Companies Outsource Software Development?
From cost to security to risk management and beyond, many companies benefit greatly from hiring outside development firms.
In today’s fast-paced, gig-focused business landscape where outsourced personnel and contract workers are around every corner and joining in on every Zoom call, it’s hard to remember a time when businesses were organized around very different staffing and business principles. It’s hard to remember when IT departments and software developers had their own corner of the office behind several locked doors where they would all just hang out, waiting for the company’s next big IT project to come down the pipeline.
That’s all changed in the modern economic sphere. With each segment valued at $92.5 billion at the end of 2020, there’s no arguing that managed services and IT outsourcing over the last five years have changed the competitive landscape in ways we’re still trying to understand.
What is Software Development Outsourcing?
One of the primary changes is that, whether we’re talking about large corporations or small niche operations, there’s less willingness to maintain full-blown IT departments in-house, and thus, less ability for companies to build and launch their own customized in-house software application solutions or create software products for their clients. Instead, businesses are turning to third-party outsourcing companies and managed services providers to gain access to varying levels of software development services ranging from self-contained software development projects to services necessitating that the service provider acts as the organization’s de facto IT team.
Several years ago, you might have been able to ask the question of which industries outsource the most, and get a smaller, more manageable list as an answer than if you were to ask that question today. That’s because more organizations are striving to operate lean with as little overhead as possible in order to maximize their staff’s ability to meet client needs and drive the operation. However, data does show a few industries as leading the way in offloading software development. Among the most likely suspects are the healthcare industry, shipping and transportation businesses, and the banking and finance sectors. Others include retail and manufacturing operations, energy and other utility providers, and various government agencies.
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What Are the Benefits of Software Development Outsourcing?
We’re becoming an increasingly digital society, which means more businesses are being forced to shift their models by offering digital transformation solutions to survive. While B2B service providers are recognizing this severe gap in the supply and demand chain, not all have the expertise to fully step in and fill the space.
Outsourcing Bridges the Way for Digital Transformation
While businesses may have the infrastructure to be a world-class sales operation, they don’t have the skills or expertise in-house to create the types of services and products clients are desperate for. This is an instance when software development companies and managed IT services providers are especially beneficial. Whichever model you might choose to support your software development needs in the long-term, you’re benefiting from the arrangement in eight fiscally important ways that help keep costs down and your ability to meet customer needs ever-evolving.
Keep Operations Streamlined And Reduce Overhead
Maintaining a software development team is extremely expensive. Not only do you have an entire department that you would need to staff and maintain, but you’d also have the associated technology and software licensing necessary to carry out projects for clients. And since the process is often project-based, there’s not a constant demand for such talent to be on-staff.
Outsourcing your development team up to the C-suite level manager—some managed services provide the option to outsource the Chief Information Officer role—means that you aren’t blowing what could be your development budget on trying to hire for a specific project, only to have to do the same for subsequent projects that might require different skill sets.
Focus More On Revenue Generation
Startups and large businesses alike have limited staffing resources and many times the staff is deployed to maximize the sales and client acquisition process. Companies will often pay to cross-train employees and overload teams with cross-functional tasks. Offloading a software development project to an outsourcing partner keeps your sales staff focused on the customer experience and building revenue.
Access to World-Class Solutions At Reasonable Costs
Expertise is expensive. Building high-quality software solutions require access to highly expensive equipment. And not all projects require the same expertise or same equipment, so over time if you’re attempting to develop software in-house, you’re going to accumulate a very expensive room full of equipment that won’t be put to best use consistently enough to make the investment worth it, and you’ll have a segment of your staff either idle or under-producing, driving up labor costs. By outsourcing custom software development, you get a world-class software solution while your vendor gets to manage and maintain these expensive resources, which leads us to our next benefit of outsourcing—the fact that it’s a managed cost rather than a capital expenditure.
Outsourcing Shifts Personnel and Capital Expenses to Controllable Costs
Perhaps more importantly to your operational model, a managed IT service providing your business software development solutions becomes a managed, controllable cost that with planning and collaboration can be budgeted for and forecast. This removes the costs of hardware and expensive infrastructure from the capital expenditure side of the balance sheet and gives your business more flexibility and agility to react and respond to business needs.
Outsourcing Companies Scale Solutions and Reduce Risk
The discussion of costs leads us to scalability and risk. The shift of services to an outsourced software development team creates several advantages for your business, mostly around flexible solutions that can be adjusted on a project-to-project basis. But what isn’t considered in that equation is the costs you’ve taken on to fully staff a development team, acquire the necessary technology and other resources, and then devote a significant portion of your time to executing the project – only to have the product fail or underperform.
In that situation your company’s financial exposure and risk are tremendous. Outsourcing that same project reduces your risk exposure exponentially and keeps your investment costs low enough that in the event the final project underperforms or fails, your brand isn’t irreparably damaged and you can pivot to a solution that will put you back on top.
Access to the Team and Resources That You Need
Software development can be a tricky undertaking depending on the scope and function of the final project. Without the expertise in-house to fully plan out your needs, you’re likely to undershoot and have to spend more on the back end of the project to bring it all together.
And then if a new feature needs to be added and no one on the team has the expertise, you’re paying to bring in another set of hands or train someone at the last minute, jeopardizing timelines and deliverables and creating uncertainty in your revenue stream. It’s better to outsource the project to a firm that creates software solutions on a regular basis that has the experience and staff on hand capable of executing the software build efficiently.
Outsourced Resources Are For Now, Not Forever
When we talk about these sorts of engagements, they are strictly on a project basis. Between engagements, you are not having to maintain the equipment or staffing.
If properly structured, your business arrangement with the outsourced service provider will include ongoing support and cloud-based management so that even the ongoing support of the products you have built can be managed offsite and at a rate cheaper than you’d be able to manage in-house. This keeps your office space and staff clear of unused or underutilized resources, allowing agility, responsiveness, and efficiency across the board.
They’re Better at Cybersecurity Than You Are
When we talk about letting the experts handle what they’re good at, and let your staff remain focused on your client’s brand experience, we mean just that. With the rapidly increasing occurrences of data breaches and cyber attacks, outsourcing software development means that you’re not only getting professional programmers building a solution that fits your clients’ needs, but you’re also relying on their expertise as IT professionals to build your software in a way that is in line with current cybersecurity standards. This is especially important if client data is involved and your business falls under certain government regulatory and privacy standards.
Is Outsourcing Right For Me?
As you can see from the benefits outsourcing provides, almost any organization without its own software development team in place or software development as a core competency would benefit from outsourcing project management to a software development company or managed services provider. The process saves you valuable time and resources and allows your team to not be distracted or derailed from lead building and sales conversions.
There are a few factors that you must consider before entering into a contractual relationship with a service provider in order to meet the needs of your own client community. A primary concern is whether the types of pain points your clients are trying to solve can be met by an off-the-shelf solution or an existing software service provider for a significantly lower cost than having a customized solution built.
Another consideration is the effort, skills, time, and resources a B2B services provider will need to invest to enter into an outsourcing situation. Is it significant enough to ask how many of your clients are looking for digital solutions that you can’t provide?
If you don’t have the client management team with the depth or skills to navigate in the digital transformation space, then it might be worth stepping out of the middle, remaining focused on your core services and products, and allowing the client to pursue the software developer relationship directly.
Leverage Outsourcing Companies for Software Development Projects
Between prohibitive costs associated with staffing and equipment and the associated risks tied to failure, there is little reason for your organization to enter into such an expensive and complex IT undertaking as developing a software solution for your clients in-house. However, in order to embrace digital transformation and reach a wider client base, we understand that it’s necessary to have flexibility in the products and services you offer.
But instead of trying to do it on your own, you’ll find more success and your clients will be better served if you were to reach out to an outsourced software development solutions provider that has experience building the types of products your clients demand. Trust us, your clients will thank you for it, and so will your bottom line.