No matter how much your startup has grown so far, it will inevitably hit a ‘speed bump’ sometime in the future if it hasn’t already.
What will this ‘speed bump’ be?
The most common scenario is that the startup’s software solutions that have served you so well thus far become ineffective.
If this happens, what should you do?
The simple answer is to create new software solutions specifically designed for your startup!
While the answer may be simple, the process itself may not be, especially if you don’t have a talented IT team to develop tailor-made software to suit your company’s current needs.
Of course, you can always outsource the entire process if you lack the resources to develop software in-house.
Outsourcing software development for startups is the practice of using outside sources instead of in-house ones to create company-specific and industry-specific software.
In the following sections, we will:
- describe the outsourcing decision-making process,
- go over the pros and cons of outsourcing software development,
- offer some tips to increase the chances of successful outsourcing
- Provide examples of companies that utilized outsourced software to create successful businesses.
In short, you’ll have all you need to make an informed decision on whether outsourcing software development is right for you and your company.
Table of Contents
How to Decide Whether to Outsource or Not
Software development can be a headache, which is why you should carefully consider whether or not you have the internal resources to develop custom software.
Answering the following questions will give you a better idea if your startup has what it takes to develop its software or if outsourcing the job would be more practical.
Is Creating Technology Part of Your Value Proposition or Do You Need It to Solve Your Business’s Problems?
The decision to outsource software development will often depend on the core offer and values of your business.
Your usual line of work will determine whether you have the resources to tackle this task with an in-house team.
If your business model uses technology to solve problems for other businesses, then you probably already have all the resources you need to build new software in-house.
On the other hand, if you need software to merely facilitate processes within your own business (such as software for payment gateways) and the technology itself isn’t part of its core offer, you’ll probably want to leave the job to experts who know what they are doing.
Who Are Your Customers?
Next, consider the profile of your customers.
If you are supplying technology to developers and other IT specialists, you will probably be able to develop any needed technology through your IT team.
In fact, if your audience is tech-savvy, that’s likely what they’ll expect from you.
However, if you specialize in non-tech products or services, and your client base doesn’t consist of tech professionals, hiring outside experts for the development process might be a better choice.
Does Your Product Have a Unique Technological Advantage?
The decision to put your development needs in the hands of outside talent will also depend on whether the products you offer rely on some form of technology that is not accessible to the masses.
In other words, it will depend on whether your product provides unique features that other software does not.
If you have a unique technology proposition that is either proprietary to your company or used in a special way, then you will probably want to develop it in-house.
However, depending on the level of development complexity your startup can handle, you may decide to outsource to a trusted provider after all.
This brings us to our next question.
Does Your Team Have the Skills?
Ask yourself whether your company has sufficient human resources to take on developing crucial technology.
The resources for software development include skills like product management, UI/UX design, software engineering, quality assurance and control, and branding.
The following is an example of a complete software development team :
- Frontend Developer
- Backend Developer
- Quality Assurance Engineer
- Quality Assurance Automation Engineer
- DevOps Engineer
- Product Designer
- Project Manager
- Business Analyst
If your IT team covers all of those areas, then go for it.
However, if your startup is missing one or more of the above-listed skills, then consider outsourcing.
Can You Afford to Develop Software In-House?
There are more resources you need to develop software than just human resources. You may have the skills but not the money or the time to develop custom software.
Custom software can take four to nine months to develop and come with lots of hidden costs.
Make sure you do your research and consider them all before committing to a development project.
The Pros and Cons of Outsourcing Software Development for Startups
Along with answering the questions from the previous section, you should also weigh the pros and cons of outsourcing your software.
Measuring the two against each other will make it abundantly clear if handing the job over to someone else will offer more benefits or create more obstacles for your startup.
There are advantages and drawbacks to every business endeavor, and software development outsourcing is no different.
First, let’s take a look at the advantages.
Pros of Outsourcing Software Development for Startups
Outsourcing software development can carry many benefits for your company.
These include:
- Lower Risks Due to Transparency
- Saving the Time You’d Spend on Onboarding
- Better Know-How
- Reduced Costs
- Cutting-Edge Equipment
- Scalability
Let’s delve into them.
Ensured Transparency, Lower Risk
Outsourcing software is low-risk precisely because of how transparent it is.
External developers and development agencies will provide you with updates and feedback loops, as well as answer any questions you may have during the entire development process.
They have to, or their reputation will suffer.
Outsourced developers and their teams will provide the following methods and tools so you can stay in constant contact with them:
- Status Reporting
- Tracking Tools
- Project Portals
- Project Monitors
- Audits
- Video Control
Since you get to connect and share information with them at any time, you remain in control of the entire process, lowering the probability of mistakes and delays.
The transparency of the outsourcing process makes it possible for startups to find the best talent from outside their country’s borders.
Take the example of WhatsApp, the popular multi-platform messaging app.
WhatsApp continues to hire offshore software developers in Russia to create new technology for the company that keeps it on the cutting-edge of mobile communication.
Bill Gates once said that “connectivity enables transparency”— but what he forgot to add is that transparency eliminates risk.
Faster Delivery: Less Time Spent on Hiring and Onboarding
What if you wanted to build your software in-house but realized you did not have enough skilled employees to do so?
Yes, you could always hire more software engineers, but that takes time — sometimes lots of time.
The average employee onboarding period can take up to three months.
When you outsource your software development, you don’t have to spend days and nights looking for full-time engineers or go through the onboarding hassles that come with hiring new employees.
Established software development teams have the advantage of already possessing the experience and the expertise to start on your software development project right away.
Moreover, they are already used to working remotely so you won’t have to micromanage them, freeing you up to do what you need to do to foster new growth for your startup.
Many companies in the U.S. have already increased their outsourcing of software development projects to save both time and money.
Research shows that 40 percent of U.S. companies plan to increase their software development outsourcing to cut down on 30 percent of their operating costs.
This includes hiring and training new employees.
If you choose to outsource the top experts in the software development field, you will get results faster and save money in the process.
Access to Superior Knowledge
Outsourcing software development can give you access to those resources you lack to complete your projects and bring more talent to the table than you ever even thought of.
Companies that take on outsourced projects tend to have an entire spectrum of business experts in various fields.
Many such companies offer the following services:
- Business Consultancy
- Marketing
- Design and Development
Even if you only want to employ their software development experts, you can expect a complete software development package:
- Project Planning
- Cost Estimation
- UI/UX Design
- Wireframing
If there was no expertise and deep knowledge in outsourcing, then why would it be a trillion-dollar industry? And why would Fortune 500 companies outsource a good portion of their IT projects?
The fact is that if your startup is just beginning, it is going to be hard to hire the top software engineers.
Why would any expert join a no-name startup to work on projects that may or may not get off the ground?
By outsourcing software to experts, you get access to the best of the best even if your startup is currently an unproven entity.
Cost Savings
Saving money is why most businesses outsource projects.
This is especially true for startups who tend to have small budgets and high failure rates.
Almost 50 percent of all startups that fail do so because they run out of money.
Outsourcing helps startups save money by:
- cutting down on labor costs
- minimizing capital costs
- reducing penalties
Considering that the average hourly salary for an offshore software developer is $20-$50 and that the annual salary for a full-time software engineer is around $90,000, which one do you think would cost less if your software project only took three months to complete?
The answer is pretty obvious.
Equipment and Talent Availability
The technology needed to develop a software product can be quite costly if you choose to go into it yourself.
On the other hand, software development studios have the latest equipment and technology to create custom-made software at no cost to you.
Outsourced developers can also help reduce any penalties associated with delays.
Development agencies carry a team of full-time experts, skilled at using the necessary equipment, who can easily replace one another should any of them leave for a better opportunity.
For instance, in its early days, Skype, the video and audio mobile app company, lacked a team of developers that could bring their idea to fruition, so they decided to outsource.
They tasked a team of developers in Estonia with getting the job done.
They didn’t have to worry about hiring new talent, investing in new technology to build their app, or about their IT team members leaving them in the middle of their project.
Their outsourced team bore the burden of all these costs.
Easy Scalability
Even with the best planning, you can’t always predict the changes that will have to be made to complete a software development project.
During software development, the need to scale a team up or down can arise, leaving startups in a difficult situation, especially if they have to hire more skilled labor to complete project tasks either now or in the future.
Finding skilled labor for a single development project can take a lot of time and money and cause untold delays to software projects.
Aside from the problems with hiring and firing team members, scaling software development projects can also cause the following problems:
- Increased number of tasks.
- Incompatibility issues between software architecture and software development teams.
- A decrease in productivity and quality.
- An increased number of process bottlenecks due to an influx of manual tasks.
When you outsource, you can avoid all the above problems as studios you outsource to tend to have enough staff to deal with them.
Even if they don’t, they can easily get them.
Software development agencies can easily hire part-time software development engineers or trusted freelancers as needed.
Scaling down is not a problem either because these same agencies are usually working on various projects at any given time and can allocate team members instantly as the need arises.
All the above benefits that were just covered may give you the impression that outsourcing software development is all ‘peaks’ and no ‘valleys’.
This, however, is not true.
Let’s take a look at some of those valleys in the following section.
Cons of Outsourcing Startup Software Development
There are three potential problems startups could face when outsourcing their software development projects:
- Misaligned Goals
- Lower Code Quality
- Data and Privacy Risks
This is not to say that you will encounter any of them should you decide to outsource your software projects, but it is a good idea to be aware of them.
You can measure them against the benefits of outsourcing that were previously covered.
Misaligned Goals
You want your startup to deliver the best products to your market and while freelance software developers and outsourcing agencies want to help you achieve this goal, they are not as dedicated to your mission as you are.
Creative agencies and software freelancers serve many clients.
Think about this, if you hire an outside agency or software developer, they will charge you a fixed price for your software project.
How happy will they be if you change the project stipulations due to scaling issues?
Will they appreciate having to spend more time to complete it or allocate more resources towards it than was first agreed?
It is hard to focus on multiple projects if those projects keep changing all the time.
A lack of focus will not only cause problems in project management and completion but can also lead to a final product that does not create value for your end-users.
This is not a theoretical problem either: some of the biggest technology consultancy firms have dropped the ball when unforeseen challenges arose during the development process.
When faced with unforeseen technical challenges, IBM raised the price on a client’s health application project from $6 million to $27 million.
As a result, the software did not work correctly.
If even IBM can lose focus due to unforeseen changes and produce an application that is not in line with a client’s objectives, then it is possible that lesser-known agencies, developers, and outsourcing firms can do the same.
Lower Code Quality
The problem with code quality is that there are no set standards for it.
If your startup lacks experts who can monitor and communicate your expectations so that the end product meets your goals and objectives, you could end up with low-quality coding.
To ensure proper coding, you need to provide the following to outsourced developers:
- Project Expectations
- Coding Benchmarks
- Regular Briefings & Checkups
Aside from the above, software development teams need to have the following protocols and tools set in place to avoid lower code quality:
- Application Testing
- Regression Testing
- Project Management Tools
If they don’t have such things, then the burden will fall on you to maintain code integrity. This will not only increase your startup’s workload but could also cost you a fortune.
A recent study found that the time spent on checking and debugging low-quality code resulted in an opportunity cost of $85 billion annually.
That is a heavy price to pay for poor coding.
Data and Privacy Risks
There is always going to be a privacy risk when you outsource any project.
Anytime you share data and ideas with a third-party, they could steal or copy them for their benefit — yet you have to provide confidential company information to those you have hired.
Otherwise, they won’t be able to complete their task.
Even if the agency, firm, or freelancer you hire to develop our software is legit and would never consider stealing your company’s data and private information, they could still get hacked by cybersecurity criminals.
Those hackers can later leak, sell, or use your startup’s information and ideas for profit.
This occurrence is more common than you may think.
Cybersecurity attacks happen every 39 seconds.
The truth is that companies that outsource a large portion of their projects are more susceptible to cyber-attacks.
Even big companies like TD Ameritrade have been put in the unenviable situation of having to tell their 6 million customers that their data had been leaked due to mistakes made by an outsourced programmer/developer.
Of course, there are things that you can do to limit data and privacy risks when outsourcing your software development.
For instance, consider having freelance developers and outsourcing agencies sign a non-disclosure agreement (NDA) to protect your intellectual property.
Aside from protecting your company’s data and private information, you can also utilize the four tips in the following section to increase the chances of getting your software developed through outside sources.
Tips to Help Startups Succeed in Outsourcing Software Development
There are four things you should do when outsourcing your software development project:
- Define Product Goals
- Incorporate Milestone-Based Payments
- Clarify Terms of Ownership and Compliances Upfront
Doing so will decrease the chances of having a poor outsourcing experience.
Clearly Define Your Product Goals
If you don’t know what you want from your software, how will your remote team of developers know?
Before you hand over your software project to your outsourced team, define and communicate the following items:
- Project Requirements
- Deliverables
- Timeline
- Goals (the end result of the software)
Failure to do so will lead to confusion and, ultimately, a piece of software that does not meet your expectations.
To help you clearly define your software project goals and communicate them effectively to your remote team, you can use a software requirement specification document (SRS).
A well-thought-out SRS document will contain the following items:
- The Purpose of the Project
- The Description of the Project
- Project Requirements
These three general points will be followed by many specific details that serve to clearly define your software goals and communicate them effectively.
Unfortunately, this task can be quite daunting.
Pro Tip: To simplify the process, use the “Five Steps to Writing an SRS” template.
It will help you figure out what you want from your software, what you need for your software project, and how best to communicate these points clearly to your remote staff of software developers.
Have Milestone-Based Payments
Payment is one of the most significant legal issues that can arise when outsourcing.
When drafting a contract with an external software development team, you want to make sure that both sides are clear on a variety of project issues, so there are no legal problems later on down the road.
To avoid confusion regarding the amount of payment and the payment schedule, as well as to incentivize your remote team to complete the project on time, you should use a milestone-based payment plan.
Splitting up payments based on project milestones not only simplifies the payment structure but also reduces payment conflicts if certain milestones aren’t met.
Project milestones can include the following;
- Project Starting & Ending Dates
- Client Deliverable Approvals
- Stakeholder Approval
- Completion of Critical Tasks
How you set your payments based on the above milestones is entirely up to you, but you should at least split up the schedule into two payments based on a first draft and project completion.
Here is an example of how to write a simple milestone-based payment schedule within your contract:
“(Startup Name) will pay a deposit of $1,000 upon contract agreement, after which (Startup) will pay 50% of the remaining balance ($5,000) upon completion of the (first or second) draft and the remaining 50% ($5,000) upon completion of the project.
Along with including such milestones in your contract, you also want to schedule meetings and follow-ups with your team.
They need to know you are keeping track of them and are serious about reaching specific project deadlines.
Milestone-based payments will protect you and the team you hired.
You will not have to pay if project milestones are not met, and your team will at the very least receive some form of payment should you decide to terminate the contract before completion.
Clarify the Terms of Ownership and Compliances Upfront
Whether you outsource your software development project to local or offshore companies, you want your contract to comply with the law.
To do so, you need to mention all the terms of ownership clauses along with any non-compete and non-disclosure clauses that you deem necessary.
There are six main clauses to consider including in your contract as far as ownership and compliance issues are concerned.
1) Intellectual Property Rights
Outsourcing clients automatically have full rights to their project, but just to be sure that everything is legal, you should make sure to include an intellectual property rights clause.
Doing so will protect you against intellectual rights infringement, including your outsourced team using your software code for any of their other clients.
2) Confidentiality Agreement
This is a non-disclosure clause that protects the private information you have shared with your development team from being shared with others.
It is particularly useful when developers leave the team you hired to work for some other team.
However, for it to be binding, it must be signed by both the development agency and the individual developers who work for them.
3) Indemnity Clauses
Indemnity clauses protect you, the client, from unjust legal fees due to lawsuits that may appear during the project.
Such clauses help spread the risk between the client and the contractor in the event of legal issues arising before project completion.
5) Termination Clause
Including a termination clause that spells out what happens if you terminate the contract is a must.
By making provisions for every eventuality should the project take a turn for the worse, you protect yourself from legal issues that may come up during the termination process.
6) Jurisdiction
As outsourcing software development is now a global phenomenon, it is also important to clarify in which jurisdiction you will resolve legal disputes if a problem arises.
There should be no confusion as to which country’s laws are applicable and where any related lawsuits will be handled.
While you hope that everything will go smoothly with your development agency, the truth is that issues do arise that require legal action during the life of your outsourcing contract.
Therefore, never forget to use the above clauses to protect your proprietary information, software code, and contract agreement anytime you outsource.
Determine Technological Requirements
As your software development will not take place in-house, it is a good idea to verify that your outsourced development team has the needed technology to fulfill your development needs.
This will include the right group of developers, the necessary tools, and security and data protection features to keep your software and information safe.
As mentioned earlier, your development team should consist of a well-rounded group of software developers, project managers, and software engineers.
The following list is an example of some of the basic tools and skills your outsourced team should have for completing software development projects:
- Frontend Coding (JavaScript, HTML, CSS, etc.)
- Backend Coding (PHP, SQL, Node.js, etc.)
- Quality AssuranceTools & Technologies (QA Touch, Postman, Test Flight, etc.)
- Automation Engineer Tools & Technologies (Kakunin, Cypress, Puppeteer, etc.)
- DevOps Tools & Technologies (Azure, AWS, Cloud Computing, etc.)
- Design Tools & Technologies (Sketch, Figma, InVision, etc.)
- Project Management Tools & Technologies (Budget Tracker, Product Roadmap, Release Plan, etc.)
- Business Analysis Tools & Technologies (Storymap, Business Model Canvas, Product Backlog, etc.)
Remember, you are outsourcing because you don’t have the resources or time to create your software in-house.
If the outsourcing agency you are thinking of taking on does not have them either, there is no point in hiring them.
Also, be sure to ask for case studies!
Successful Startups That Have Outsourced Software Development
If you are still hesitant about handing your software development project over to a remote team, take comfort in the fact that numerous startups, some of them now famous, also took the plunge.
In outsourcing their software, these companies gained excellent results — and reaped maximum rewards.
The following are three former startups that have used outsourcing to grow their business into giant corporations.
No introduction is needed here — Google is probably your go-to destination when you search for something online.
However, did you know that the company has a long-lasting history of outsourcing its software development, one that continues to this day?
To mention one of the more notable examples, in 2014, Google entered an outsourcing partnership with a Latin American Technology services provider, Globant, to help in the development of hardware and software for its Project Ara.
Why would a major company with a giant development team need to hire remote software developers and engineers?
According to Google, it is to save on costs, as well as free up their core development team to focus on more urgent work.
GitHub
Github, an internet hosting provider for software developers, initially outsourced its backend development to a single consultant, Scott Chacon.
The partnership was so successful that Chacon eventually became the CIO of the company, which was later sold to Microsoft for $7.5 billion.
It just goes to show how a successful outsourcing gig can turn into a full-time carer for some talented developers.
Alibaba
One of the biggest online marketplaces in the world, Alibaba, had all of its early development done through outsourcing.
By outsourcing its software, Alibaba created a future growth model that bypassed China’s strict internet restrictions.
This growth is expected to reach $1.4 trillion in sold merchandise by 2024.
Some of that success can be attributed to Jack Ma’s (Alibaba co-founder and former executive chairman of Alibaba Group) foresight in hiring development experts from the United States to build up the company’s marketplace right from the start.
As you can see, startups don’t always stay startups.
Many that go on to become huge successes do so with the help of outsourced software development.
Conclusion
Many components make up a successful startup.
One of them is having a good software development team to create the technology that gives clients and end-users the right solutions at the right times.
Sometimes getting the right software team on a full-time basis is impossible due to restricted budgets and lack of relevant skills.
This is where outsourcing can be of great help.
It can provide the required talent, tools, and infrastructure at a fraction of the price it would cost to obtain them by hiring, buying, and developing them yourself.
Is outsourcing software development the right choice for your startup?
That decision is entirely up to you and your company’s key decision-makers.
We wanted to give you the added advantage of having all the pros and cons that come along with outsourcing software.
We’ve also listed some valuable tips to make sure the process goes smoothly should you choose to hire a remote team.
Go through the above information as many times as you need and choose wisely. Your startup may very well turn into the next corporate giant of tomorrow if you do.