Outsourcing is becoming a standard business practice where companies hire external vendors or contractors to perform certain tasks or functions. There are several types of outsourcing, each with unique characteristics and benefits.
Types of outsourcing
Offshore outsourcing is when a company hires a vendor or contractor located in a different country. This type of outsourcing is often chosen for cost savings as labor and other costs may be lower in other countries.
Pros: Lower labor and other cost. It can also provide access to new markets and a larger pool of skilled workers.
Cons: May face communication, cultural barriers and time zone differences. It may also face regulatory and compliance issues, depending on the country.
Nearshore outsourcing is when a company hires a vendor or contractor located in a nearby country. This type of outsourcing is often chosen for its proximity, which can facilitate communication and collaboration.
Pros: Can provide cost savings and access to a larger pool of skilled workers while still allowing for more accessible communication and collaboration due to proximity.
Cons: Depending on the location, companies may still face some cultural and language barriers and time zone differences.
Onshore outsourcing is when a company hires a vendor or contractor within the same country. Onshore outsourcing is often chosen for its convenience, ease of communication and potential to boost the domestic economy.
Pros: Easier communication and collaboration. It may also be subject to the exact regulatory and compliance requirements as in-house work.
Cons: This may result in less cost savings than offshore or nearshore outsourcing, as labor and other costs may be higher.
Besides location, there are a couple of different models based on the type of collaboration.
Fixed Price Model
A fixed price model is commonly used for outsourcing, especially when there's an established relationship between the client and the outsourced team. It's effective when both parties understand each other's processes and culture, and the project is well-defined.
However, for first-time projects, the fixed price model may present challenges. If variables like project specifications and team dynamics are unknown, it can be difficult to accurately estimate costs. This model isn't ideal for inexperienced outsourcing clients, as misunderstandings can lead to unexpected expenses. Therefore, it's crucial to carefully consider the suitability of a fixed cost model based on the project complexity and the level of familiarity between the client and the software development partner.
Staff Augmentation
Staff augmentation involves hiring external engineers on a Time and Materials basis to fill team gaps. It's easily scalable, offering flexibility for those needing additional experts for specific product development areas. Unlike team extension, the project is managed in-house, with external developers executing tasks. Communication challenges and minor issues can escalate if not addressed promptly in this model, so it is ideal for experienced teams.
Team Extension Model
The team extension model integrates outsourced teams with existing ones to extend project capabilities. Ideal for future project expansion without shifting in-house teams or for projects requiring specific expertise.
For example, Serengeti's Team Extension Model consists of three phases: onsite, transition and offsite, minimizing time spent on expertise gaps and backlog. During the on-site phase, ambassadors are introduced to the corporate culture and technology, which leads to the formation of high-performing teams during the transition phase. The final phase involves flexible and reliable project execution. International talent, flexible project management, seamless integration with internal teams and access to industry experts are some of the benefits. This model simplifies outsourcing by avoiding the challenges of hiring and retaining employees during demanding times.
Watch how can you benefit the most form team extension model
No matter which outsourcing model a company chooses, it is essential to consider the costs, benefits, and potential risks before making a decision. By carefully evaluating the options, companies can find the outsourcing solution that best meets their needs and helps them achieve their business goals.
Outsourcing process
Companies should consider software development outsourcing as a potential strategy for meeting business goals. Outsourcing can provide access to a global pool of talent, allow for the allocation of internal resources towards core competencies, and potentially reduce costs. However, it is important to carefully plan and manage the process to ensure a successful outcome.
Here is a step-by-step guide to help you navigate the process of outsourcing software development:
Identify your business needs: Before outsourcing, it is necessary to have a clear understanding of your business needs and goals. This will help you determine the type of software you need, and the skills and expertise required to develop it.
Define the scope of work: Clearly define the scope of work for the project, including the specific tasks that will be outsourced, the timelines for completion, and any required deliverables. This will ensure that both your company and the vendor have a shared understanding of the project and can effectively manage it.
Determine the communication and collaboration process: Effective communication and collaboration are critical to the success of an outsourcing project. Determine how you will communicate with the vendor and what tools you will use for collaboration. It is also important to establish clear lines of communication and a process to address any issues that may arise during the project.
Monitor progress and provide feedback: Regularly monitoring the progress of the project and providing feedback to the vendor will help ensure that the project stays on track and meets your business needs.
Establish clear contracts and agreements: Before starting a project, establish clear contracts and agreements with the vendor, including project terms, payment terms and any intellectual property considerations.
Potential problems and how to avoid them
Outsourcing is a common business model where organizations contract third-party services to complete customer service, payroll administration, software development, etc.
Although this method can help you save money and enhance productivity, there are potential issues with outsourcing that you need to address.
Loss of control
One risk is that outsourcing may lead to a loss of control over the outsourced task or function. The CTO may be concerned about losing visibility or control over the work performed by an external vendor, for example.
Solution
CTOs can create clear expectations and communication channels with the external provider to allay concerns about loss of control. Regular check-ins and progress reports ensure that the job is completed according to the company's requirements.
Quality of work
Ensuring the quality of the work delivered by the vendor is crucial for the project's success. Consider factors such as the vendor's reputation and experience when evaluating their track record.
Solution
Evaluate the company's reputation, technical expertise and cultural fit with your company. You can find them on well-known platforms such as Clutch.co, GoodFirms and others based on their web page, portfolio, testimonials and prior customer references. Reputable vendors will gladly provide you with all the information you want.
To address concerns about the quality of work performed by an external vendor, establish clear quality standards and metrics, and hold the vendor accountable for meeting them.
Cost savings
While outsourcing can often result in cost savings, it is not always the case. There are times when companies are hesitant to outsource if they are not confident that the potential risk and disadvantage will outweigh the potential savings.
Solution
To ensure that outsourcing results in cost savings, carefully evaluate the costs and benefits of outsourcing vs. performing the work in-house. By doing this, you can ensure that the decision to outsource is based on sound financial analysis.
Cultural fit
Companies may be hesitant to outsource if they are not confident that the external vendor will fit well with the company's culture and values. A misalignment in culture and values can lead to communication and collaboration issues that can negatively impact the success of the outsourcing relationship.
Solution
To address concerns about cultural fit, evaluate the values and culture of potential vendors to ensure that they align with those of the company. Establishing clear expectations and communication channels to facilitate a smooth and productive working relationship is also helpful.
Security risks
Depending on the type of task being outsourced, there may be concerns about data security or the possibility of disclosure of sensitive company information to third parties.
Solution
To reduce security threats, carefully pick providers who follow strict security measures and compel them to sign confidentiality agreements. Making investments in additional security measures, such as encryption or secure data storage, can help safeguard important information.
How to choose the right outsourcing team
Choosing the optimal team size and composition is important for the success of any project. Here are some tips for selecting the optimal team size and composition:
Define the project scope and goals: Before deciding on the team size and composition, it is necessary to clearly define the scope and goals of the project. This will help determine the required skills and expertise needed by the team.
Evaluate the workload: Consider the workload and determine how many team members will be needed to complete the work promptly and efficiently. Try to strike a balance between having too few team members, which can lead to burnout, and too many, which can lead to inefficiency.
Consider required skills and expertise: Choose team members with the necessary skills and expertise to complete the work. This may include technical skills, problem-solving abilities and experience in relevant areas.
Consider team dynamics: Besides skills and expertise, it is essential to consider team dynamics and how team members will work together. Choose team members who are likely to work well together and complement each other's strengths.
Be flexible: It may be necessary to adjust the team size and composition as the project progresses. Be open to making changes if it is in the best interests of the project.
Choosing the right software development partner entails prioritizing long-term relationships over transactional agreements. Beyond technical capabilities, cultural compatibility and communication are important parts of successful collaboration. Understanding the partner's expertise with blended teams, team stability metrics and onboarding processes is critical. Companies must coordinate their sizes, do reputation checks through references and customer feedback, and set realistic expectations for price, volume discounts and candidate criteria.
Finally, choosing an outsourcing partner who shares your company's values, culture and project needs encourages a collaborative and effective partnership.
Questions to ask your future outsourcing partner
The following questions provide practical guidance for companies looking for a software development partner. These questions are created to assist companies in navigating the complex processes of partnership selection, providing a synergistic connection that aligns with their values, needs and development goals. They range from measuring team stability to understanding partner's experience with various engineering processes, providing essential insights into forming effective and long-term software development outsourcing relationships.
- Are they experienced with blended teams?
- Are their engineers accustomed to the same daily stand-up meeting together with their customer’s engineers?
- Does the commercial business model facilitate such close cooperation?
- Ask your future partner about their typical cooperation size and how many active customers they have. It must match your needs.
- How many clients from your sector do they have?
- For how long do their average partnerships last?
- How can you benefit from their expertise?
- How many engineers they were able to employ last year, how many do they have in the “talent pool” (in their HR network but not hired yet) and how do they make sure that they will attract the right talents in the following years as well.
- How do they recruit and onboard new engineers?
- Ask your future partner about the churn rate and, if it is below average (10-15%,) ask them about how they achieved that. Pure luck or some mature measures in recruiting and team management?
- How experienced is your future partner in working with similar companies with similar challenges and expectations? Developing software for long lasting products with long lasting product lifecycles requires completely different project management skills than developing software for service providers like banks, telcos and governments. For a product vendor quality of documentation, Clean Code and overall maintainability has higher priority than development in-budget and in-time.
- Is your future development partner experienced with legacy technologies? Do they already work for companies with similar “legacy issues”? And most importantly: Do their engineers expect to hop on such systems or are they spoiled by green field development using only the most modern technologies?
- Is your future partner experienced with several different engineering processes and tools, or are they focused on the engineering process + related tools they always use?
Conclusion
To summarize, the process of picking an outsourcing team and partner usually involves the evaluation of several different criteria.
Taking a methodical approach and asking relevant questions may reduce the risk and increase the probability of successful cooperation and finding a long-term outsourcing partner who can support your business.
In most cases, companies should prioritize long-term partnerships over transactional agreements. Selecting the ideal outsourcing partner requires matching the company's goals and fostering a collaborative atmosphere that encourages innovation and growth. With careful preparation and smart decision-making, companies can use outsourcing to get access to global talent, optimize resources and efficiently fulfil corporate objectives.
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By remaining current on industry trends and adopting continuous learning, we allow our clients to successfully exploit cutting-edge technology. We aspire to preserve our reputation for dependability, functioning as a long-term software development partner.
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