Outsourcing vs In-House: Choose the Right Development Model

Deciding how to build your software product can be tricky. Should you keep development completely in-house with your own team? Or outsource all or part of it to another company? Outsourcing and In-House both approaches have upsides and downsides to consider carefully based on your specific needs and constraints.

In this post, we’ll break down the core differences between outsourcing vs in-house development models. You’ll understand the pros and cons of each approach and the key factors to evaluate when deciding between them. We’ll also explore the option of combining both models if that meets your needs best.

With the right information, you can make an informed decision on the development approach most likely to set your product up for success.

Outsourcing vs In-House: Understand The Development Models

First, what exactly do we mean by “in-house” and “outsourcing” development?

In-house development refers to building a software product using your own internal team of developers and engineers. They are full-time employees working out of your offices. You direct their work priorities and provide the infrastructure they need like hardware/software tools and office space.

Outsourcing development means partnering with an external agency or freelance developers who deliver code and features for you on a project basis. Outsourcing has a few different flavors:

Onshore leverages third-party developers located in the same country. This makes in-person meetings easier and avoids significant time zone differences.
Nearshore works with nearby countries, typically sharing just a 1-3 hour time zone gap which still allows some overlap in working hours.
Offshore involves more distant countries, usually overseas, that can have a time zone difference of many hours. Rates tend to be lowest with offshore outsourcing due to lower costs of living.

These core differences influence the pros and cons of each model.

Pros and Cons of In-House Development

Advantages of In-House Development

Building with an internal team under one roof has some compelling benefits:

Direct control and oversight: With in-house developers you manage their workload directly and can monitor progress closely using your preferred systems. Outsource partners operate more independently which makes things like agile sprints harder.
Strong team cohesion and culture: Shared goals and direct interactions build camaraderie within an internal team. You leverage a collaborative, energizing office culture instead of relying on status reports from a vendor.
Faster responsiveness to changes: Your team sits nearby, so quick questions and prototype demos can happen spontaneously in person versus waiting for an overseas call. Pivots get implemented faster.
Deeper domain expertise: In-house talent often gains more first-hand experience of your users and business needs through close access to internal stakeholders. Customer empathy directly infuses the product.

Disadvantages of In-House Development

Of course, maintaining your own team does come with some notable disadvantages:

Higher fixed costs: Salaries, benefits, office infrastructure, and employment taxes add up faster than outsourcing hourly project fees. Cost per head is higher especially with top Silicon Valley-type talent.
Slower scaling: Growing an in-house team requires careful recruiting. Outsource partners can ramp up faster by tapping large international talent pools. Handoffs as people leave can also stall progress.
Skill gaps: No team will have world class expertise in EVERY needed domain like AI, security, 3D modeling etc. Filling niche skills gaps often requires rare (expensive) hires. Outsourcing projects bring specialized skills.
Limited experience diversity: Depending on location, in-house teams can lean heavily to certain demographics lacking the global perspective that offshore teams provide. This homogeneity risks narrow thinking.

If these cons concern you, outsourcing development may help.

Pros and Cons of Outsourced Development

Advantages of Outsourced Development

External partners can seem extremely attractive, especially upfront:

Cost savings: Global talent pools accessed by outsourcing cut hourly rates substantially without sacrificing quality when reputable partners are chosen. 10x savings over Silicon Valley rates are possible.
Specialized expertise: Focus is everything. Third-parties specialize in certain technologies and domains (like AI, blockchain). This lets them deliver faster versus in-house devs continuously context switching between projects.
Scalability and flexibility: Staff up and down quickly based on needs, leveraging the outsourcing partner as an “extended bench.” Shifting gears to pivot product direction also doesn’t require any internal reorganization. New features simply get added to the vendor roadmap.
Faster time-to-market: Handing clearly scoped features to an outsourced team with specialized expertise frees up internal staff to focus on other priorities. Assuming a competent partner, progress can be even faster.

Disadvantages of Outsourced Development

But this high level of independence does create some risks:

Lack of control: Outsourced teams operate at a distance without much visibility. Contract clauses attempt to guarantee quality and turnaround times but progress still feels less tangible than sitting next to your own developers.
Communication challenges: Language barriers, time zones and lack of context all make smooth communication harder with outsourced teams. Misalignments happen. Critical requirements get lost in translation. Progress updates seem cryptic rather than open dialogues.
Cultural differences: The global workforce has varying cultural norms around things like deadlines, quality expectations, communication styles and work hours. Indian engineers for example put in extremely long days which may not sync with your preferred schedule. Adapting takes effort and empathy on both sides.
Finding reliable partners: Lots of outsourcing horror stories float around. But problems mainly arise when companies pick partners blindly based just on low rates or slick sales pitches. The due diligence required to vet vendors thoroughly feels daunting.

So outsourcing seems amazing on paper until hidden snags like these arise. Where internal team costs are predictable but rigid, outsourcing costs stay lean yet quality fluctuates.

Key Factors When Deciding Between In-House and Outsourcing

Evaluating the above pros and cons make the right choice clearer for your specific situation. Keep these factors in mind:

Project size and complexity: Outsourcing can deliver faster turnaround on well-scoped features. But significant coordination overhead creeps in for complex enterprise systems built over multi-year timeframes . Politics also compounds things when many internal stakeholders get involved. Keeping governance lean favors in-house builds.
Skillset requirements: If niche expertise like AI/ML or security is critical to deliver a competitive advantage, leveraging specialized outsourcing talent may prove more pragmatic than attempting to build this internally from scratch.
Need for support: Outsourcing development provides less visibility for future teams to maintain and extend system functionality. If reliability and long-term agility matters, in-house knowledge transfer is easier.
Budget constraints: Heavy upfront capital requirements to hire dedicated developers and internal teams puts in-house development out of reach for many early stage startups. Outsourcing delivers more bang for buck and frees up cash to test ideas.
Importance of control: Governance limits feel tolerable when outsourcing standardized components. However fintech apps or hardware needing strict regulatory compliance often necessitate keeping things in-house.
Company culture: Does hands-off vendor management dampen the close-knit culture you want? Or does it free staff to focus on areas they truly care about most like innovation vs. keeping lights on?
Timelines: Tight deadlines may necessitate outsourcing to access additional bandwidth rapidly. But sufficient runway allows carefully nurturing your own internal capacity.

Weighing the above factors helps determine the right development mix for YOU. Rarely does a single model fit every need across an organization.

Using A Hybrid Development Approach

Rather than treating in-house and external resourcing as an binary either-or choice, often the two can complement each other effectively:

Maintain a small in-house team for critical architectural design and project leadership activities demanding internal visibility.
Outsource specialized sub-components of work (e.g. UI/UX design, QA testing) to vendors boasting deeper expertise.
Keep most feature development in-house, but contract external specialists for short-term skill gaps like mobile app builds or data modeling.

Build an initial product internally but switch to outsourcing maintenance later in the life cycle.

This “best of both worlds” approach offers advantages like:

Control costs by only paying external team fees when extra skills are truly required.
Access world-class capabilities beyond what makes fiscal sense to build in-house.
Reduce development bottlenecks.
Maintain continuity of critical product and domain knowledge internally.

The hybrid route works best for complex projects or large enterprises with more variables at play. Nonetheless, upfront data analytics is still required to determine what mix of internal and external resourcing optimally balances priorities like budget, deadlines, quality, and risk.

The Process for Making Your Software Development Decision

We’ve now covered multiple angles to analyze when choosing between building in-house or outsourcing your software development – from costs and control factors to capabilities and communication.

Here is a step-by-step guide to navigate this crucial decision:

Define Detailed Requirements

Document all features, technologies, 3rd-party integrations, specialized expertise or regulatory requirements needed. Get granular on must-haves versus nice-to-have. This scopes the realistic complexity to assess sourcing models against. You can’t make an informed choice without specificity.

Model Total Cost of Ownership

Research market salaries and team budgets for in-house development based on requirements. Then collect vendor project quotes for outsourcing. Model total multi-year costs in a spreadsheet accounting for fluctuations, overhead, tooling, transitions, support etc. Include contingency buffers. Analyze spending time across options.

Pressure Test Timelines

Factor target launch dates or speed-to-market pressures into evaluations. Can an offshore team spin up faster than locating and hiring specialized in-house talent? Account for post-launch velocity too based on team familiarity. Pressure test assumptions.

Vet Security and Compliance

Review regulations, data management system and intellectual property concerns. Will external vendors comply with all regulations and pass security audits? Do they match internal risk tolerances? Develop checklists.

Plan for Post-Launch Work

Outline expected maintenance, enhancements and support 12-24 months after launch. Estimate effort levels and budget. Compare feasibility across internal or external resourcing models factoring in ramp up time and retraining needs.

Gauge Cultural Alignment

Assess communication styles and work norms. Would outsourcing teams readily adopt existing rituals around daily standups, issue tracking, toolchain preferences etc? Analyze org structure fit.

Explore Hybrid Options

Could blending internal and external resources balance control with flexibility? Maybe outsource commoditized work while keeping specialized tasks requiring business domain knowledge in-house.

Revisit Pros and Cons

With concrete requirements, re-score in-house and outsourcing models across success criteria. Update earlier generic pros and cons list with specifics.

Evaluate Viable Choices

Finally, narrow down one, two or three viable options with rough budgets and timeframes attached to each approach. Define risks and mitigations strategies.

Repeating this framework before embarking on any major software build will pay dividends over the long-haul in increased team productivity, maximized budgets and ultimately faster product to market timelines.

Case Studies: Models Successfully Applied

To make these outsourcing versus in-house decisions more concrete, here are two examples of companies picking models aligned well to their environment and goals.

In-House Case Study

Fintech startup focuses on streamlining wire transfers and simplifying secure global money movement. As a highly regulated sector dealing with sensitive financial transactions, controlling strict access to source code was critical.

After initial prototype outsourcing, the company determined bringing product development fully in-house minimized risks while allowing their vision to evolve. Four years later their cohesive internal technical team continues shipping products tailored tightly to ever-changing payment capabilities worldwide.

Outsourcing Case Study

A company for finding friends began connecting like-minded social groups online over a decade ago. But with dated technology they struggled scaling. Modernizing on a startup budget required tapping affordable programming talent quickly.

Offshore outsourcers helped rebuild Friend finder using open-source components to manage costs. Separating front and backend work streams enabled parallel advancement. Occasional quality issues arose but were offset by the speed at which scaled resources could be applied compared to local options alone.

Eight months since launching their new community site, 50%+ user growth continues fueling the transition’s success.

Conclusion

We hope you now know the difference between outsourcing vs in-house development. The best option depends on the company’s needs and goals, so it’s important to carefully consider the benefits and drawbacks of each option before making a decision.

Determining whether to build outsourcing or in-house requires an honest accounting of priorities around budget, skills, control and communication. Rarely will all factors point clearly at one model alone.

Analyze your constraints and goals within a framework evaluating where each model shines versus adds risks. Then balance trade-offs and costs judiciously against the realities all projects face adapting to changing requirements and challenges over time.

With dedication to finding the right talent fit and management commitment to nurture their productivity, either model or a hybrid combination can deliver fantastic products when done thoughtfully. So stay open to reassessing development needs often, but stick to choices aligned closely to your company’s core competencies and values.