As this has been a dilemma for quite some time now, we will try to explain in this article the “outsourcing software development” approach and how to decide if a company should go ‘internal’, or ‘external’. Most companies activating in different areas of business understand the importance of one or several internal software system as the basis of their business efficiency maximization.
Some companies have their own development departments producing software for the internal needs. This approach is known as ‘in-house development’ and was more used in the past.
But the business world is increasingly complex and undergoing massive transformation, with more players and diverse business models, solution bundles and more sophisticated, tech savvy business users, all these bringing new challenges to the managers. Such new business challenges, cannot always be supported in due time and cost effectively by internal software systems. The software departments were facing difficulties in aligning the varied business functional needs with multiproduct and multiphase developmental pipelines. Also companies were facing challenges in finding all skills needed to adopt latest technologies internally.
In order to solve quickly a broad range of requests, but also to adapt to new technologies, companies started to extend their internal software development departments. This brought new challenges in terms of budget control. Not only they were facing fixed costs with salaries increases, but also long term expenses made to cover new infrastructure needs (servers, special buildings, etc.).
Companies started to see the benefits of externalizing some of their IT services, including software development in order to lower these costs and become more efficient. There were 2 options for doing this:
- Offshore outsourcing – making a partnership with a company from another country
- Near-shore outsourcing – making a partnership with a company from the same country, or a near region.
These terms are now obsolete in my opinion as most of the companies (the big ones, for sure) are having offices in diverse geographical regions.
So, we are going to use from now on the term: outsourcing.
Here are some international figures released by Gartner Group related to our subject:
From 2011-2015, Gartner estimates that the IT outsourcing market will grow about 4% annually. Moreover, the application outsourcing segment is expected to reach $40.7 billion, a 2 percent increase from 2011 spending of $39.9 billion.
Nowadays, frequently companies are confronting with the decision: outsourcing product software development, or continue with the internal development team.
What are the pros and cons of outsourcing?
- Cost Effectiveness – Offshore outsourcing can significantly reduce the overhead and operational costs that must be otherwise incurred in internal development
- Risk-sharing – One of the most significant benefits of offshore outsourcing is that the risks can be shared. The specialized vendor helps you plan the risk mitigating factors in an effective manner.
- Access to latest technologies – Being the professional service provider in the industry, the companies are always updated with innovative and upgraded technologies. This not only allows you to serve the international clients better, but also puts you ahead, in front of your competitors.
- Improved Focus – Outsourcing allows you to focus on your core business needs instead of worrying about the internal resources needed to reach your goal.
- Lack of control in the status of development
- Dependency on a specific supplier
- Uncertainty about information confidentiality.
- Lack of proximity to staff.
All these cons can be properly transformed in pros with a well planning and constant discussion with vendor.
But this will be another story….