Software Outsourcing: Benefits, Risks and Decision Factors

NAPA Insights
| 20/12/2022
Software Outsourcing
Entrepreneurs and business owners can find efficient answers to their business difficulties by Software Outsourcing with IT talents from across the world

Organizations worldwide use outsourcing in a variety of regular business operations. For information technology companies, software outsourcing improves operational efficiency and output quality. This article gives information on software outsourcing and weighs its benefits and risks.

Information technology has been more and more significant to enterprise growth. The curve of digital transformation and Web3 development spread their influences across industries. Intensive demand for the IT workforce raises while many nations face employee shortages. It is when local human resources cannot adequately address the problem of quantity and, to some extent, quality.  By locating IT talent worldwide, companies can solve staff shortages as well as skill gaps. Thus, the demand for software engineering outsourcing is growing as well.

This severe gap also makes software development costs expensive. Many IT enterprises can’t afford service from software projects outsourcing companies in the USA, Japan, the EU, and Singapore. So they offshore software development to Vietnam, India, the Philippines, or China to reduce costs.

If you are considering outsourcing software development, the following information will help.

What is Software Outsourcing?

Outsourcing is hiring third parties to perform tasks, handle operations or provide services for the company. Outsourcing a software project involves using a person or a team to complete some or all of an IT Service. It includes software development, graphic design, infrastructure maintenance, and even quality assurance outsourcing.

The offshore software development company delivers functions and features that meet clients' needs. But they do not take part in the business development process.

Breaking the in-house limitation, outsourcing takes advantage of various skills and expertise. Software outsourcing helps develop and enhance consumer services.

In another word, software outsourcing is the act of handing over responsibility for the creation of software to a third party. This will aid them in overcoming their lack of internal expertise and resources.

Why is software outsourcing beneficial?

With quick IT development, software outsourcing is crucial to keep pace with market demands. Many companies decide to outsource development because of the significant benefits:

Software outsourcing is a considerably cost-effective option in this rapid change era of Technology

Software outsourcing is a considerably cost-effective option in this rapid change era of Technology

Access to worldwide IT talents and experts

In a fast-changing industry like industry, it is impossible to own an in-house development team excelling in every technological section. But if you use software outsourcing services, you not only access smart IT solutions but great technological talents. These experts will use their knowledge and years of experience to meet your requirements in the most professional manner. By cooperating with them, your in-house capacity also enhances to meet further needs. Yet, each type of software outsourcing company will offer a different talent pool. This is why you need to go above and beyond to ensure that you’re working with the right partner.

Increase effectiveness and productivity

When outsourcing, you not only make use of your strengths, but those of many other vendors. Like puzzles, you put in-house and outsourcing teams in the right place where they do their best. As a result, outsourcing application development increases efficiency and productivity.

Working with software outsourcing companies, you can concentrate on growing your core values. You do branding, research, and new initiatives to meet customers and leave problems to domain experts.


According to Deloitte’s Global Outsourcing Survey, cost-cutting is the major reason to partner with an outsourcing development company.

Cost is always at the top criteria list, even though it is not usually the most crucial consideration in outsourcing decisions. Hiring people in-house means paying salaries, equipment, software, training, office space, and more. But outsourcing development lowers operation costs. It has no hiring, onboarding, training, or retention costs and less workspace and equipment.

We have numbers to prove the same:

- An Australian survey of 7500 public organizations shows outsourcing saved around 46% of costs over in-house.

- Analysis of 210 studies in the past two decades reveals a whopping 85 of them to be talking about outsourcing as an effective way of reducing cost.

- A McKinsey Global Institute study states outsourcing IT services reduce costs by 60% in the US.

- An MIT Sloan Management Review study saw a drop of $121.14 million in non-IT operating costs, as IT outsourcing increased to $96.14 million.

- As per a Deloitte study, 64% of companies consider cost-savings as the primary factor to outsource.

- A recent IBM research report shows almost 27% of organizations outsource to reduce costs.

Access latest technologies

Different software applications embrace different programming languages for various operating systems. It is unreasonable to expect your team to excel in all technologies in such an enormous industry.

Outsourcing is an excellent approach to filling the IT skill gap and adapting to new trends. In a world where new competition is born every second, outsourcing is outshining to keep you on track.

Ensure the desired results

Software outsourcing ensures performance and timeline by bridging the shortcomings of in-house software development.

Regular meetings and collaboration ensure qualified deliveries of outsourcing software development projects. Outsourcing developers help speed up time to market and keep projects on schedule.

As outsourcing brings flexibility, it adds agility to your values. Securing high availability, an outsourcing partner can become a competitive advantage for enterprises.

What are common types of outsourcing services?

There are different software engineering approaches for offshore and outsourced development. People classify outsourcing vendors depending on the price, size, location, and other factors. Given a wealth of possibilities, it's a good idea to familiarize yourself with the various forms of outsourcing before you begin:

Based on specialized business function

Engineering Process Outsourcing (EPO)

EPO is assigning specific engineering functions to an outside team. This service meets all the needs of architecture, engineering, and construction. For instance, some automakers contract out product development outsourcing to expand their market reach and raise their standards.

Business Process Outsourcing

Business process outsourcing (BPO) utilizes third-party vendors or subcontractors to carry out partial business processes or operations. Companies apply BPO practices in the two main operations of front-office and back-office:

- Front office BPO tasks commonly include customer-related services such as tech support, sales, and marketing.

- Back office BPO refers to business support activities such as accounting, payment processing, manufacturing, and quality assurance.

Outsourcing Information Technology (ITO)

When a business needs a team to take care of any technology and computer work, ITO is one of the suitable approaches. This outsourcing service contains things such as programming, website design, networking, and so on.

Knowledge Process Outsourcing (KPO)

KPO is outsourcing high-level tasks involving specialized knowledge. Using KPO allows businesses to fill up their shortage of skilled employees and let them focus on other business aspects. Different from BPO outsourcing labor and other operational work, KPO involves more specialized, analytical, and knowledge-based work, for example:

- Financial consultants

- Research and development (R&D)

- Technical analysis

- Medical & Healthcare

- Data analysis and interpretation

Legal Process Outsourcing (LPO)

Since not all businesses have a legal department, most will eventually outsource their legal needs. Some companies decide to use outside attorneys to draft contracts, provide legal counsel, and resolve legal disputes.

Recruitment Process Outsourcing (RPO)

RPO reduces the workload for HR professionals and delivers recruitment for businesses:

- Consulting and Strategy

- Recruitment Process Optimization

- Talent pool development

- Screening and Interviewing

- Job offer management

- Hiring and post-hiring.

Human Resource Outsourcing (HRO)

HRO is employing a third party to perform all or a part of a company’s HR functions including: 

- Payroll and compensation management

- Recruitment and onboarding

- Orientation and job evaluation

- Staff training and evaluation

- Employee policies and benefits.

Based on geographical location

Local Software Outsourcing

It means the company works with outsourcing partners within the country or region. For example, if a Vietnamese company hires a local agency for quality assurance purposes, it will partner with a local software QA company in Vietnam. Speaking the same language, this approach optimizes collaboration without language barriers. But its development cost may be higher than nearshoring and offshoring.

Offshore Software Outsourcing

Offshore is that the software company you hired is in another country with a different time zone. For instance, a European enterprise hires software developers in Ukraine, India, China, and Southeast Asia like Vietnam. Offshoring software outsourcing saves costs and embraces a large pool of talent.

Nearshore Software Outsourcing

A company located in China and works with a nearshore software development company in Vietnam. Then Vietnam will be a nearshore outsourcing to China.

Nearshore refers to outsourcing software development to a neighboring country. Because of the closing in geography and time zone, it is convenient to travel to meet your outsourcing team.

Based on People Management

Staff Augmentation Outsourcing Model

This is a type of outsourcing model that uses temporary workers to fill short-term job positions within your company. It is suitable for a company that has an in-house software development team.  It solves new skill requirements instantly without time for training. The company also has complete control over the development process.

Dedicated Team Outsourcing Model

With the dedicated team model, you hire remote developers reporting directly to you and working for you full-time. But they will remain in the dedicated team provider’s office. The software outsourcing providers will share with you the responsibilities and risks for project quality. It prevents you from distracting your main members from their tasks while still ensuring the project schedule. When the project is done, this collaboration also ends as well.

Project-based Outsourcing Model (or Full Project Outsourcing Model)

This model is delegating the completion of an entire project to a third party. All you need to do is tell them your specifications and requirements. The project-based outsourcing model gives you limited control over projects. But outsourcing companies take main responsibility for projects from start to finish. They form the development team, carry out project management, and control quality.

What are popular software development methodologies for outsourcing?

The market currently offers a wide variety of software development and outsourcing models. These models include, among others:

Waterfall Model for Software Outsourcing

The Waterfall Model was the first project management methodology introduced in 1970 by Winston Royce. It is a breakdown of the software development life cycle (SDLC) into linear sequential phases. Each phase must be completed before the next can begin without overlap between the phases. The model is therefore quite precise and well-defined. Its phases move from a higher level to a lower level, like a waterfall.

Agile Model for Software Outsourcing

Agile Outsourcing is a software project development process prioritizing customers and flexibility. Instead of planning the entire project, it divides the development process into small iterations. Each iteration includes all SDLC phases.  It employs continual planning, learning, improvement, team collaboration, evolutionary development, and early delivery.  A new or updated product comes out after several iterations. When the customer expects the development team to respond quickly to updated requirements, the Agile development method will be a suitable approach.

V model for Software Outsourcing

As an extension of the waterfall model, the V model (also called Verification & Validation model) demonstrates the relationships between each phase of the development life cycle and its associated phase of testing. In the V model, each development stage must be completed in parallel with the testing phase. This model is easy to use and suitable for programmers of any expertise level. However, it cannot be used for significant tasks requiring sophisticated methods.

Spiral model for Software Outsourcing

The spiral model is the combination of the iterative development process model with elements of the waterfall model. When viewed as a diagram, this model is like a coil with many loops. The number of loops often varies based on the complication of each project. Each loop of the spiral is called a phase of the software development process, including planning, design, construction, and evaluation. The spiral model is suitable for large, expensive, and complicated projects.

What are common types of software outsourcing contracts?

Time and Materials Model

The time and materials (T&M) model is a contract type that reimburses one party based on the time spent on the projects, the materials used, and other fees related to the service. This model is also known as a cost-reimbursable contract or cost-plus contract. The T&M model (“pay as you go”) is the best choice when the requirements of a project are not clearly defined at the beginning, especially if the scope of work is likely to change during the development process.

Fixed-Price Model

A fixed-price model (also known as a firm-fixed-price model) is a type of contract in which both the customers and the vendors agree on the scope of work, deadlines, and amount of money needed to complete the project before the development process starts. Even though the scope of work is well-fixed, there’s a high possibility you’ll need to add some extra features along the way. As a result, deadlines may extend, and expenses arise.

Lab-type Development

The lab-type development model is a business model that refers to a long-term agreement between the clients and service providers to supply software specialists. These experts are selected based on their experience and skills and the client’s needs. The customers can choose to manage the team themselves or engage a project manager from the service supplier to supervise the development process.

Please read Cooperation Models to know the pros and cons of each type of contract and what suits you most. 

What are the potential risks of software outsourcing?

There have always been two sides to everything, and outsourcing is no different. While with software projects outsourcing agents has many advantages, it remains some risks as well.

Software outsourcing has significant advantages yet remaining potential risks

Software outsourcing has significant advantages yet remaining potential risks

Information leaking & security issues

The most worrying issue with outsourcing is security. Since outsourced staff is not a part of the organization, they may divulge sensitive information. They might even be workers of competitors. So it is necessary to sign a confidentiality agreement with outsourcing employees. It is to uphold security, limit information leaking, and get protection from the laws in case of disputes.

Loss of control

Quality depends on the team you hire to outsource. It will be challenging to guarantee that the work is proceeding effectively or that the outcome is accurate.

Additionally, since outsourced personnel does not have a thorough understanding of the business at the beginning of the collaboration, it will be challenging for them to suggest strategic directions and avoid making costly errors.

Unforeseen and hidden costs

In general, outsourcing assists businesses in making short-term cost savings, but not always. If enterprises do not have a tight agreement and reasonable allocation of work, software outsourcing is costly as well.

Before starting a software outsourcing project, you should acknowledge unforeseen and hidden costs:

- Hardware or software upgrades

- Relocation or redeployment

- After-hours services

- Troubleshooting

This gives a rough idea of the vendor charges, helping you calculate and manage the actual budget.

Communication barriers

The communication barriers depend on geographic distance. It is more difficult to communicate over phones and video calls than in-person, especially if not sharing the same language or/and time zone. Although technologies improve remote communication, this barrier is still a noticeable disadvantage. Misunderstanding and late responses are potential risks leading to unsuccessful software outsourcing projects.

The bottom line

Outsourcing has enormous advantages while posing significant risks. Software outsourcing requires thoughtful consideration of particular business circumstances. And the success of a software outsourcing project depends much on the agency you cooperate with.

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