In-house vs Outsourcing - Choose Your Software Development Wisely

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Karolina Tomaszewska

Updated Jun 19, 2024 • 18 min read
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Software development entails finding the right balance among a variety of factors such as time, cost, and talent.

In juggling these considerations, company executives often debate whether to build in-house or outsourcing software development. Neither option is better than the other in absolute terms, but each approach might be more suitable for certain projects or situations.

In this guide, we’ll be comparing in-house software development versus outsourcing. We’ll go through the pros and cons of each, along with the type of situations when it might be better to go for one approach over the other. This guide is particularly relevant to decision-makers in businesses and organizations weighing the in-house development va outsourcing options for their next digital product.

This blogpost was created in collaboration with Karolina Tomaszewska (Project Manager) and Kinga Bukowska (Project Manager).

What’s the difference between in-house software development and outsourcing?

In-house software development is the practice of staffing project teams with company employees, whether newly hired or from existing personnel. Opting for an in-house approach is no different from hiring new employees or pulling in the current staff to deliver a given software development project. When developing in-house, businesses go through their own process of recruitment.

On the other hand, software development outsourcing is the practice of delegating the delivery of a project to an external, third-party firm (or firms). In this arrangement, a business signs a contract with a software development outsourcing firm to build digital products according to a defined scope. While the client manages the work of the service provider, it’s the outsourcing firm that’s primarily responsible for building the software.

In-house software development

Developing software internally is the default approach for some companies with the proper talent and resources. Even if they opt to outsource development in specific situations (e.g. for projects that require highly specialized talent), they’ve already built internal software development capabilities for their projects. This means that they have confidence in their in-house project managers, developers, and other specialists to deliver software. As a result, in-house development gives businesses greater control over their projects.

If you’re thinking of developing software in-house, consider its advantages, disadvantages, and specific business contexts to make an informed choice.

Pros of in-house development

  • Alignment of personnel with the project and company: With in-house development, you have direct control over talent selection. This gives you the freedom to accept candidates based not only on the requirements of the project but also on your preferences, the company’s culture, and other factors important to you. This flexibility might not always be possible in outsourcing where the vetting process may be limited to 2-3 candidates shortlisted for every role based on their availability.

  • Staff motivation: Members of your in-house development team might be more motivated and eager to work towards maximizing the outcome of their efforts. Because they’re building a product directly for the company they’re working for, they have an immediate sense of ownership and accountability.

  • Direct supervision over employees: Because you’re the one creating employment contracts, you have control over stipulations that meet your requirements – be it non-standard working hours, code of conduct, or your company’s holiday policy. When you want to change the project scope and requirements, your in-house team can immediately execute it. You don’t have to deal with contractual issues with your outsourcing partner. This may include change management fees, the notice period and consequences of an abrupt termination, among other factors that may be beyond your control.

  • Immediate action when problem-solving: Your managers can communicate and take action more directly instead of going through the project structure of the outsourcing consultancy. You have direct control over your infrastructure and technology stack when troubleshooting technical problems. Problem-solving tends to be more manageable when dealing with an in-house project team.

  • Institutional learning and professional development: By building software in-house, you allow your managers and employees to learn from the process. This gives your organization a leg up for succeeding projects where they can apply what they’ve learned.

Cons of in-house development

  • Time, cost, and effort towards recruitment and onboarding: You need to conduct the recruitment and onboarding process yourself to screen for the candidates’ skills. This includes advertising open positions, reviewing resumes, shortlisting candidates, conducting multiple interviews, negotiating their contracts, and conducting the usual company onboarding protocols – all that before starting the project. That’s a lot of effort that outsourcing providers cover for you.
  • Lack of immediate project infrastructure: In addition to personnel, software projects require development tools, technology solutions, infrastructure, and many other inputs, which may not be available to your company. Coming to an outsourcing agency, you’ll be able to immediately access their technical resources, knowledge base, and development practices.
  • Project take-off and momentum: Assembling an in-house team and setting up the project infrastructure can be a challenge for organizations not used to in-house development. This is in contrast to engaging software development consultancies, which can help you hurdle the administrative challenges of getting a project immediately started.
  • Limited flexibility in times of crisis: Employment contracts typically can’t afford a great deal of flexibility when it comes to reducing the number of staff and work hours. It may not be easy to let go of developers, which might be essential when a project encounters unforeseen events or the company goes through a crisis. It’s entirely possible that the people you hired may end up in floating status, without a project, and not working for the company's revenue.
  • Turnover and talent retention: Considering that the IT sector is a highly competitive market, your organization will have to put in a serious effort to attract and retain in-house talent.

When to develop software in-house?

Taking into consideration all these advantages and disadvantages of in-house development, here are some situations where your project will be better served by opting for internally staffed teams.

  • For long-term projects with no strict budget cap: It’s worthwhile to invest money and effort in searching for the right talent and building up technical resources when you have a considerable runway in terms of time and budget.
  • When there’s the availability of leadership and expertise: It may also be optimal to opt for in-house development if your business already has the right managers and technical specialists that match the project’s requirements. You can get the project started immediately and hire additional personnel at a later stage if necessary.
  • When you prefer or need to be in complete control: Because of considerations such as security, privacy, or proprietary technology, you may prefer – or actually need to – build your product in-house. You cannot afford specific sensitive problems arising and having no influence over their mitigation. You may also need to make decisions that affect the development of the product with your own team.

Companies with in-house teams

There are quite a few well-known global companies that have built and continue to maintain their in-house development teams, as follows:

  • Amazon
  • Apple
  • Google
  • Klarna
  • PayPal
  • Revolut
  • Salesforce

Outsourcing software development

In outsourcing, businesses of any size – whether a startup or a multinational enterprise – delegate the delivery of a software development project to a third-party service provider. The sophistication of today’s business environment, labor laws, technological innovations, and a whole host of factors make it possible for companies to grow without only relying on their in-house teams. Outsourcing and its various models – such as offshoring, nearshoring, extended teams, and even freelancing – have offered businesses a wide range of options to scale while minimizing inputs and risks.

Before outsourcing your next software development company project, carefully consider its benefits and drawbacks, as well as your software development metrics and KPIs.

Pros of outsourcing software development

  • Optimal balance of talent and rates: If your business operates in an economy where local talent comes at a comparative premium, you can take advantage of outsourcing to a firm based in a location where salaries are considerably lower. The right partner can reduce your cost when it comes to development talent while maintaining the same level of expertise and experience. For instance, the outsourcing industry in Eastern Europe has built a global reputation for being able to offer credible engineering talent at considerably lower rates than in North America or Western Europe.
  • Battle-tested development practices, workflows, and overall project infrastructure: The very core business of software development companies is to build digital products. When turning to a software consultancy, you can count on tried and tested development processes built from years of experience.
  • Flexibility to scale upwards and downwards: Outsourcing software development provides flexibility in managing a project team’s size and setup. There’s a wide range of risks that may require a sudden need for your software development project teams to scale up or down, such as volatility in demand, fluctuating economic conditions, and uncertainty in external financing. Outsourcing firms usually require a certain period of notice in contracts before adjusting the scope and headcount for your project. However, it’s still fairly straightforward to expand or downsize your outsourced team when necessary.
  • Faster project kick-off and delivery: After pinning down your project scope, outsourcing enables you to begin development work almost immediately. This contrasts with in-house development which is likely to cost you some period of time in assembling an internal staff of software developers. It can take as many as 2-3 months to hire a developer with the right skills for a technology stack. Outsourced teams can help you get your software to market faster.
  • Access to global talent supported by infrastructure: Outsourcing gives you access to a wide pool of development talent worldwide. That would be an important aspect if you don’t have the right infrastructure for remote work and you traditionally hire from your local area. Software outsourcing firms already have the right infrastructure in place.
  • Wide range of technical expertise: Further, outsourcing opens up your access to highly technical and specific skill sets, which may be difficult to find through traditional recruitment. Aside from the usual Product Managers, Business Analysts, Software Architects, programmers, or UI/UX Designers, some firms can provide specialists in machine learning, augmented reality, cybersecurity, and other highly technical domains. They can also offer industry-specific consultants in healthcare, education, fintech, ecommerce, and other verticals. In effect, outsourcing gives you the opportunity to tap any kind of talent you’re looking for.
  • Focus on your core business: Building software isn’t necessarily a core strength for a lot of companies. Outsourcing provides you room to focus on your main business and competencies. While your software development partner focuses on what they’re good at, you can shift your focus and resources to strategy, growth, and key priorities.

Cons of outsourcing software development

  • Limited control and direct action: While your company sets the scope and direction of the project, it’s the outsourcing provider that executes the day-to-day work. Hence, your ability to direct or oversee their outputs relies on the communication between your internal managers and the project leaders of the outsourced team. Your visibility over project progress will be only as good as the working relationship between the client and the consultancy. This requires not only a certain degree of trust, professionalism, and interpersonal skills, but also systems and practices that facilitate a healthy working environment between parties.
  • Cultural differences leading to communication issues: If you outsource software development to a consultancy abroad, then differences in languages, cultural norms, or workplace practices can arise and affect the relationship between your internal staff and the outsourced team. Misunderstandings can occur from something as small as being lost in translation or poor choice of words. Managers on both sides should also pay attention to small details such as managing deadlines around certain holidays. Nevertheless, Project Managers from top outsourcing firms have built a wealth of experience in navigating multicultural environments.
  • Time zone differences: Contracting with an outsourcing company based in a different time zone can result in suboptimal coordination. It’s generally the project staff from the consultancy firm who adjusts to the timezone of the client, especially for conference calls and synchronous work. As often experienced when the time difference is wide, there’s just a narrow window when business hours overlap, which can impede communication and cause delays in the development process.
  • Heightened risks in security and confidentiality: Outsourcing software development inherently entails entrusting proprietary information (and intellectual property) to the consulting firm. The moment you take on an external partner, the project and your company take on risks from the vulnerabilities in their infrastructure and in the communication between both parties. Ascertain that the outsourcing firm has sufficient security measures in place to guard against cyberattacks. It’s also an industry practice to sign a Non-Disclosure Agreement that sets out the confidential terms of the project.

When to outsource software development?

Accounting for all these pros and cons of outsourcing software projects, here are key situations when your software project will be better served by taking on an external partner.

  • For projects with tight budgets or when you need to reduce cost: Outsource your software project if you have a fixed budget. It’s common practice for enterprises and bigger companies that suddenly need to better manage corporate budgets to pivot away from in-house development to outsourcing. Outsourcing is also a viable approach for startups and small businesses that can’t afford a full complement of developers.
  • For quick delivery or when pressed for time to launch: An experienced software development vendor will help your project take off immediately and accelerate the development process.
  • Lack of technical leaders, developers, and/or specialists: If you’re not willing to take time, effort, and resources to either hire new talent or train your current staff for a specific software project, then you’ll be better served by outsourcing its development.
  • When you need your in-house team to focus on current roles: It may be possible that your company has the talent to build your next software. However, if you’d rather have them focus on their existing projects, or you can’t afford them to take on additional work, outsourcing will fill in the immediate gap.
  • When there’s a credible risk of downscaling: If your company, your industry, or the economy as a whole is anticipating or going through some instability that may require you to downscale your project, outsourcing provides you this option when necessary.
  • To learn and improve: Outsourcing can be an opportunity for your in-house team to learn from outside experts. This can be a way for your managers and staff to study their methodologies and practices and adapt them to your own company.
  • Expansion to a foreign market: Consultancies will help your company navigate business practices and regulations in other jurisdictions. For example, when expanding to other countries, you can tap outsourcing firms to configure your app to be compliant with local data privacy laws.

Additional Considerations

In the realm of outsourced software development, companies can reap benefits beyond the evident cost savings and talent acquisition.

One notable advantage is the alleviation of legal and human resource burdens. Outsourcing mitigates the need for managing intricate legal aspects associated with in-house hiring, such as drafting contracts, handling employee benefits, ensuring workplace compliance, and managing employee relations. This reduction in administrative complexities contributes to increased efficiency, enhanced project quality, and overall success.

However, it introduces new considerations, particularly in the realms of data security and intellectual property protection. As companies share sensitive data with external development team, concerns arise about safeguarding intellectual assets. Establishing a robust legal framework, encompassing comprehensive confidentiality agreements, precise terms on data handling, and intellectual property rights, becomes paramount. The heightened risks associated with intellectual property rights necessitate careful management, emphasizing the importance of Non-Disclosure Agreements (NDAs).

These legal instruments bind outsourcing partners to confidentiality, safeguarding critical business information and trade secrets. Additionally, specifying legal jurisdiction in contracts is crucial for international outsourcing arrangements, determining the governing laws and dispute resolution procedures. Regular audits ensure compliance with legal and contractual obligations, covering aspects like data protection laws, IP agreements, and Service Level Agreements (SLAs), further solidifying the foundation of a successful outsourced software development partnership.

Companies with outsourcing teams

Despite having a considerable headcount characterized by outstanding talent, these widely recognized corporations also engage outsourcing firms:

  • Alibaba
  • Basecamp
  • Google (deploys both in-house and outsourcing teams)
  • GitHub
  • Skype
  • Slack
  • WhatsApp

In-house vs outsourcing: the right approach for your project

Choosing between in-house and outsourcing software development isn’t always a straightforward decision. What works for one organization may not work for another. Even within the same company, different development projects may be best served by different strategies.

In some circumstances, it’s possible – even ideal – to combine both approaches. You can deploy an in-house team to handle fundamental and core components, while outsourcing aspects that require specialized talent. It’s vital to be attuned to the pros and cons of outsourcing and in-house development that apply to your company’s needs.

If you’re opting to outsource software development – whether in full or in part – it’s critical to find a capable partner that takes time to understand your vision and project requirements.

This requires the right technical competencies, tools, infrastructure, and methodologies to deliver your product vision. Further, the most reputable software development companies owe their success to the personnel’s soft skills in work ethic, communication, and leadership.

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Karolina Tomaszewska

Project Manager
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