In-house vs. outsourcing software development: how to make the right choice

So, you want to build a software product but you’re not sure if you want to outsource development or keep it in-house?

Well, that’s no surprise – this isn’t a decision you should take lightly.

And making the wrong choice can have serious consequences for your business.

With that in mind, we’ll give you a detailed comparison between in-house and outsourced software development to help you make the right decision.

Let’s dive in!

In-house vs. outsourcing software development: the basics

Let’s start from the top and define both in-house development and software development outsourcing.

Software development outsourcing is when you hire an external company or team to manage your software development projects and tasks.

It can range from hiring a couple of freelancers to help out with specific tasks all the way to fully outsourced software product development.

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In-house development, like the name suggests, is when your internal development team builds and maintains your software.

Here’s a quick comparison between the two:

In-house vs. outsourcing software development: overview

Outsourced development is more cost-effective and flexible, but it’s also inherently riskier because you have less control over the development process.

And to really reap the benefits of outsourcing, you need to hire the right company and they can be really hard to find.

On the other hand, keeping development in-house will give you full control but comes with higher costs and is more difficult to scale.

And if your hiring process isn’t top-notch, hiring in-house talent can be just as risky as outsourcing to a low-quality vendor.

Now, let’s compare them in more detail.

In-house vs. outsourcing development: key differences

Here, we’ll analyze how in-house and outsourced development stack up across key categories.

Cost

We’ll start with the most important factor – cost.

Here, outsourcing is the clear winner.

In fact, lower costs are the main reasons why companies outsource development – according to a Deloitte survey, 70% of business leaders named cost as the main reason they outsource.

But, what’s the actual difference in cost between in-house and outsourced development? And why is outsourcing cheaper?

Existek ran a study and found that outsourcing development can cut costs by up to 53%:

source: Existek

That’s because when you outsource development, you minimize costs like:

• Recruiting and onboarding costs
• Training costs
• Employee benefits
• Salary taxes
• Administrative and infrastructure costs

Let’s zoom in for a minute.

Just the recruitment and onboarding of new employees can cost you a lot of money and comes with a lot of hidden costs:

source: Scribe

And these costs can add up quickly.

Here’s an example – according to SHRM, the average onboarding cost is $4,100 per new hire.

If you need a large team of say, 10 developers, just onboarding the team will cost you $41,000.

But, the real reason why outsourcing is cheaper is lower labor costs.

Here’s a comparison of the average hourly rates by role and region worldwide.

Average hourly development rates by role and region

Let’s say you’re based in the U.S.

The average yearly salary for a software engineer in 2024 is $160,000/year, while it reached $214,000/year for a a senior software engineer.

Now, multiply that across the entire development team – that’s a lot of money, right?

But, when you outsource, especially to a region with lower labor costs, you won’t spend nearly as much on development.

Control and quality

Great software quality should be non-negotiable. 

In fact, it’s an absolute necessity – poor software quality costs U.S. companies $2.42 trillion every year.

Now, we’ve all heard the outsourcing horror stories – broken deadlines, buggy code that barely works, poor communication derailing projects, to name just a few.

When you outsource development, you’re fully dependent on a vendor and their approach to development.

But, with in-house development, you’re fully in charge and you can set up your processes based on industry best practices and your specific needs.

A great example is integrating QA engineers from the start of development. That’s because the sooner you find bugs or defects, the cheaper they are to fix:

Fixing bugs after deployment can be up to 100x more expensive than fixing them at the start of development. And with in-house development, integrating QA from the start is much easier.

And that’s just one example.

Of course, if you hire the right company, they’ll follow all the top software development best practices.

But, they’re not your employees so you’ll naturally have less control over the development process.

Also, there’s another important quality factor that’s often overlooked – culture and cultural compatibility. Poor cultural compatibility is one of the main reasons why outsourced projects fail:

For example, big cultural differences can create misunderstandings and delays which slow down development – and that’s a major quality risk.

But, with in-house development, you shape the culture of your team and how they approach development.

And that’s a great way to ensure high quality.

Scalability and flexibility

Two other hugely important factors you need to consider when choosing between in-house and outsourced development are scalability and flexibility.

And here, outsourcing has the upper hand.

Hiring an in-house team takes a lot of time and resources – it takes an average of 35 days to find and hire a software engineer.

That’s just the average – if you’re looking for engineers with specialized skills, it can take a lot longer.

But, if you outsource development, you can have a ready-made team start development in a matter of weeks.

And outsourcing is much more flexible, too. Let’s say you just need a few experts with specialized skills – hiring them is a much simpler process when you outsource.

Another good example is if you’re a big enterprise and want to build an MVP for a new pilot project.

You can hire a small dedicated team to start and if your MVP gains traction in the market, you can easily expand the team to meet the new demand.

And if it doesn’t hit the mark, you simply scale down your commitment to the vendor and that’s it.

With an in-house team, this is much harder – you would need to hire and then lay off staff members, which carries a huge reputational risk. 

Not to mention that it’s costlier and more time-consuming.

And that’s why if you’re not sure about future needs, you should outsource development.

Talent pool

One of the biggest challenges you likely face is finding the right talent to hire.

That’s no surprise – the IT skills gap is only getting bigger and it’s showing no signs of slowing down.

The stats prove it, too – 53% of companies struggle to recruit software developers because they lack the skills they need.

And when you hire in-house, you’re limited by geography and the talent in your local area.

But, when you outsource development, you can get access to a massive global talent pool.

source: Springs

This makes finding the right talent much easier, especially for in-demand positions like:

• AI engineers
• Cloud engineers
• Cybersecurity engineers
• Data scientists
• Subject matter experts (SMEs)

And the best part? 

They’ll be cheaper to hire, too, like we’ve discussed previously.

And you can’t beat that.

When should you outsource software development?

Now we come to the big question – when exactly should you outsource development?

While it does come with a lot of benefits, it isn’t always the right fit.

So, here’s when outsourcing is the right choice:

• You have budget constraints – if you’re on a tight budget, outsourcing development will help you save a lot of money and reduce your development costs
• You need access to specialized talent – if you need talent with specialized skills and niche expertise, outsourcing development will help you find and hire them much more easily
• You need to speed up development – if you need to get your product on the market quickly, outsourcing its development is your best bet
• You need to quickly scale your team – outsourcing is the quickest and cheapest way to quickly scale your development team to meet new demand
• You’re facing a shortage of local talent – if you can’t find the talent you need in your local area, outsourcing gives you access to a global talent pool

In a nutshell, you should outsource development if you have a limited budget and you can’t find the right talent in your local area.

It’s also a great choice if you’re a startup building an MVP or you need to quickly scale and augment your team to meet new demand.

Pros and cons of outsourcing software development

When should you choose in-house software development?

In-house development, while pricier and less flexible, still has its advantages over outsourcing software development.

Here’s when you should keep development in-house:

• You’re working on a mission-critical project – if your project is key to your business operations or involves sensitive, proprietary data, in-house development is less risky
• You need full control over development – if you need full oversight over every step of the development process, from planning to execution, you should keep development in-house
• You need immediate support – if your project needs constant iteration and immediate support, an internal development team will be able to respond faster
• You want a team that knows your business – if you want to build a team that has deep knowledge of your product and business processes, in-house development is the way to go
• You want stronger internal collaboration – if you need feedback and strong collaboration with internal stakeholders, an in-house team is the better choice

In short, in-house development is the better fit for long-term, mission-critical projects you need full control over, like projects that involve a lot of sensitive information about your business or users.

And it’s also the better choice if you need a team with deep knowledge of your processes and you want better internal collaboration between developers and other stakeholders.

Pros and cons of in-house software development

In-house vs outsourcing software development: FAQs

If you go with outsourcing, you need to choose the right partner

Outsourcing development can be one of the most important strategic decisions you can make for your business.

But, to get it right, you need to choose the right development partner – and that’s easier said than done.

You need to make sure the company you hire can successfully handle development from start to finish and deliver a high-quality product.

Luckily, you’re in the right place.

We’re a high-caliber, full service software development company and we pride ourselves on fast delivery and rigorous QA standards.

If you want to learn more, feel free to contact us and our team will be happy to set up a quick call at your convenience.