And one of the best ways you can cut costs is by outsourcing software development.
But, reducing costs isn’t the only reason you should consider it – you get a lot of other benefits, too (no spoilers!).
Here, we’ll discuss all you need to know about outsourcing development as a startup – what it is, the different types of outsourcing, its main benefits, and more.
Let’s dive in!
Table of Contents
What is software development outsourcing?
Software development outsourcing is when you hire an external companyor team to manage your software development projects and tasks.
Outsourcing development can range from a couple of freelancers helping out with some specific tasks to fully outsourced software product development.
As a startup, it’s one of the best ways you can cut development costs and plug any skill gaps in your in-house team.
And while you might hear horror stories when outsourcing goes wrong, you should know that some of the most successful companies out there outsource development:
The trick is to not just hire the cheapest developers you can find and call it a day.
You need to find the right company to partner with – we’ll discuss how to find the right outsourcing partner a bit later.
If you find the right partner, they’ll be able to handle all of your development needs and help you build your product from the ground up.
And at a significantly lower cost than hiring an in-house team, too.
In-house vs. outsourcing software development for startups: a comparison
So, how does outsourcing software development stack up to hiring an in-house team?
Here’s an overview of their key differences:
In-house vs. outsourcing software development: overview
Hiring model
Price
Time
Expertise
Experience
In-house
Higher due to salaries, benefits, and infrastructure costs
Can take longer because of limitations in scaling the team quickly
Limited to your current team and the talent pool in your area
Deep understanding of your culture and processes
Outsourcing
Lower due to reduced overhead and lower labor costs
Usually shorter, because you can scale the team quickly
Access to a global pool of talent
Depends on the vendor’s experience with similar projects
In short, when you outsource development, you get a scalable team and access to a larger talent pool – at a lower cost than an in-house team.
The downside is that they won’t have a deep understanding of your company culture and processes like an in-house team.
But, for startups, that’s not a huge deal and the cost savings from outsourcing outweigh these concerns.
And that’s why you should go with outsourcing.
Types of software development outsourcing models
Here, we’ll discuss the various types of software development outsourcing models.
Location-based software development outsourcing models
The first types we’ll cover are location-based outsourcing models.
As the name suggests, the main difference between the 3 is location.
Onshore outsourcing is when you outsource to the same country, nearshore is when you outsource to a neighboring country (time zone difference of 3 hours or less) and offshore is when you outsource to a distant country.
Here’s a more detailed comparison:
Onshore vs. nearshore vs. offshore outsourcing: overview
Category
Onshore
Nearshore
Offshore
Geographical proximity
Same country
Neighboring country
Distant country
Cost
Higher
Moderate
Lower
Communication
Easiest, no language barrier
Relatively easy
Potential challenges due to language barriers
Time zone alignment
High
Moderate to high
Low to moderate
Cultural closeness
Very high
Moderate to high
Varies, often lower
Scalability
Limited due to higher costs and a smaller talent pool
Moderate, access to a wider talent pool and lower costs compared to onshore
High, access to a global talent pool and much lower costs
Next, we’ll cover the different relationship-based models.
Relationship-based software development outsourcing models
The relationship-based outsourcing models deal with the dynamics between the client and service provider, i.e. the type of team and how they work with the client’s in-house team.
Team augmentation, also known as outstaffing or an extended team, is when you hire outside contractors to support and scale your existing in-house team or plug any skill gaps you might have.
A dedicated team, on the other hand, is just like an in-house team, except it’s formed by the company you hire – it’s the best model if you’re looking for a long-term development partner.
Finally, the project-based model is when you hire a team that handles every aspect of a project, from planning to release, including project management.
It’s the best model if you have no experience or technical expertise when it comes to building software products.
Here’s a detailed overview of their key differences:
Team augmentation vs. dedicated team vs. project-based outsourcing: overview
Category
Team augmentation
Dedicated team
Project-based model
Best for
Quickly scaling internal teams for big projects or to cover skill gaps
Long-term, complex projects that need ongoing work
One-off or well-defined projects with a clear scope
Client involvement
High, the client directly manages the staff they hire
Medium, the client manages the project while the vendor manages the team
Low, the vendor manages the project from end-to-end
Flexibility
Highly flexible, team members can be added or removed easily
Moderate, can take time to adjust to changes in team size or structure
Low, changes are difficult once the project starts
Duration
Short to medium-term, based on project needs
Long-term, the team works exclusively for the client
Short to medium-term, ends once the project is completed
Onboarding
Quick onboarding, developers integrate into an existing team
Takes longer, the team needs to understand the client’s business and processes
Typically requires significant time, the team needs to define requirements to align with the client’s expectations
Risk level
Low, clients have full control over the process
Low, the team understands your processes
Medium to high, especially if the scope is unclear
Finally, we’ll cover the types of contract-based outsourcing models.
Contract-based software development outsourcing models
Contract-based outsourcing models are about one thing – how the company you’ve outsourced development to gets paid.
The fixed-price model is pretty self-explanatory – you agree a price with the vendor before the project starts, based on the estimated time and resources needed to complete the project.
But, there’s a catch – if you need to make any changes or pivot mid-development, that will cost you extra.
That’s why, especially for startups, the time and materials model is the better fit. Here, you pay for the actual hours worked and resources used during development.
And changes to your requirements or scope don’t need to be negotiated separately, like in the fixed-price model.
Here’s a detailed comparison between the 2 pricing models:
Fixed-price vs. time and materials: overview
Category
Fixed-price
Time and materials
Best for
Well-defined projects with clear requirements and scope
Complex projects with unclear requirements that can change mid-development
Cost structure
Fixed, predefined cost for the entire project
Flexible, based on the actual hours worked and resources used
Flexibility
Very low, any changes to the scope need to be negotiated separately
Highly flexible, scope and cost can change dynamically with no issues
Risk for client
Lower risk, the client knows the cost upfront
Higher risk, total cost can increase if the project takes longer or needs more resources than expected
Risk for vendor
Higher risk, the vendor might underestimate the effort and resources required
Lower risk, the vendor gets paid for all the work completed, regardless of changes in scope or delays
Client involvement
Usually low, the client defines the scope upfront and waits for deliverables
Usually high, the client is involved in decisions about scope changes and resources used
So, we’ve covered the how of software development outsourcing and now we’ll move on to the why, i.e. the main benefits of outsourcing development for startups.
Top benefits of outsourcing development for startups
Next, we’ll cover the main benefits startups get when they outsource development.
Lower development costs
Outsourcing software development is synonymous with lower development costs – for a good reason, too.
It’s one of the best ways startups can build their product without breaking the bank.
In fact, according to a Deloitte survey, lower costs are the main reason why companies outsource development – 70% of companiesnamed it as the main reasonwhy they outsource:
Outsourcing development can significantly speed it up and let you reap these benefits.
Now, think about how long it would take and how much it would cost to hire a full in-house team from scratch.
The process would take months, involve a lot of paperwork, and cost a fortune – just onboarding will cost you $4100 per hire, on average.
But, when you outsource development, you just have to sign a contract with a vendor and you’re all set – the team you hire will immediately start working on your product.
And that will significantly speed up development.
Access to a large talent pool
Finding the right talent is tricky at the best of times.
And as a startup with a limited budget, it’s even trickier – and that’s where outsourcing comes in.
You get access to a huge talent pool, often at a fraction of the cost of finding them locally.
With the IT skills gap only growing in 2024, it’s a great option if you’re struggling to find the right experts, like:
Compared to hiring in-house, you get unmatched flexibility.
You can hire a full team or just augment your existing team with the experts you need.
Also, you don’t have to screen and hire them yourself, so you can fully focus on building and getting your product to market.
And that’s key to success as a startup.
Easy team scalability
One more benefit of outsourcing software development is easy team scalability.
You can easily scale the team upor down, depending on your specific needs at the moment.
Let’s say you’ve just launched your MVP and it’s quickly starting to get traction in the market.
Scaling up your outsourced team to meet this new demand is much easier than hiring a bunch of new people.
The opposite is true, too – scaling down an outsourced team is much less of a hassle than laying off in-house staff.
On top of that, you’ll avoid reputational damage and the costs of laying off in-house staff.
And that’s why outsourcing development is a good idea.
How to choose the right software development outsourcing partner
Now, we’ll give you a quick guide on how to find the right software development company to partner with.
Define your goals and requirements first
If you don’t know what you want to build, even the best software development company won’t be able to help you.
Now, as a startup, you might not have your idea fully nailed down – and that’s okay, as long as you at least have an idea of what you want your product to do.
To get there, you should ask yourself questions like:
What are our long-term goals for our product?
Which features should our product have?
What type of development team do we need?
A good place to start answering these questions is setting clear and actionable goals with the SMART framework.
Of course, these will just be assumptions you’ll have to validate.
But, it will help you better define your idea, write out your main requirements, and narrow down the list of potential vendors.
And that’s key to finding a partner that’s the right fit for your startup.
Check their expertise
Once you’ve defined your goals and main requirements, the search for the right development company is on.
Of course, the main thing you need to do is check if they have the necessary expertise to successfully build your product.
And the best way to do that is checking out their portfolio and case studies.
And you don’t have to worry about their authenticity, either.
Every review on these sites is verified – users have to log in with their business email or LinkedIn profile.
And that’s why they’re so valuable.
Look into their pricing
The last step before choosing a company to partner with is checking their pricing and seeing if it fits your budget and requirements.
But, there’s one thing you need to keep in mind – different companies will give you wildly different estimates.
Your total development cost will depend on a bunch of different factors like:
How complex your product is
The type of product you want to build
The size of the team you hire
The services you agree
Also, the company’s pricing model is another major factor – we’ve covered them in detail earlier, so we won’t repeat ourselves.
But, we’ll just say this again – for startups, the time and materials model is the best fit.
If you go for a fixed price model it means you’d spend a lot of time and energy on making sure the contract is respected. You’d be in a constant tug of war with the agency instead of doing more important things.
Marko Strizic, DECODE co-founder and CEO
Here’s a common scenario for startups: you have to pivot or make major changes mid-development.
With a fixed price contract, you’ll have to negotiate all of these changes separately or even sign a whole new contract.
But, if you’re on a time and materials contract, the company can keep on building your product no matter how many changes you need to make.
Also, since it matches the actual work hours and resources used, it’s the fairest compensation model for everyone involved.
And that’s why it’s the best fit.
Outsourcing software development for startups: FAQs
Software development outsourcing is when you hire an external company or team to manage your software development projects and tasks.
Outsourcing development can range from a couple of freelancers helping out with some specific tasks to fully outsourced software product development.
The different software development outsourcing models are:
Location-based – onshore, nearshore, and offshore outsourcing
Relationship-based – team augmentation, dedicated team, project-based model
Contract-based – fixed price and time and materials
For startups, the top benefits of outsourcing software development are:
Lower development costs
Faster development
Access to a large talent pool
Easy team scalability
Need a software development outsourcing partner?
Are you thinking about outsourcing development but haven’t taken the plunge yet? Or are you having trouble finding the right outsourcing partner to build your product?
Well, you’re in the right place.
We can help you build your product from the ground up, from validating your idea all the way to helping your product grow after launch.
If you want to learn more, feel free to reach out and our team will be happy to set up an introduction call to discuss your needs in more detail.
A seasoned software engineering executive, Marin’s role combines his in-depth understanding of software engineering processes (particularly mobile) with product and business strategies. Humbly boasting 20+ years of international experience at the forefront of telecoms, Marin knows how to create and deliver state of the art software products to businesses of all sizes. Plus, his skills as a lifelong basketball player mean he can lead a team to victory.
When he’s not hopping from meeting to meeting, you’ll find Marin listening to indie rock, or scouring the latest IT news.
