Outsourcing software product development: Complete guide

$565.6 billion – that’s how much the IT outsourcing market was valued in 2023, and it’s expected to reach a value of $1.42 trillion by 2031.

Outsourcing software product development can be a great opportunity for your business, but it’s not without its risks.

And that’s why you need to get it right – we’ll show you how.

In this article, we’ll discuss what exactly software product development outsourcing is, when you should do it, its main benefits, and (much) more.

Let’s dive in!

What is software product development outsourcing?

Software product development outsourcing is when you hire an external company or team to manage the development of your software product.

It’s a great way to reduce development costs and plug skill gaps in your in-house team.

And some of the most successful companies outsource their product’s development, like:

• Slack
• Alibaba
• Github
• Google
• Microsoft

But, it’s more than just hiring the cheapest engineers to write the code and calling it a day.

If you hire the right company, you’ll get a long-term development partner that can handle your product’s development from start to finish.

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They’ll be able to help you with everything from product discovery all the way to growing your product after launch at a much lower cost than doing it fully in-house.

And that’s why it’s a good choice.

When should you outsource software product development?

Outsourcing software product development isn’t always the best choice.

To get the most out of it, you need to know when it’s the right time to outsource.

So, when should you outsource your product’s development?

You should do it if:

• You can’t find the right talent in your area
• Your team doesn’t have the right experience for your project
• You need specialized skill sets
• You need to rapidly scale up development

You should also know you have a few different outsourcing options like:

• Hiring freelancers
• Hiring an extended team
• Hiring a dedicated team

The one you end up going with will depend on your specific needs.

If you need to plug skill gaps in your in-house team and need only a couple of extra engineers or subject matter experts (SMEs), hiring an extended team is the right choice.

But, if you need help building your product from scratch, a dedicated team is a better option – we’ll touch on why a bit later.

In any case, you should outsource software product development only if it solves a problem you have and can make your product better.

Main benefits of outsourcing software product development

Now, let’s cover the main benefits of outsourcing software product development.

Lower costs

Lower costs are one of the main benefits of outsourcing software product development.

According to Deloitte’s Global Outsourcing Survey, 70% of companies named cost reduction as the main reason for outsourcing development.

And outsourcing software product development can reduce costs by around 53%, according to a study by Existek:

source: Existek

Of course, lower labor costs are a huge factor here, but they’re not the only reason outsourcing leads to lower costs.

One underrated reason is that when you outsource, you don’t have turnover costs – for a mid-sized company with 100 employees, they range between $660,000 and $2.6 million per year.

Also, when you outsource, you’ll have lower overhead costs, too.

You won’t have to spend nearly as much on hardware and office space and you’ll be able to dedicate those resources to your product’s development.

And that’s why outsourcing is a good choice.

Easy scalability

Another major benefit of outsourcing software product development is easy scalability.

But, what exactly does that mean?

It means that you can easily scale up or scale down your operations, based on your business needs.

Let’s say you need to pivot mid-development because of market changes.

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If you outsource your product’s development, you’ll have a much easier time scaling up and finding new talent to keep development on track.

And when you finish development and launch your product, it’s also much easier to scale down operations than if you hired in-house.

That’s because you don’t have to deal with hiring and then laying off internal staff, so you avoid the costs of onboarding, training, and employee turnover.

That flexibility is a major reason why outsourcing is here to stay.

Large talent pool

Another huge benefit of outsourcing software product development is that you get access to a large, global talent pool with a wide range of skills.

This is important if you’re looking for specialists with specific skills that might be too expensive or hard to find locally.

And that’s especially true for emerging technologies like:

• AI
• Blockchain
• Internet of Things (IoT)

Outsourcing solves that problem and connects you with top talents in those fields.

There’s another major benefit to hiring a global team – increased cognitive diversity.

Cognitive diversity has several major benefits:

source: Herrmann International

The stats prove it, too.

A Harvard Business Review study found that cognitively diverse teams solve problems faster and adapt better to change than non-diverse teams.

And that’s why you should outsource and hire globally.

Fast development

Outsourcing software product development speeds up your product’s development and helps you get it to market faster.

And that’s especially true if you hire a dedicated team.

A dedicated team works just like an in-house team, except it’s formed by a third-party agency or service provider.

And if you hire the right company, the team will only work on your product with no context switching.

Also, since the team members have likely worked together before, you don’t have to worry about culture fit.

All of these factors speed up development compared to hiring a full in-house team and starting from scratch.

Multidisciplinary expertise

Finally, getting access to multidisciplinary expertise is another important benefit of outsourcing software product development.

But, keep in mind that not every company can offer you this.

You’ll need to find a company that can handle your product’s development from start to finish, from product discovery to post-launch support and updates.

And they can offer you a cross-functional team to help you build a well-rounded, successful product.

So, you shouldn’t just look for engineers to build your product – you should also look for:

• Quality assurance (QA) engineers
• Product designers
• Product managers

If you want to learn more about why that’s important, here’s what DECODE co-founder and CEO, Marko Strizic, had to say about why you need these roles on your team:

In a nutshell, the most important benefit of a cross-functional team with multidisciplinary expertise is that they can help you build a complete, profitable software product.

And that’s exactly what you should want.

Factors to consider when outsourcing software product development

Here, we’ll cover the factors that you need to consider when outsourcing software product development.

Relevant industry experience

One of the first things you should consider when outsourcing software product development is whether or not the vendors you’re looking at have relevant industry experience.

And the best way to do that is reading their case studies and looking into their portfolio.

Reading these will show you if they’re the right fit to build your product and if they have the skills you’re looking for.

Let’s say you want to build a fintech app.

A company that’s already worked on similar products will have a much deeper understanding of your target market and the resources needed to build your product.

And there’s a simple way to separate the wheat from the chaff when reading a company’s case studies.

A good case study will talk about:

• The problem they’ve solved for their client
• How they solved the problem
• The team and tech stack they used
• The impact of their solutions

If their case studies are vague and don’t have these (or similar) elements, that’s a sign they’re not the right fit.

Relevant tech experience

Next, you want to make sure your potential outsourcing partners have the relevant tech experience and can actually build your product.

The first thing you should check is what types of software products they build, like:

• Web apps
• Android apps
• iOS apps
• Cross-platform apps
• AI apps

It (almost) goes without saying that a company that specializes in iOS apps won’t be able to help you build a web app.

Then, once you’re satisfied they can actually build your product, you need to check their tech stack.

source: GetApp

This is to make sure they’re compatible with your tech stack and your product’s requirements.

If they are, you’ll have no problem working with them and quickly onboarding their team to start building your product.

Price

Another major factor you need to consider when outsourcing software product development is price.

For reference, here are the average outsourcing rates around the globe in 2024:

source: Onix Systems

Of course, these are just averages and the rates will vary from country to country and company to company.

But, keep this in mind – if it sounds too good to be true, it most likely is.

As a general rule, the lower the price, the lower the quality of work, so you shouldn’t just go for the cheapest option.

And often, picking the cheapest option will cost you much more in the long run, as you’ll have to pay someone else to fix their mistakes.

That’s why your priority should be finding the right balance between price and quality and hiring a company that will add value to your product’s development.

Time zone

The last major factor you need to take into consideration is the time zone differences between you and a potential outsourcing partner.

If you manage these differences poorly, they can lead to communication delays and inefficiencies.

But, they have some benefits, too:

source: Unity Communications

So, how do you manage time zone differences effectively?

Some of the best tips you should keep in mind are:

• Set up clear communication windows
• Use asynchronous communication tools
• Rotate meeting times

But, if you’re still worried, there’s another solution – nearshoring.

This is when you hire a team from a nearby country – usually, a location with a time zone difference of 3 hours or less counts as a nearshore location.

It’s the best of both worlds – you get lower costs and access to a larger talent pool without worrying about time zones and major cultural differences.

How to outsource software product development

Now, we’ll discuss how you should outsource software product development.

Define your goals and requirements first

Before you start looking for an outsourcing partner, you first need to define your goals and requirements.

In other words, you need to know what you want to build and what you’re looking for in a potential partner.

And that starts with answering questions like:

• Which features should our product have?
• What are the long-term goals for our product?
• Do we need a full team or a couple of extra hands?

Of course, at this point these are just assumptions and they can change as you start development.

But, if you’re not clear about what you want your product to do, even the best development company won’t be able to help you.

A good place to start is setting clear goals using the SMART goals framework:

Then, you need to think about the features you want your product to have.

For example, if you want it to have AI features, you’ll need to pick a vendor that has experience building AI-powered products.

This will help you narrow down the list of potential vendors and find the right fit for your product’s development.

Check the company’s reviews

Reading a potential partner company’s reviews is a crucial step when outsourcing software product development.

Think about this stat for a second – 95% of users read reviews before buying products online.

And that’s a trivial, low-stakes decision compared to finding a company to build your software product – so, checking their reviews is a must.

They’ll give you an idea of what it’s like to work with them and if they’re a viable long-term partner.

Your best bet is checking out third-party review sites, like:

• Clutch
• G2
• Goodfirms

Most companies also feature reviews and testimonials on their website, but these are cherry-picked to show them in the best light.

source: Clutch

The reviews you find on third-party sites are much more objective and realistic,

And the best part?

Every review is verified – to post a review, users have to log in with their LinkedIn profile or business email.

And that’s why they’re such a valuable resource.

Review their development process

Another important step you should take before choosing an outsourcing partner is reviewing their development process.

This will show you if they follow industry best practices and if they’re the right fit for your software product’s development.

To start, it’s a good idea to check which services they offer other than development, like:

• Product discovery
• Quality assurance
• Product design
• Maintenance and support

This is important because having a full-service development partner is much easier than trying to coordinate multiple different vendors.

And having just the one outsourcing partner will lower your costs, too.

But, the main thing you should be paying attention to is the development methodology they use.

Agile methodologies like Scrum or Kanban are the gold standard for contemporary software product development.

Their main advantage is that they promote collaboration and prioritize quick iteration, which means faster development.

And getting your product to market quickly can mean the difference between success and failure.

Check their pricing

The last step when choosing a software product development outsourcing partner is checking if their pricing fits your budget and requirements.

We’ve already mentioned that cost savings are one of the main benefits of outsourcing.

But, there’s another major factor you should pay attention to – the pricing model they use.

When it comes to software product development, 2 pricing models are the most common – fixed price and time and materials.

Here’s what Benjamin Huskic, founder of The Quality Gate, had to say about both pricing models on our podcast, The Roadmap:

So, what’s the difference between the two?

The fixed price model is a good choice if you’re building a simple product with well-defined requirements or for smaller updates.

It does have one major drawback, though – if you have to make major changes mid-development, you’ll have to negotiate them separately and it will cost you extra.

The time and materials model is a better choice if you’re building a complex product with changing requirements.

Here’s a look at it’s pros and cons:

Also, it’s the fairest compensation model for everyone involved because it matches the actual person-hours and resources used to build your product.

And that’s why you should go with it.

In-house vs. outsourcing software product development

Pros and cons of outsourcing software product development

Software product development outsourcing: FAQs

What is software product development outsourcing?

Software product development outsourcing is when you hire a company or a team to manage your software product’s development.

How can I outsource software product development?

The factors you need to consider before hiring a company and outsourcing software product development are:

• Their relevant industry experience
• Their relevant tech expertise
• Price
• Time zone

And before you hire them, the steps you need to take are:

• Defining your goals and requirements
• Check their reviews
• Review their development process
• Check their pricing

Why should I outsource software product development?

The main benefits of outsourcing software product development are:

• Lower costs
• Easy scalability
• Access to a large talent pool
• Fast development
• Multi-disciplinary expertise

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