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Benefits of Outsourcing Software Development: Going Way Beyond OPEX Reduction

Navigating software development outsourcing

Maintaining desirable profit margins and cash flow levels when the economic environment is more like freezing cold Minnesota winter than Mediterranean springtime is one of the undeniable benefits of outsourcing software development. Concerned about turtle-speed economic growth, inflation rates still above the Federal Reserve’s 2% target, high interest rates, and geopolitical tensions, tech companies reduce operating costs through this measure.

Relying on external contractors is a proven way to shave expenses, and 76% of executives who contributed to Deloitte’s Global Outsourcing Survey 2022 admitted to doing so. Cybersecurity, app and software development, as well as next-gen technology are the top three functions handled by tech partners.

IT functions delegated to external service providers

But what motivates businesses to cooperate with third parties besides cost savings? That’s one of the questions we’ll raise in our article. We’ll also explore delivery models of outsourcing in terms of the service provider’s proximity to a client, the complexity of assigned tasks and focus on added value, and pricing arrangements. 

Understanding how difficult it might be to choose a reliable tech partner from the pool of potential candidates, we’ll give tips on what to look for. Additionally, we’ll talk about Akvelon’s expertise and approaches to implementing high-quality digital products. Brace yourself because we begin.

Benefits of outsourcing software development

The perception of outsourcing among executives has shifted from exclusively cost-cutting workaround to the opportunity to effortlessly and quickly access specific knowledge, expertise, and tools necessary for keeping up with rapidly evolving technology and, consequently, remaining competitive. Let’s dissect the advantages of this strategy, starting with the financial considerations. 

Operating cost reduction  

So, how can operating costs be reduced when cooperating with external service providers?

Hiring. The costs of recruiting one specialist (entailing talent sourcing, selection, and onboarding) average $4,683, according to 2022 benchmarking data from the Society for Human Resource Management (SHRM). Many employers, however, estimate the total cost to bring a new employee to the company can be three to four times the position’s salary. For instance, hiring a U.S.-based developer with a yearly salary of $120,000 might cost you $360,000 or more. Now imagine scaling this cost-per-hire for at least a 10-person team. 

Businesses that sign a service-level agreement with a contractor avoid these expenses because a third party is responsible for finding the right people for a project. 

Compensation. Salaries make up 44% of operating costs on average. The payroll share might be higher for IT companies, given the demand for skilled tech professionals like software developers, data scientists, and data engineers. Outsourcing allows companies to optimize their budgets by hiring professionals from countries with lower hourly rates. 

Average yearly salary of a developer

Benefits. Outsourcing custom software development also means saving a sizable chunk of costs you could’ve otherwise spent on employee benefits. The Bureau of Labor Statistics calculated that this expenditure accounted for 34.6% of total compensation as of September 2023. So, hiring an outsourced team within a country can be more cost-efficient even than having an in-house one.

Salary benefits ratio within employer costs for employee compensation

Streamlined access to expertise and technologies

By relying on external service providers, IT companies can tap into the best talent from international job markets, filling in the gaps in domain expertise and technologies of interest. 

Slack, for instance, teamed up with MetaLab, whose specialists designed the platform’s web and mobile versions and a marketing site and worked on its branding. Functionality expansion is another popular request. Within one of the assignments for Microsoft, Akvelon transformed its MDM platform into an all-in-one marketing solution by adding features like audience targeting, campaign progress tracking, and customer journey personalization.

The opportunity to draw seasoned tech experts in the shortest possible time is especially critical, given that 76% of organizations struggle to fill positions, according to the ManpowerGroup Employment Survey for Q1 2024.

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SLA-sealed deliverables

By signing a service-level agreement, a tech partner guarantees the implementation of an agreed scope of work within a given deadline. As simple as that. The service provider is responsible for finding the right specialists for the project and managing their work, including replacing employees who quit or took sick leave. What happens behind the curtains is no longer the client’s matter, as the service provider handles administrative and managerial questions to meet the SLA.

Delivery and pricing models of outsourcing

Service delivery and pricing models of outsourcing

Businesses can choose among three delivery models of software engineering outsourcing in terms of workforce proximity: onshore, nearshore, and offshore.

Onshore outsourcing. In this model, the contractor and a client are located in the same country. Businesses that value the flexibility of cooperating within the same time zone and want to avoid cultural differences that may lead to misunderstandings prefer onshore. Cost savings may be the driver: the average annual salary of a software developer from Atlanta, Georgia, is $114,284, while the one from Los Angeles, California, earns $150,776. Additionally, some countries may require additional security assessments before transferring data outside their borders or even prohibit handling certain types of data (e.g., medical or financial). So, working with an outsourcer from one’s country is feasible.

Nearshore outsourcing. Nearshore entails hiring a service provider from a neighboring country. Businesses that opt for nearshore software development benefit from convenient collaboration within the same time zone or with minimum time difference and lower labor costs.

Offshore outsourcing. In this case, the tech partner is geographically far away from the client. The drawback of this model is a significant time zone difference. Still, it’s compensated with cost-efficiency of development, effective project management, and the opportunity to engage the larger pool of skilled specialists who are hard to come by in a client’s country.

If viewed from the perspective of task or process complexity, degree of collaboration, and focus on outcomes, software development outsourcing falls under three categories.

  • Traditional outsourcing: the model focuses on cost reduction for discrete, relatively simple tasks, such as data labeling, network administration, software testing, IT asset management, etc. 

  • Managed services: collaboration goes beyond traditional outsourcing and combines cost reduction and emphasis on added value. Vendors are typically in charge of complex processes and full IT functions like hosting, infrastructure support, mobile and software development, cloud operations, and cybersecurity. Client-contractor relationships are generally long-term, SLA-regulated, and priced on outcomes and volume consumption.

  • Operate services: that’s another outcome-oriented model in which automation and data insights are used to drive client value. Customers access top specialists and benefit from their expertise in cutting-edge technology. Relashipships with an external contractor are highly collaborative, and outsourced services commonly include analytics-as-a-service, cyber threat detection and response, and advise-as-a-service.

Akvelon supports all delivery models. However, the majority of engagements with solid industry players are carried out in the form of managed services. 

As for pricing models in software outsourcing, customers either sign fixed-price contracts with a specified scope of work, timelines, and budget or engage with outsourcing companies based on time-and-materials contracts. In the latter case, the project cost is formed based on hours worked by staff and used resources (e.g., software licenses and hardware). The growing popularity of time-and-materials contracts is attributed to the ubiquity of the agile project management philosophy, which is about flexibility and adaptivity during the project lifecycle.

How to choose an outsourcing software development company?

The global software outsourcing market is a crowded place: the Clutch review platform, for instance, features more than 31,000 firms under the software development category. Therefore, it’s crucial to have criteria to shortlist potential tech partners and choose the one able to deliver an optimal solution based on your needs. Below are the main factors you can consider when doing your research.

Expertise and experience. Initial questions about a potential contractor should be about its services, industries of focus, and current and past clients. Website service pages, case studies, blog articles, news, guest posts, whitepapers, or webinar recordings usually give a clear understanding of a firm’s areas of expertise and the professionalism of its team members. Partnerships with cloud service providers (Google Cloud, Azure, and AWS) are additional indicators of a company’s proficiency in areas related to cloud computing, data science, or ML, as it must be vetted by a service provider and independent assessors to become a partner in the first place.

Reputation. Customer references are as essential as information a software development firm shares about its work. Testimonials, media mentions, and verified feedback on review sites like Clutch, G2, and GoodFirms also give insights into a company’s work ethic and technical expertise.

The main criteria for evaluating potential tech partners

Project managing and reporting. Transparency in communication between in-house and external teams regarding the project scope, timelines, deliverables, and progression is the cornerstone of getting an expected outcome. It’s crucial to inquire how the service provider manages projects and reports on work done to ensure everyone is on the same page.

Tech support. Ensuring the firm provides comprehensive tech support during development and after deployment also should be on your checklist. Ask about terms of support — availability, communication channels, and average incident response time. Additionally, inquire about whether the outsourcer provides clients with knowledge bases, tutorials, and troubleshooting guides.

Development offices. There are financial, managerial, and logistical sides to this question. The location of development offices can significantly impact the project budget due to varying wages and salaries across countries. For instance, offshore outsourcing to Eastern European countries will allow a business to reduce operating costs. A time difference of four hours or more usually leads to delays in communication and less flexibility in scheduling calls. Nonetheless, teams can overcome such drawbacks by agreeing on expected response times and meeting timeframes. Office proximity becomes a decisive factor for clients who prefer regular in-person meetings with the project team. They are more likely to opt for nearshore outsourcing in such cases. 

Companies with globally distributed teams, in this sense, have a competitive edge as they can ensure convenient collaboration for customers from more than one region.

Why consider Akvelon for outsourcing custom software development?

Akvelon has been accumulating its broad expertise and domain knowledge for 24 years, helping software-centric companies, healthcare and financial services institutions, retailers, manufacturers, and organizations from other sectors achieve goals through digital transformation.

Prominent players in their industries, such as Microsoft, Google, Protegrity, Reddit, T-Mobile, GitHub, Nuance, WebMD, and DoorDash, are among our clients.

Key facts about Akvelon and its work

Leveraging extensive experience working on client projects, we’ve developed an effective yet stress-free onboarding for developer teams. The process involves:

  • Thoroughly analyzing the client’s operations, systems, and documentation

  • Identifying key stakeholders

  • Assigning experienced team members to support newcomers.

  • Organizing workshops and knowledge transfer sessions

Akvelon teams go the extra mile not only when it comes to development but also reporting. We use our own KPIs on top of the ones documented in contracts to monitor engineering teams’ performance.

Teams complement weekly reporting with real-time insights into project progress, milestones, and potential challenges via DevOps tools. Clients also get interactive, visually compelling reports on key performance indicators, project metrics, and trend analyses. Quarterly reviews further enhance collaboration and strategic alignment.

We are committed to ensuring transparent collaboration, exceeding SLAs, and maximizing the benefits of outsourcing software development for our customers. 

Do you want a reliable tech partner with projects for Fortune 500 leaders under its belt to implement yours? Connect with us to learn more about collaborating with your future dedicated team.

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