In-house development vs outsourcing – this is the dilemma many founders and C-level managers face while planning software development project or building a product.
This problem is becoming even more pressing because of the growing demand for developers, rising wages, and deficit of IT professionals in Western Europe:
- Wage growth in European Union averaged 2% from 2009 until 2019.
- Denmark will lack around 19,000 IT workers by 2030.
- European job market is becoming more and more competitive.
Indeed, It’s these problems that give reason to why IT outsourcing has been a major boon for companies in Europe.
Denmark is among first to recognise this problem, forecasting a lack of over 19,000 IT workers by 2030.
Based on current grad rates, and putting this into layman’s terms, an additional 19 ‘graduation years’ of Danish IT students will be required to fill this gap.
As a result, outsourcing software development may be an answer to some companies seeking talents and financial viability. Others, on the other hand, will decide on building an in-house team. In this article, I’m about to show you the pros and cons of both approaches.
Here’s what you will learn:
- What is software development outsourcing?
- IT outsourcing challenges of today: manageable and tougher to manage challenges
- IT outsourcing merits in SMEs & MVPs
- In-house development challenges
- In-house merits
What is Software Development Outsourcing?
Outsourcing is contracting services to an outside supplier. It is beneficial for many reasons, within telecommunications and manufacturing. Most recently, for instance, it’s being favoured by businesses in the IT industry.
Software development outsourcing is the practice of hiring a third-party contractor to provide programming services. It may include supporting parts of the project or the entire software development.
My colleague, Rene Koelblen, explains outsourcing and the degrees of practice in greater detail. His article is an insightful read into choosing between nearhoring vs offshoring it outsourcing.
IT Outsourcing Challenges of Today
How safe is IT outsourcing? Certainly, it has its pitfalls, but these can be kept shallow.
For instance, the time difference between Copenhagen and Warsaw is non-existent. For UK companies seeking to outsource to Europe, a one-hour change makes scheduling conference calls a minimal hassle.
Cultural differences persist between nations. This has an impact on:
- working hours,
- break times,
- holiday periods,
- as well as workplace relations.
Keep each one in mind and make sure to understand the subtle disparities between each European country.
Language is also as important as ever. To prevent misunderstandings between the client and the software house, companies are requesting that developers speak the company’s local language. In some cases, companies may find initial difficulties, particularly for less-spoken languages.
Our senior project manager, Marcin Skoczylas, wrote the entire article on how to manage your project with a remote team. Make sure to read it, if you’re interested in outsourcing IT projects.
Moreover, when choosing your next outsourcing destination, keep statistics and news headlines in mind. Political and economic instability is rife in the most unexpected places. Therefore, it’s important to assess the hard facts.
Trust is key.
And maintaining that trust is central to a brand’s integrity. For this reason, look for highlights in major publications, like the Wall Street Journal, or the Financial Times. They feature lists of top companies, such as FT 1000, which can help you search for an outsourcing partner.
Industry awards by the major consulting agencies can also help understand a brand’s standing – think Deloitte, Ernst & Young, or PwC. The most promising companies are assessed and awarded in self-titled rankings, such as the Deloitte Fast 50.
Of course, while there is no set metric determining levels of integrity in a brand, it’s important to look for the best association.
Did you know?
As part of the TenderHut Capital Group, SoftwareHut has been listed 2x on Deloitte’s Fast 50 CE, 2x on Deloitte’s Fast 500 EMEA, and 2x on FT 1000 list.
Respect for intellectual property is a sacred issue today, since information spreads fast. However, the same principle applies – the enforcement of Non-Disclosure Agreements (NDAs), as well as legal mechanisms ensuring the protection of property.
Believe it or not, some countries fare much worse in this area than others. I recommend banking on a company with a good track record in respecting the rule of law, and intellectual property.
IT Outsourcing Merits in SMEs & MVPs
In fact, outsourcing helps carry some weight off your shoulders. It’s akin to ‘hold this box for a moment, while I flip this switch’ – imagined on a grander scale.
In the short-term, outsourcing can be an incredible relief from busy work that happens ‘in a flash’. Most importantly, this helps companies focus on the core aspects of their business.
For this reason, start-ups benefit just as much. From a cost perspective, outsourcing IT development is an ideal solution to adopting a Lean IT model. By enabling a cost-effective workforce, start-ups with limited seed funding can find early reliable pillars to their Minimum Viable Products.
The Fundamental Problem
The term ‘permanent talent’ is becoming an oxymoron. On the one hand, companies look for on-site workers, providing consistent quality IT development. At the same time, that worker may be highly-skilled, so a cost for the company is higher, particularly in high-income countries.
But not all start-ups situate in population centres. Regional metropolitans seldom offer the calibre of talent and expertise that’d be otherwise available in large cities.
Developers are a skilled class of people. And as universities offer increasingly niche IT degree varieties, even graduates are among the most competitively-paid entry-level employees. Indeed, this situation paints a highly-lucrative job market for prospective IT developers.
Specifically, it’s going to be expensive. That’s unless you can leverage your workforce like larger companies. This leaves smaller companies exposed the stinging winds of change. Market forces are as strong as ever – and wages will continue to rise, particularly in this very competitive job market.
Tight HR budgets, in fact, pressure the need to provide quality. Barriers to entry into the marketplace is tougher when adopting a traditional hiring model. Here, smaller firms may experience competitive disadvantage, if playing by the same set of rules as larger firms. Should they choose to do so, their end-product will ultimately lag.
Respective of costs vs. product outcome, a cost-benefit analysis will likely rule contrary to the benefits. A smaller in-house team is unable to compete with seasoned teams inside larger firms, which exert scale economics on development tasks.
In-house development is expensive. Consider wages, HR budget, the time to find top talents, and the back-office costs before you decide on building your own team.
Finally, when playing by numbers as a smaller company, odds are stacked against you.
In-House Merits: Large Companies
Of course, retaining in-house staff is a sound long-term strategy. Long-term projects and developments would benefit from an in-house IT developer. Very often, they have intimate knowledge of company operations, the local language, as well as culture, particularly for already-established organisations.
This strategy would be otherwise ineffective for ‘quick entry-to-market’ product times, which would require only per-project staff. For this purpose, only a ‘seasonal’ approach of hiring developers is necessary.
Of course, hiring in-house sometimes comes down to a simple sentiment. Some companies would rather have staff ‘close-by and on-site’. This is understandable, as organisations seek a more hands-on approach to IT.
Larger enterprises would maximise full-time developers, as talents would always be put to effective use. In the case of smaller upstart organisations, the initial need for talent in-house may be less pressing on such grand a scale.
In-House Development vs Outsourcing: the Verdict
Salaries for IT-centred jobs across Europe are rising considerably and with a remarkably simple formula. This supply-demand perfect storm is a lucrative career path for some and expensive investment for others.
- Of course, in-house IT development quality is not based upon in-house placement, as such an endeavour takes time to implement and verify. Smaller companies would need to invest more time in finding the exact persons to suit their needs.
- Outsourcing is a valid solution to address IT voids and can be very cost-effective. This does not mean it is ideal for all involved. I recommend looking within and recognise the company’s needs and requirements of the customer.
- However, in the short term, in-house is out of the reach of smaller companies. As far as solutions go, the best bet would be to outsource in the immediate term.
Thankfully, this has never been easier.
Tools are readily available, to help link SMEs with IT developers offering tailor-made solutions. Emerging companies would do well to examine regions boasting world-class IT infrastructure, with similar work cultures to their home countries. Such is the winning formula helping to determine the premium quality of IT staff.
In all, as Western Europe begins to lack the availability of IT staff, the dilemma will grow.