Outsourcing Software Development for Startups: Should or Shouldn’t?

Every startup hits the wall at some point. They are two-three years into their business, are scaling nicely, and have enough seed funding to move forward with larger goals and plans. It’s an exciting time!

The “wall” that is hit, however, is that the MVP or “elementary” software solutions that served so well during these first years are no longer adequate. It is time to do what so many other successful startups do – acquire bespoke applications that serve their unique needs and help expanding the business further.

There are two options for startups as they scale:

• Hire the talent to work in-house and encumber a large chunk of expense, and continually add to that staff as they grow and needs become larger and more complex.
• Choose to outsource their software development services, conducting the careful research to find nearshore or offshore IT firms with superior reputations and that come highly recommended by others in their sector.

It will be important for any business considering outsourcing software development to take a very considered approach in exploring the pros and cons of such a move, as opposed to keeping everything in-house. Here’s some research that will help you in making this decision.

Why You Should Consider Outsourcing

Last year, Deloitte completed a major study of global outsourcing – a study that took a comprehensive look at what, why, and how companies outsource. Here are some important findings of their survey, which included 70+ questions:

• While 85% of respondents were large established companies, many with a global reach, another 15% were small and mid-sized enterprises.
• Of the respondents, 78% have successful outsourcing stories to tell and have a positive feeling about the relationships they have with their providers.
• 72% of the respondents outsource at least some of their IT functions, including software development outsourcing.

When asked for their reasons for outsourcing, the most companies named the following ones:

• 59% claim that outsourcing is more cost effective.
• 57% say that, by outsourcing some functions, they are able to focus their resources (financial and human) on the core business goals. This is especially important for startup development in the early years of an enterprise.
• 47% state that, especially with IT development outsourcing that is cloud-based, their capacity issues are resolved.
• 31% say that customized IT solutions, in areas such as customer service, enhance revenue and retention. For instance, this would stand to reason then, that startup outsourcing development for unique CRM functions can bring huge benefits.

Are There Downsides to IT Application Development Outsourcing?

Yes, there are, and many of them depend upon the vendor and, more importantly, the relationship between the client and vendor.

If a client is not intimately involved in detailed discussions and solution options, and kept in the loop at all times, a disconnect develops that may not be reparable.

Another downside is that many vendors experience a high rate of staff turnover. Obviously, this impacts a team and the efficacy of project work. It would be important to investigate the turnover rate of vendors being considered. There are new tech startups all over the globe that are marketing themselves as software development providers. Don’t ignore them just because they may be newer – they often have great talent. But take caution. Perhaps contract with them for one of the less essential needs you have at the moment and gauge their performance.

A third downside can be the confidentiality reliability of a vendor. This certainly can be mitigated with tight contracts and, again, contracting with a vendor for a project that involves less risk, as a “test” of sorts. And checking reputable references is obviously a must.

How Do You Seek The Right Outsourcers?

Exactly how do enterprises, especially startups, look for good options to outsource web application development? They follow the lead of larger enterprises, that is, they rely on their own research, and RFPs (requests for proposals). In fact, according to the Deloitte survey, 95% of the enterprises surveyed used this method.

Once proposals have been received, of course, there is the checking of references and further conversation relative to details, timelines, etc.

But, according to the Deloitte study, once relationships are established with vendors, 89% of the companies surveyed continue to leverage their relationships with those same vendors.

Cybersecurity as An Ongoing Issue

This is an issue for 64% of the respondents, and it will be important to investigate the security protocols of any vendor with which a company will share confidential information/data.

On the other hand, many companies who outsource with trusted vendors and who have long-term relationships with those vendors, do depend upon those vendors to provide security solutions for them. Custom software development for startups should provide the same security measures, and business owners must ensure that this is so.

At Romexsoft our standard procedures include signing Non-Disclosure/Non-Compete agreements whenever necessarily; using the latest security protocols for data transmission and sharing; and of course, coding the solutions using the latest security standards.

The Future of Outsourcing for Startups

Respondents to the Deloitte survey say that they are experiencing far fewer issues with vendors being reactive rather than being proactive. Most companies mentioned experiencing better responsiveness, and overall product quality. IT outsourcing specifically is among the top three sectors in which outsourcing is expected to grow the most over the next several years.

Where To Go for Outsourcing?

For many years, India and China have been the “go-to” spots for outsourcing for organizations all over the globe. The talent level has been high and the prices right. Currently, however, this is changing.

Costs in India have been increasing significantly, closely followed by Chinese providers. And many European countries are looking for “nearshore” solutions on their own continent. This is occurring at the same time that wage inflation remains rather low in many European countries, making those providers, if they are of quality, far more cost-attractive, both to the continent and to North America.

So, who are the up and comers in the software development outsourcing sector? Well, according to Tholons, an advisory company for global outsourcing, the picture is changing rapidly. In compiling data to name the 100 best outsourcing locations, there has been a definite shift. Three main regions are picking up steam in the IT outsourcing sector – Eastern Europe, South America, and Southeast Asia.
While Southeast Asia has really focused on serving clients in its region, the other two have expanded their focus to major cities all over the globe. Two factors in this growth include:

• Lots of government support and lower rates of wage increase.
• Universities focus on IT programs as places where they are placing their resources. This means a larger labor pool of highly skilled IT professionals. In the Ukraine alone, IT outsourcing as a sector of the economy has reached well over $1.5 billion with thousands of new software specialists graduating annually, all of whom also happen to speak English.

Looking at outsourcing to Ukraine specifically, it has been ranked on Gartner’s list of the top 30 outsourcing destinations since 2007 and continues to climb on that list each year. Gartner’s criteria for ranking IT outsourcing destinations include the following:

• Infrastructure
• Government support
• Language
• Economic environment
• Educational system
• Cultural compliance
• Costs
• Large skill pool
• Global maturity
• Intellectual and data security and privacy

Additionally, twelve Ukrainian IT companies have made it to The Global Outsourcing 100 rating compiled by IAOP. Other organizations have also ranked Ukraine outsourcing in its top locations for IT services, app development and gaming. Additionally, Ukraine is well-regarded in terms of newer areas of IT expertise, including blockchain development and Data Science services.

Outsourcing for Startups: Should or Shouldn’t?

Only you know whether you have “hit that wall” yet. But if you are scaling, you probably have. You need more sophisticated solutions for logistics, inventory, operations, data storage, finance and accounting, customer service and relationships, and project management that are unique to your enterprise.

Again, you have those two choices – recruit, hire, and onboard full-time employees whose salaries and benefits become a permanent new cost, or take the more cost-effective approach of outsourcing and do the upfront research and discussion to find the right development firm for your needs.

If you are ready to begin the outsourcing exploration process, Romexsoft would love to have a conversation about your needs and how we can meet them!