If you ask any famous founder how they got to be so successful, there’s one phrase you’ll never hear them say: “I just got lucky.” Sure, there’s an element of finding yourself in the right time and place to seize a golden opportunity. But most of the time, the ability to win in the market comes down to having the better technology.
So, the logical question is, how do successful companies get the right talent to build this great software?
Most successful companies foster some of that talent in-house and supplement with outside help. But there are two challenges with this:
Most of you are still looking for the best outside talent—a software outsourcing company with frictionless engagement, cultural context, speed, and agility—a partner that’s not only invested in simply “completing the project” but is committed to making sure your in-house team has the foundation and skills to propel you forward.
You may also be concerned about the changing political and regulatory risks of depending too heavily on offshore software outsourcing. Perhaps the outsourcing software development companies you’ve worked with previously have delivered great value in legacy application maintenance but lack the vision and ability to execute mission critical, must-not-fail, modern software development.
If any of the above resonates with you, you’ve come to the right place. Read this guide to understand:
Software outsourcing is the process of contracting a partner who provides software services (maintenance, development, consulting services, etc.) that would otherwise be performed internally. Software outsourcing is often mistakenly conflated with a single model of service delivery: offshore software development, where a company hires a development partner located in a lower-cost country.
In fact, the software outsourcing industry contains several different delivery models, including nearshore software outsourcing, offshore software outsourcing, and outsourcing software projects from the US. Software outsourcing services can range from the development of modern, best-in-class software, product/market fit consulting services, digital transformation services, and “keep the lights on” system maintenance.
When it comes to software development outsourcing, most organizations want the same three things: a great product, delivered fast and cheap. Realistically though, it’s hard to get all three at once. If you go for great and fast, it’s not going to be the cheapest option. If you choose cheap and fast... it’s unlikely to be the greatest quality.
So where do you go? When buyers want great and fast, they often turn to boutique consulting services. However, these options are typically too costly to use for very long.
To find long term, affordable help at scale, the alternative has largely been to outsource software development offshore. Offshore software development is the fast and cheap option buyers tend to choose when they’re under pressure to finish a project and don’t think they can hire fast enough to meet the need.
But as the pace and methodology of software development has changed, the software outsourcing business has too. Outsourcing software development to India or Eastern Europe is no longer the only option for buyers under pressure. To understand why the old software outsourcing business model has given rise to a more responsive way of delivering software development outsourcing services, we’ll look at economic forces in the US and beyond.
Over the past two decades, the software outsourcing industry in regions like India, China, eastern Europe, and even Latin America grew exponentially as western countries sought cost savings and scalable sources of talent. Software outsourcing companies in India accounted for more than half of the $185-190 billion global services sourcing market in 2017-18.
The globalization push and accompanying offshoring explosion of the 2000s proved business had an appetite for offshore software outsourcing. Because of this surge—and corresponding tech job transfers to lower-cost locations—many anticipated a “white collar job apocalypse” to hit the US.
But according to Ben Casselman of The New York Times, that apocalypse never happened.
“Companies did move millions of office jobs to India, the Philippines and other places where they could pay workers less. But those job losses were more than balanced by growth elsewhere in the economy. …Many companies discovered that labor savings were offset by other factors: time differences, language barriers, legal hurdles and the simple challenge of coordinating work half a world away. In some cases, companies decided they were better off moving jobs to less expensive parts of the United States rather than out of the country.”
Offshore software development still plays a huge role in the software outsourcing business. But growth has flattened, for many reasons.
Offshore software outsourcing can produce excellent results for certain types of work, especially well-defined programs such as global ERP implementations or 24/7 applications support and maintenance.
But as we’ve seen, it has its limitations. Here are a few examples of the problems with outsourcing software development you’ll encounter when working with a vendor located so far from you.
New York Times tech journalist Steve Lohr may have articulated the problems of outsourcing software development offshore the best:
“Companies in every industry need mobile apps and appealing websites, which can be made smarter with data and constantly updated. That software is best created by small, nimble teams, working closely with businesses and customers—not shipped to programmers half a world away.” As businesses look to improve their capabilities and execution on the innovation and disruption front, the offshore software outsourcing model often comes up short in the mindset, understanding, and competencies required to support this need. Afterall, offshoring was launched and has been optimized for mostly BAU and operational initiatives, not innovation and disruption. Lohr was writing about a new delivery model for software projects outsourcing that has taken off in the last ten years: domestic sourcing. That’s the topic of our next chapter.
As businesses look to improve their capabilities and execution on the innovation and disruption front, the offshore software outsourcing model often comes up short in the mindset, understanding, and competencies required to support this need. Afterall, offshoring was launched and has been optimized for mostly BAU and operational initiatives, not innovation and disruption.
Lohr was writing about a new delivery model for software projects outsourcing that has taken off in the last ten years: domestic sourcing. That’s the topic of our next chapter.
The new CTO of a publicly traded fintech company was doing the usual thing: outsourcing software development to India, China, Vietnam, and Ukraine. But after a year of delays and subpar results, he decided to try something new.
He contracted outsourcing software development services from a Midwest-based provider instead. Speaking to VentureBeat, he explained why he made the change:
“We’ve shifted 90 percent of our outsourced work to Michigan over the past five years. In my mind, it’s not about dollars and cents, but about value.”
In America, the process of outsourcing software projects from USA-based providers is called domestic sourcing. There are also domestic sourcing companies in the UK, Australia, and other countries serving their respective markets. In the domestic sourcing model, a company outsources software development to a local partner who delivers the services exclusively from within their home country.
US-based software outsourcing meaning, as defined in Gartner’s1 2018 Hype Cycle for Application Services:
Low-cost domestic sourcing (or "rural sourcing") is the delivery of IT services from domestic locations—in other words, in the same country, but generally not the same city as an organization's major offices. These locations are often nonmetropolitan or rural locations, but can also be smaller cities or economically challenged metropolitan areas where salaries and operating costs are attractive. Since this phenomenon is not limited to rural areas, the term "low-cost domestic sourcing" is more accurate than the colloquial "rural sourcing."
Reasons to outsource software development abound and shouldn’t surprise you. Companies often engage a development outsourcing company for the following purposes:
The globalization and offshoring explosion of the 2000s clearly proved that software outsourcing plays a vital role in many companies' development strategies. And while the software outsourcing industry still thrives today, many American enterprises are opting for a software outsourcing business model better equipped to meet the demands of the modern market.
When the desire for mobile apps, sleek websites, and other cutting-edge digital products picked up steam in the 2010s, businesses began to realize offshore software outsourcing couldn’t keep up with the rapid demand for five-star user experiences.
As explored in the New York Times’ “white collar job apocalypse" story quoted above, domestic sourcing emerged as a more responsive alternative to offshore software development.
For innovative outsourcing software projects, development leaders learned they’re much better off tapping Agile development teams from vendors who can deploy quickly and closer to home. These US-based custom software outsourcing teams have the context and training to get the job done right the first time.
Naturally, cost will be a factor in the software development outsourcing model you choose. And naturally, costs will vary by market, vendor, scope of work, and other factors. For buyers wondering, “how much does it cost to outsource software development?” Consider whether you’re really asking about cost—or if you’re actually asking about value.
While hiring US labor is undeniably more expensive than (for example) hiring an Eastern Europe software development outsourcing team, many buyers find domestic sourcing offers better value, even though offshore software outsourcing appears to come with a lower price tag.
In its 2019 Hype Cycle for Application Services report, technology analyst firm Gartner explains the apparent cost savings of offshoring can be misleading.
“The cost per hour for low-cost domestic sourcing is higher than offshore or nearshore development. However, there is strong anecdotal evidence that closer cultural compatibility, business understanding, sympathetic time zones and judicious use of collaboration tools make onshore sourced developers more productive and better value for money than offshore or nearshore.”
In the words of the fintech CTO featured in VentureBeat:
“The overhead required to get offshored teams to be productive outweighed the cost benefits.”
Domestic sourcing centers tend to locate in areas where the cost of living, and hence the cost of development, is relatively lower. What domestic sourcing providers save on high salaries in engineering hotspots—New York City and the Bay Area developers average $81K and $103K respectively, compared to $68K-$73K in Columbus, Nashville, and Kansas City—they pass back to their enterprise partners.
There are still more models beyond domestic sourcing and offshore software outsourcing. In the next chapter, we’ll explore different options in the software outsourcing market, and when to use each for different business needs.
Before you dive into the nuances of how the software services outsourcing is delivered, you first have to consider whether you need software outsourcing at all. Do you have the dedicated developers and complete resources you need to build your product internally, or do you require a partner for any part of the process? Sometimes it pays to return to the foundational question: when it comes to developing software in house vs outsourcing the work, what’s the best option for my organization?
By now you’re well familiar with how outsourcing software development works, so let’s discuss insourcing.
Insourcing refers to using business units or shared services centers within your own organization—essentially, keeping software development in-house. Insourcing takes around 6 months to a year to set up, although it will vary by organization.
Insourcing is best for work that must be kept in-house, perhaps because it is a core competency, difficult to transition, or highly confidential.
There are some advantages to developing software in-house vs. outsourcing. You maintain internal knowledge and maximum control over data protection and IP. Insourcing is a good option for a core competency that requires significant scale (min 500 FTEs).
However, setting up an insourcing model can be a long and costly process. It’s also slow and costly to exit. If you’re not in a core market, it may be difficult to attract the talent you need to develop strong software on your own—which is exactly why software outsourcing exists.
Here are some of the most compelling advantages of software outsourcing:
When you’re outsourcing software projects from the USA (aka domestic sourcing) you’re hiring services delivered 100% from the US, usually a combination of development center and client site locations. This model uses capacity-based teams, entirely outsourced, or blended with your team. You’ll work off of a defined statement of work that’s outcome-based (e.g., by numbers of transactions, users, etc).
There are lots of benefits of outsourcing software development to US-based teams:
Of course, there can be disadvantages too. Domestic sourcing providers tend to be smaller scale—so they can provide hundreds, not thousands of resources, which may lack niche skills. Not all deliver the same suite of special competencies such as Agile software development outsourcing.
In offshore software development, services are delivered from global locations, or multiple low-cost countries several time zones away (eg, Asia, Eastern Europe). The percentage of work done overseas (“offshore ratio”) typically increases over time.
Offshore software development is best suited for large, multi-country, multiphase programs with well-defined requirements and transition plans, where scale and cost are more important than speed and context. Offshore software development gives you the advantage of geographic flexibility, broad domain experience, lower-cost labor (although that is offset by higher management and travel costs), access to niche skills, and certifications at scale.
But offshore software development carries many disadvantages:
In the nearshore software outsourcing model, services are delivered from a low-cost country not too many time zones away (e.g. Latin America).
Nearshore software outsourcing is best for medium scale programs. Like offshore software development, it’s a model useful for projects with well-defined requirements, transition plans, and again, where scale and cost are more important than speed and context.
Nearshore software outsourcing also carries similar pros and cons to offshore software development. What you might save in hiring lower-cost labor, you’ll spend back in management dollars and travel expenses. You might benefit from the global scale and geographic flexibility of nearshore software outsourcing, but you’ll also face the language and cultural differences that come with it.
You—not vendors, not analysts, or even sourcing advisors—you, are the only one who can determine the best software outsourcing model for your needs.
It’s important to note here that most large enterprises employ a mixture of software development outsourcing approaches and partners for different programs of work. A multi-sourcing strategy helps you match the right partner for each initiative, and reduces the risks of over-reliance on a single partner.
You probably already know what kind of development you need, when you need it, and maybe the budget available to deliver it, and the tech stack you want to use.
But, there are some additional factors to consider when you’re outsourcing software development projects.
Before engaging with a software outsourcing company, it is crucial to first identify your organization’s core competencies. By assessing your own strengths, you can identify which areas to prioritize with a software outsourcing partner. Why assess your own strengths before evaluating a provider? Even if they use similar delivery models, providers offer different services and specialties. You’ll want to seek firms that complement your strengths, and help you address any gaps.
Nexient uses a MAP (Maturity Assessment Process) to help clients evaluate their product management, Agile, development, UX, verification and DevOps practices. These competencies form the core of our product development strategy, developed to help businesses create a healthy sustainable engine for successful digital products.
Perhaps your technically elegant products aren’t driving repeat business. This might indicate that you have a great development team but need better user research to understand what is inhibiting renewals. A software product outsourcing provider with a strong UX practice should be high on your list.
For example, Nexient specializes in a product mindset development approach, integrating the six competencies described above. As a custom software outsourcing firm, we’re a great partner for a client that wants to accelerate the pace and impact of their product development, but there are better options for clients who want to implement an SAP package.
“Product mindset development” refers to a philosophy of continuous innovation honed at maverick consumer tech companies like Apple, Google and Netflix. The product mindset approach embraces fast, flexible and highly iterative development to improve what’s already working and fix what isn’t. It employs techniques like Agile development, with its iterative cycles and feedback loops, DevOps for smooth, continuous deployment in fast-changing environments, as well as robust UX research and product management practices.
Like any contractor, your outsourced software product development resources will require a good amount of daily management time—in some cases, as much or more than hiring your own staff. Make sure you have sufficient internal resources if you need to onboard, support and manage a large group of contracted or staff augmentation resources.
Nearshore software outsourcing and offshore software outsourcing demand an entirely different kind of management expertise. In addition to the contract management and governance processes you’d expect when hiring any external firm, you will need dedicated teams to oversee these engagements—from regular overseas travel to evaluating people, processes and facilities in person, to legal and human resources review of the potential liabilities of moving work offshore. It can be complicated to sort through all the visa and legal regulations by yourself. You may have to also hire a professional sourcing advisory firm to guide you through this process.
If you’re trying to determine when to outsource software development, what you’re really figuring out is: what types of projects would benefit from software outsourcing the most?
It’s helpful to divide software projects into “mission critical” and “non-mission critical” as different types of outsourcers excel in different categories.
We define “mission critical” as the products, apps, or systems essential to your organization’s survival. Work that’s not mission critical can be interrupted, compromised, or pulled without threatening your business.
When outsourcing software development that's mission critical work:
For Agile software development outsourcing projects and mission critical work, where speed and cultural context are essential (like customer-facing products and digital business initiatives), we recommend companies choose domestic sourcing firms.
Offshore software outsourcing is not positioned to deliver excellent outcomes for mission critical work.
Another factor to keep in mind when you’re considering where to outsource software development: Certain projects call for special expertise. For instance, if you’re trying to modernize legacy systems, or build a new product from the ground-up, you may need to engage a product development company that specializes in Agile software development development outsourcing. If specific industry knowledge is critical, look for companies with a track record in your domain.
Lots of organizations hire software consulting service providers for projects that rely on third-party appraisal, or implementation to be truly successful, such as digital transformation initiatives, Agile, and DevOps transformations.
If you’re considering these kinds of transitions, prepare for a cultural shift, and the adjustment period that comes with it. In other words: you need to be ready to disrupt your internal organization if you want to disrupt the market. DevOps busts through the silos that divide development and operation teams. Agile, meanwhile, calls for more rigorous KPIs and more flexible budgets, in order to deliver software in shorter, faster increments.
While you may experience growing pains, over the long run these disruptions will bring big benefits. But you’ll achieve ROI quicker, outpace old-line competitors and increase revenue… not to mention join the league of companies like Apple, Google and Amazon that have raised the bar on user experience.
You’ve assessed your internal needs. Now it’s time to turn your line of questioning outward.
If you’re considering outsourcing software projects from within the US, finding the right domestic sourcing partner might seem daunting. Domestic sourcing calls for a different approach to team management and metrics than you might be used to.
To help you evaluate potential software outsourcing company partners, we’re sharing the questions we get asked most. Use them as a starting point to help you shortlist the right partner for you.
1. What’s your engagement model?
We provide talented engineers on demand – just name the tech stack you need. We’ll take care of all the administrative hassles like payroll and taxes, while you retain control over interviewing and project management.
Why be concerned? This isn’t a software product outsourcing partner—it’s a staffing firm!
We're a software development outsourcing partner that’s accountable for managing schedules, budgets and quality. We take a team-based approach. You’ll engage with one or many cross-functional product teams consisting of a tech lead, a mixture of junior and senior developers and quality engineers, plus scrum masters, product owners, DevOps engineers, UX and other specialists as needed.
2. How does your team stay integrated with ours, especially if they’re remote?
We’ll provide a dedicated account manager and weekly meetings with your delivery manager. We can even provide on-site resources so there’s always easy access to our people and documentation of your software when we hand it over.
Why be concerned?This provider is hand-picking a few trusted resources for you to work with, but offering little visibility into the dynamics and abilities of the full team you’re paying for. With so little interaction with your team, there’s a risk of insufficient knowledge transfer and misunderstanding of critical organizational needs.
We’ll provide full transparency and integration with your team, starting with brief daily video standups (or audio if you prefer) in which you’ll have the opportunity to hear from every team member. From the informal communication through instant messaging and other collaboration tools throughout the day, to more structured biweekly demos, retrospectives and backlog grooming, both our onsite and remote team members will be collaborating as a cohesive extension of your business. We’ll also take accountability for workshops, usability research and testing and other collaboration with your customer and business stakeholders to ensure we’re building exactly what you need, and flexing as those needs evolve.
Absolutely. We will deliver wireframes and prototypes that meet your brand standards and bring your software to life.
Why be concerned? This is a fairly limited and engineering-centric definition of UX services. If you do not have a strong in-house UX practice with capacity to support your software development project, keep looking.
We provide the full of breadth product design and development capabilities a digital interactive agency would. That’s everything from Big Idea conception, user and market research, wireframing and visual design, interaction specification, copywriting, usability testing and A/B testing.
We’ll provide strong business analysts to take ownership of the project. That means communicating with stakeholders as well as planning out the scope with an eye for the development approach, be it waterfall or Agile.
Why be concerned? This firm doesn’t know the first thing about product management! They’re confusing it with project management and trying to pass off a business analyst as a product manager. A partner with a seasoned product management offering will tell you that combining the product manager and product owner into a single role is a recipe for disaster—resulting in overlapping responsibilities and confusing expectations.
In a product context, there are really two critical roles: the product owner and the product manager. Other organizations might have one individual perform both jobs—we provide them as separate roles to maximize efficiency and quality. Our product manager will be responsible for establishing the strategic umbrella, understanding the market and TAM, getting stakeholder input and developing the financial models as well as the overall roadmap. Our product owners will translate the strategic vision and business objectives into consumable user stories that feed UX and engineering.
We can do whatever you’re looking for. We have expertise in most technologies, verticals and industries.
Why be concerned? This partner may have exactly the expertise you need, but even the largest multinational firms aren’t equally good at everything. Ask to speak to client references or learn more about past work relevant to the program you’re looking to outsource. Just bear in mind that the best ideas may come not from exact industry peers. For example, a retailer might provide inspiration for a bank, or a tech company for a healthcare company.
We have a wide breadth of knowledge that applies across industries, but we do have sweet spots in particular development technologies and domains. We would like to know more about your needs so we can share relevant case studies and references. If you need a niche skill or certification we don’t offer, we’ll refer you to a specialist provider that does.
Typical metrics include response times, incident rates, on-time and on-budget delivery, and of course, client satisfaction!
Why be concerned? These are traditional IT delivery metrics and certainly of some value. However, the focus is primarily on outputs, not outcomes. It may be hard to assess the value you’re getting from your investment from these metrics.
We start by focusing on the business outcomes you are trying to drive with your software. These might include completion or conversion rates, adoption rate, app store feedback, retention, renewals, revenue, call center volume and so on. Our technical metrics also focus on outcomes. These might be burnup and burndown charts which help you ensure you’re on track to deliver the right features at the right time, or automated test coverage which reduces the cost of software maintenance over the life of your product.
We offer low-cost delivery locations that are faster and easier to get to than offshore providers, and we’ll get up to speed faster too. We have lots of happy clients. We can help you supplement your in-house talent pool because we specialize in training rural and other non-traditional talent. Whatever technical stack you need, we have someone with the right experience. By choosing us, you’re investing in America, creating tech jobs for Americans and avoiding visa hassles.
Why be concerned? There’s nothing wrong with these responses (although we might question the scalability of sourcing talent in remote locations where there isn’t a good mixture of universities and other tech employers). But it’s up to you to decide if these factors are powerful enough.
We’re an atomic unit that delivers digital work the way Silicon Valley product teams do—the way that’s disrupted legacy players.
In this market, your best option for lifting revenue is through developing better user experience. That requires a cross-functional product team, and our very business model is organized to deliver those capabilities. That’s why we have engineers, UX designers and product owners working together every day under the same roof.
Nexient is a software development consulting firm on a mission: we think life is too short for crappy software and our clients (mostly Fortune 500 and fast-growing tech companies) agree. So, we provide custom software development services that help our clients thrive.
Nexient is America’s largest 100% US-based Agile software development firm. As featured in The New York Times, Nexient’s teams of developers, designers, and strategists use Agile development methodology and the product mindset to accelerate clients’ revenue, loyalty and growth.
Nexient has been recognized as a Gartner Cool Vendor and HFS Hot Vendor, the only US tech firm among the World’s Top 100 Outsourcers, and a featured vendor in Gartner’s Market Guide to Agile and DevOps.
Nexient’s founders were veterans of the offshore software outsourcing world. They built highly successful businesses using this model. But, they also saw offshore software development for what it was—what worked, what didn’t work—and yearned for a delivery model that could complete the needs of their clients.
They envisioned a software outsourcing business model where a 14.5 hour time difference wasn’t a reality of daily work. A relationship that was not fraught with friction from geographic and language barriers, mismatched skill sets, and experience level gaps. A partner company without attrition problems, where the best talent were always the ones that walked out the door.
They also saw the effects of the global software outsourcing market on American engineers. The meetings where US-based developers were forced to sit with their offshore counterparts to “transition,” knowing that meant their employment was coming to an end.
Then the dot com bubble burst. The hit was particularly hard for talented engineers in the Midwest who were forced to either move away from their hometowns to seek software engineering jobs or find a different career. The overall demand for software development talent continued to grow but was mostly served by offshore software development teams.
Nexient launched in the midst of the dot com bubble with a new paradigm in mind—one that was ahead of its time back in 2009.
Nexient saw that enterprises did want to hire quality software engineering talent, especially talent that could deliver emerging expertise like Agile development methodology. But they didn’t think they could afford to. The key issue was the perceived cost difference between US-based teams and offshore software development.
So, Nexient’s founders decided to invest in building delivery centers in the Midwest: where technology talent was abundant from existing industries, where the education system would continue to supply fresh talent, and where the cost of living was much lower than in the business hubs on the coast.
The model of supplying high quality software engineers, working out of a delivery center in an affordable area, allowed Nexient to grow to its first inflection point. It was then that Nexient brought in the current CEO, Mark Orttung. Mark is a start up veteran with multiple successes, including being the former COO at Bill.com, a newly-public fintech company.
Mark’s vision was to continue building on top of Nexient’s excellent software engineering roots with the new product mindset development approach. Now, the delivery focus would not just be on building technically superior products, but technically superior products with an eye for ease of use, disruption and innovation.
To achieve this new breed of software development consulting, Mark began to invest in the core capabilities needed to create cross-functional product teams. He integrated UX designers and Product Managers to work right alongside software developers.
And the market has responded. In the last three years, Nexient’s business has grown about 50% year over year. Clients are increasingly finding that working with Nexient brings better results, better market share and cost efficiency.
This is the driving force Nexient lives by today: helping enterprises become more competitive by following the product strategy playbook of successful companies before them. “Life’s too short for crappy software” as we like to say, and we’re on a mission to help our clients upgrade to software users love, one product at a time.
PS: want the secrets to making products users love? Download our free series on the Five Golden Rules every business needs to follow in order to avoid creating bad software.
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