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Outsourcing And Offshoring: What Is The Difference?

Outsourcing and offshoring software development have emerged as effective strategies for businesses to boost their tech capabilities without breaking the bank. That being said, many firms are still wondering if they are worth the effort and often face challenges when deciding which approach is best for their needs. 

The struggle often stems from a lack of understanding about the differences, benefits, and drawbacks of outsourcing versus offshoring. Thus, this article will shed light on these approaches and explore how to determine the most appropriate one for your company.

 

Modern Problems Require Modern Solutions

As technology advances rapidly, it has also completely changed the way we conduct business. Innovative startups are emerging at unprecedented speeds to meet the ever-rising demand and expectations of customers. Consequently, competition intensifies, forcing firms to swiftly adapt and evolve.

Amidst this backdrop, the global economy faces a period of uncertainty, prompting businesses to pursue extreme optimization to minimize costs. This is especially true for tech startups and IT companies, where software development cycles are becoming shorter and significantly more expensive.

Recognizing the limitations of solely relying on local resources, which are becoming costlier and less sustainable, many firms are now seeking alternative strategies to bolster their tech capabilities. This is where outsourcing and offshoring enter the picture.

More Insights: Offshore Software Development Trends in 2024

 

Definition Of Outsourcing And Offshoring Software Development

While these terms are often used interchangeably due to some similarities and overlap, outsourcing and offshoring in software development actually refer to two distinct concepts. But before we dive deeper, it is important to understand what these “overlaps” really mean. 

According to our CTO, software development strategies on a high level can be grouped into 4 different  groups based on how you execute them and the location:

Software Development Strategies

Done Internally
(Insource)
Done Externally
(Outsource)

In-Home Country (Onshore)

Onshore Insourcing
“in-house”

Onshore Outsource
Outside Home Country (Offshore) Offshore Insourcing

Offshore Outsource

 

Insourcing involves completing specific tasks within the organization, whereas outsourcing is the process of hiring a company or individuals outside the organization to complete the same tasks. 

Onshore refers to a company operating within their home country, whereas offshore refers to a company’s operations outside their home country, making it more of a geographical differentiation. 

Interestingly, when businesses refer to outsourcing and offshoring software development, they often refer to the option of outsourcing software (which can be done onshore or offshore) and building dedicated offshore tech teams. This can lead to confusion, as many businesses think offshoring software development also means offshore software development outsourcing, which is technically still correct. 

Below is a breakdown of definitions to help you identify these two approaches more clearly, avoiding any future confusion.

Outsourcing Software Development

Offshoring Software Development

What they mean

Contracting an external party to help with the software development process. Building a dedicated team in a different country to support the software development process.

Goal

  • Cost Saving 
  • Speed Up Software Development Process
  • Cost Saving 
  • Quality Control
  • Tech Talent Acquisition

Workforce

Non-employees, who work for the outsourcing service provider instead. In-house employees but located in a different country.

Location

Can within and outside home country (onshore or offshore) Outside home country (offshore)

 

Outsourcing and Offshoring Software Development Key Considerations

Different factors between Outsourcing and Offshoring Software Development

Considerations for Outsourcing and Offshoring Software Development

Cost Consideration

One of the biggest selling points for outsourcing and offshoring software development is their cost-effectiveness. However, businesses often think it’s only about the cost gap advantage compared to hiring in-house tech talent domestically. This perspective merely scratches the surface; a deeper examination reveals a fundamental difference in how their cost-effectiveness is derived. 

In terms of cost, outsourcing emerges as the ‘cheapest’ option, especially when working with overseas outsourcing service providers. Moreover, businesses typically pay on a project basis, alleviating concerns about the expenses associated with expanding in-house teams. Therefore, it is the preferred option for short-term tech projects, usually lasting less than one year.

On the other hand, the cost-effectiveness of offshoring stems from the presence of an additional dedicated in-house tech team overseas without incurring the exorbitant costs associated with hiring local talent. So businesses often go for offshoring if they need to develop and manage key tech projects that take longer than 1 year.

 

Control and Management Consideration

Quality control and project management are crucial to the software development process, ensuring that tech projects deliver successfully within the expected timeline. 

Outsourcing software development liberates businesses from the time-consuming tasks of project management and rigorous quality control, allowing them to focus their energies on core business activities. This is especially enticing for companies that do not want to be involved too much with the technical side of a tech project.

In contrast, building an offshore tech team offers increased control and autonomy, enabling swift updates and iterations without the communication delays often associated with external partnerships. Therefore, businesses can consistently uphold the quality of their tech projects to meet the highest standards, while retaining the flexibility to adapt and update as necessary.

 

Scalability Consideration

By outsourcing to external service providers, companies gain access to a vast pool of resources and expertise. It enables them to expand their development capacity swiftly and efficiently, without the need for extensive internal infrastructure.

Conversely, offshoring provides scalability by leveraging the availability of a larger talent pool in different geographic locations. By establishing offshore teams, businesses can quickly ramp up their tech operations and access specialized skills that may not be readily available locally. 

In a nutshell, both models offer great scalability; however, they differ in nature. One enables businesses to meet their tech needs without having to scale up in-house infrastructure, while the other focuses on developing their own tech capabilities through resources beyond borders.

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Here is our breakdown of the differences between outsourcing and offshoring software development:

 

Model Comparison

Factors

Onshore Team
(In-house)
Offshore-outsourcing

Offshore Team

Costs
(headcount basis)

100% – Default 30% ~ 70% – Lower wage country

Outsourcing margins

20% ~ 60% – Lower wage country

Resources

100% Internal Lesser Internal

More External

100%

Capabilities

100% Lesser Internal

More External

100%

Control

100% – Default 25% – Different country

External vendor

75% – Different country

Performance

100% – Default Short-term (PS): Better x 80%

Long-term (PS): Depends x 80%

80% – Communications loss

General Considerations

HR is a problem

Cost is a problem

Needed trusted partner

Costs of change requested

HR is a problem

Need time to build

 

Outsourcing And Offshoring – Which Model Is Ideal 

Choosing between outsourcing and offshoring is a pivotal decision for businesses aiming to optimize their software development processes. Each model offers distinct advantages and considerations that must be carefully weighed against the specific needs and goals of the organization.

 

Why You Should Choose Outsourcing Software Development

Why outsource your software development

Why outsource your software development

It is a cost-effective method that provides opportunities for fast-scaling companies at much lower costs compared to using their in-house team. Among those offshore outsourcing destinations, Vietnam is considered one of the best options due to its low labor wages, which allow cost arbitrage to happen. 

However, entrusting external parties means giving up full control over the process and results as you are dependent on your service provider to fulfill it, on their terms. If your service provider stops their support, you are also at risk of facing business disruption. For such reasons, we advise businesses to NEVER outsource their core IT capabilities – it only makes sense for non-IT companies to outsource their IT projects to a trustworthy third party. 

Additionally, service vendors are frequently evaluated on how competitive their prices are, as outsourcing is usually done to save costs. Thus, they tend to look for the ‘least-effort solution’ so they can quote a lower price to win your contract. These solutions can result in potentially disastrous long-term consequences where your IT project becomes barely functional with poor scalability. Hence, any future change requests are often charged sky-high fees (hidden costs) by the service provider. 

 

In light of these considerations, businesses should limit outsourcing to short-term tech projects lasting less than one year, ensuring smoother project delivery and mitigating long-term risks.

More Insights: The Best Customized Software Development Outsourcing Services For Business

 

Why You Should Choose Offshoring Software Development

Why offshoring is the preferred choice

Why offshoring is the preferred choice

Tech startups and IT companies are turning to building their own dedicated offshore tech teams to leverage the benefits of a broader talent pool and reduced operational expenses in overseas locations like Vietnam.

Although the offshore team operates remotely, it remains an integral part of the company, providing a higher level of control and management compared to traditional outsourcing arrangements. While this level of control may not match that of an in-house team located in the company’s home country, it still offers a significant degree of oversight and influence over the project’s direction and execution. 

However, it’s important to acknowledge that building a dedicated offshore tech team requires a considerable upfront investment, including not only financial resources but also time and effort in setting up infrastructure, recruiting talent, and establishing effective communication channels. 

It can be a deal breaker for those who only need simple manpower to help accelerate their tech projects to the finish line. Therefore, offshoring software development is typically preferred for important tech projects with longer development and maintenance timelines, typically exceeding one year.

More Insights: The Best Recruitment Services For Building Dedicated Offshore Tech Team

 

Why You Still Go With Onshore In-house Software Development

Reasons to stay in-house

Reasons to stay in-house

The onshore insourcing strategy, commonly known as the ‘in-house’ approach, is how most companies begin. Under this model, tech companies directly recruit the right talent according to their standards and needs. Since members are recruited locally, face-to-face interviews and meetings can be conducted easily without any language or cultural barriers. 

The company maintains full control over deliverables. Members are aligned with goals and can come together to solve problems quickly and efficiently. For tech companies, being able to connect and communicate easily is crucial for efficient software development.

Thus, it is a viable strategy for businesses that have the budget to invest in more aggressive in-house tech team scaling

 

Conclusion

Offshoring and outsourcing represent powerful strategies that can significantly enhance your tech capabilities. Since every company is unique, what works for others may not be suitable for you. Depending on the structure, situation, and goals of your business, one strategy may be better suited than the others. 

V-key, a global leader in software-based digital security used by banks, governments, and payment gateways, has effectively established its remote tech team in Vietnam which plays a crucial role in increasing its tech capabilities and company performance. Get the full story here.

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Interested in offshoring software development? Read on our next curated insights:  Offshore Software Development Trends In 2024

Talent JDI

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