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Definition of Outsourcing

To get a better understanding about Outsourcing let’s begin by taking a deeper look at the concept. The term originated in the 1980s and combines the words “outside”, “resource” and “using”. It means to obtain goods and services from an outside supplier. In other words, a company uses an external resource, such as remote developers, to handle specific tasks that can vary from a defined business process to an entire IT project.

In today’s competitive world, businesses can use Outsourcing for many reasons, such as boosting brand visibility, accessing global resources, cutting operational costs, increasing efficiency and pursuing innovation. Outsourcing is no longer just a cost-cutting tool, but a way to reach expertise that would not be accessible by other means.

Companies need to better understand Outsourcing to let go of outdated prejudices, and tap into its full potential. When done correctly, Outsourcing provides multiple advantages, to include:

  • Cost savings
  • Increased efficiency
  • Variable capacity
  • Higher focus on core business
  • Access to unique skills and resources
  • Accelerated time to market
  • Reduced investment in internal infrastructure

Types of IT Outsourcing

Did you know that there are dozens of types of outsourcing? Over the past decades a large number of different models has emerged, such as the IT sourcing map by the University of St. Gallen, which categorizes IT sourcing in 7 dimensions.

IT Consultancy Graph

In the above diagram, IT sourcing is divided into categories that analyze the term through different lenses. The most popular way of categorizing outsourcing is by location, so let’s dive deeper into some of these terms.


Onshore can be described as outsourcing business operations and projects to a company residing in the same country as the one hiring. Since both are situated in the same location, this type of outsourcing offers few cultural differences, less communication barriers and the possibility to work within the same time-zone.


Nearshoring refers to developing projects in another country, but at a closer location. It combines the benefits of onshoring, such as proximity and small time-zone difference, along with the cost effectiveness of offshoring. A key point to remember is that nearshoring can yield higher costs than offshoring, depending on where the client is based, so be prepared to adapt budgets accordingly.


Offshore is a strategic practice where a company hires a third party or individual from another country, of sizeable distance, to perform tasks for them. When choosing to offshore, companies often look for countries that can provide lower costs as a result of cheaper labor fees and production. In addition, offshoring is also undertaken to access a global network of professionals with skills that might not be so widely available in the client’s location.


Onsite is a mix of insourcing, which means assigning a project to a department within the company, and outsourcing. With onsite the outsourced professionals develop their work inside the organization, which gives them the opportunity to be integrated into the client’s business culture. In other words, the hired team performs the tasks at the client’s location, making use of their infrastructure and connecting directly with the other departments of the business.

Bonus Tip: Companies that need to find skilled personnel qualified for a particular task, can use the services of Outstaffing suppliers. They analyze and select outsourced professionals for specific needs, saving time and effort. Outstaffing suppliers usually have a network of verified professionals, making it easy to find the right talent for what the business needs.

When Outsourcing is recommended

1 - When you need a specific expertise

If finding professionals with a certain skill can be too big of a challenge or if the required skill is not needed after the project is completed, then outsourcing can be a good alternative to hiring. It opens up the company to a global pool of talent, allowing it to reach qualified professionals in order to fill knowledge gaps. The specialized outsourced team contributes until the project is complete and avoids officially increasing the employee headcount.

2 - When resources are limited

A company should give priority to its core business and associated activities that occupy most of the company’s resources. In situations where a business needs to take on a project and does not wish to invest in expanding an IT department that might not suit their needs in the long run, outsourcing should be considered. With the right software agency, not only do they have the advantage of partnering with an experienced team tackling similar projects, but they are also not forced to change their team dynamics just for one project. A specialized team tackles the project, while the client can focus their resources on more strategic demands.

3 - When it is not the right time to hire

HR professionals know that the process of finding the right people can be frustrating and time-consuming. When deciding if projects are worth tackling due to hiring needs, outsourcing can be a viable option. It allows companies to access new talent while avoiding the complications of hiring, such as the recruiting costs, onboarding time, incompatibility in skillset and more.

When Outsourcing is not recommended

1 - Do not Outsource your core service or product

Never underestimate the danger of outsourcing your core business. The essential part of your company should be done by you, otherwise you risk losing control over your product and even crucial business knowledge. If you have no other choice but to outsource, it is important to find and select the right strategic partner with whom you can entrust your business.

To avoid issues, look for partners that offer clear processes for collaboration, especially when it comes to tracking development and communicating progress. It is important to establish the communication channels and frequency of communication to discuss progress. This level of collaboration is key to identifying and mitigating potential risks that could jeopardize performance, and allow the team to remove roadblocks more effectively.

2 - Do not Outsource just to cut costs

Even though outsourcing provides cost reduction opportunities, in some instances, it can be more expensive than expected. Unforeseen costs can include project management and communication activities.

The client must decide which pricing model is the most financially fitting for the outsourced services and make sure those conditions are defined in the contract. Pricing models vary depending on the type of service and its provider, but traditionally most outsourcing contracts have been billed according to time and resources allocated.

Why projects fail

The CHAOS report 2018 by the Standish Group 1 analyzed over 50,000 IT projects and found that only 33% of them had a successful outcome. Others were not delivered on time, on budget or did not fulfill the client’s expectations. Let's go over some of the reasons why outsourced software projects fail.

Lack of people

Company structures have never been leaner. It is unusual for organizations to have people available to take on any new project that pops up in the pipeline. If the workload is higher than what they can handle, performance suffers and projects are hardly delivered according to expectations.

Incompatible company culture

Especially with outsourcing, hiring the service of an incompatible agency can jeopardize the entire outcome of a project. When the supplier and the client do not share at least some cultural traits, the collaboration process does not run smoothly and disagreements often happen. Some companies focus on speed of delivery, while others prioritize maximum quality. Some organizational structures are entirely hierarchical, while others bet on a flat model. Be mindful of these differences, because they might create friction in collaboration and get in the way of optimal results.

Wrong skills

If a project requires skills that are not related to the core business of an organization, usually the IT department does not have the appropriate knowledge to deliver it. In those cases, it might be a challenge to find professionals who possess the required expertise. In fact, a survey conducted by Harvey Nash and KPMG2 revealed that accessing skills not available in-house was one of the top reasons why CIOs choose to outsource.

Poor communication

A research done by the Project Management Institute (PMI)3 found that, in 30% of all projects, communication issues are the main contributor to project failure. And in more than half, it had a negative impact on project success. The impact of poor communication is something most companies know about, yet it is still taken for granted by many. Throughout many IT projects, communication plans continue to be disregarded and stakeholders are not engaged in the process.

  1. The Standish Group (2018). CHAOS Report: Decision Latency Theory: It’s All About the Interval. Retrieved 2020.
  2. Harvey Nash & KPMG. (2017). Harvey Nash / KPMG CIO Survey 2017. Retrieved 2020.
  3. PMI (2013). The High Cost of Low Performance 2013. Retrieved 2020.

Experience matters

The advantage software agencies have over freelancers is not only their experience in working together, but also their history of solving problems efficiently, faster and with higher quality. Projects related to a particular field of expertise, such as an industry or technology, can benefit greatly from a team with previous experience dealing with similar projects.

When looking for a software company, you should seek the ones that possess a background which matches your project’s characteristics. Prioritize options that have expertise in your industry, are knowledgeable in the technologies you want to apply and also have a proven track record of successful project outcomes. When you select a partner that checks all of these boxes, you make sure their experience is relevant enough to boost performance.

Company Culture fit is key

In terms of company culture, the client and service provider may have different ways of perceiving speed, decision making and organizational structure. First and foremost, you must understand your own company culture. Once that is determined, you should make sure that the company you want to collaborate with shares some of your traits.

For example: Startups usually have organizational structures that are horizontal, also known as flat organizations, allowing for more independence and speed. If this type of company partners up with a business that leans towards a vertical structure, issues are likely to appear. Vertical businesses are more dependent on managers to control and approve work, which adds bureaucracy and time to the processes.

Bonus Tip: The study called Competing Values Framework by Robert Quinn and Kim Cameron, can help to better analyze company culture. According to the authors, company culture could be defined in two spectrums,

Organizational focus and flexibility. Organizational focus ranges from internal to external. Internally focused company culture pays more attention to internal processes, systems, and employees. An externally focused organization typically emphasizes external forces, such as market share and customer experiences.

Flexibility ranges from stability to flexibility. Stability-oriented businesses prefer rules and hierarchy. On the other hand, organizations that value flexibility rather prefer dealing with innovation and diversity.

The Technology-Stack must match the job

The decision to adopt a specific technology for a project is going to influence your application’s performance, scalability, development speed and how easy it will be to find a software agency. When choosing a technology stack, there are some factors you must consider:

  • What is more appropriate for your project: Defining what works best for your intended purpose should be the first step to take. Some types of applications demand a specific technology, because it makes the product better and easier to develop. With this in mind you can approach agencies that have knowledge and experience in developing the technology you need most.
  • Current trends: New technologies are created constantly, while others fade into obsolescence. It makes sense to keep current on the latest trends, to avoid committing to something that might become outdated.
  • Available developers: Especially when your project is running on a tight budget this factor should not be ignored. If you are looking for a technology that is not widely accepted or popular, you might find higher prices. It comes down to supply and demand: having to access a small pool of developers with a particular skillset can result in higher prices.
  • Nailing down the most fitting technology-stack for your project gives a clearer direction of which software agencies will best suit you. Investigate the portfolio of past projects to understand if a potential partner has relevant experience to develop the technology you need.

Every business has its own strategy

Every client represents a different value to a company. Some can help you grow your business, opening doors to different verticals and markets. Others might bring in money through easy and simple services.

Just because you are someone’s client it does not mean that you represent a great value to that business. Your value depends mostly on your project and whether it fits their company strategy and long-term goals. If this is the case, they most likely will treat you with more urgency and care.

Example: Let’s say you need to develop an application for the construction industry, but you settle for a software company that specializes in finance. The company focuses on medium to large projects, but yours is rather small. Chances are that your project loses priority in comparison to others that are more aligned with the strategy of the company. In most cases they will do a good job and deliver what was promised, but the level of commitment might not be high. On the other hand, they would give special attention to projects that could help them showcase skills related to the industries and project types they specialize in.

Proper collaboration leads to success

The way collaboration takes place during a project directly impacts the ability to reach the desired outcome. It can speed up the development time, help to eliminate potential bottlenecks and ensure the project hits its targets. While in the process of selecting a partner, it is difficult to foresee how the collaboration will be managed, but there are a few aspects that can be checked to minimize the risks of having a bumpy collaboration.

  • Current processes: Understand how a potential software company usually manages the collaboration. If they use a specific software to track the progress of activities, is it compatible with the systems you have in place? Do they work with a methodology for managing the project, such as agile or waterfall? Make sure that the collaboration process that the company uses are suitable for you.
  • Frequency of check-ups: Figuring out how frequently the partner will touch base with the client is also important. Both parties need to be on the same page in order to avoid surprises and to be able to deal with issues in a timely manner. But be careful not to micromanage. If there are too many check-ins the development speed can be compromised and the agency might get frustrated.
  • Flexibility to change: Having well defined project requirements and a development roadmap is a must. But very often the project needs to change course in the middle of development. New features are added, some are removed and the initial plan needs to be updated. Having the flexibility to deal with these changes is also something to look for in a software company.

Vendor selection process

The process of hiring a software company can vary from business to business depending on the internal processes in place. Usually, there are many steps to perform and documents to exchange, which can be overwhelming. Also, remember that large corporations tend to have longer and more complex processes, so plan carefully ahead to ensure time efficiency.

1- Identifying requirements

It seems simple, but in order to get what you really need, you first need to identify what that is. A proper project specification should contain the description of the project and objectives, a list of all the features, user stories that describe each use case, design mockups, and wireframes to better illustrate the concepts and the tech stack that should be used. By adding more information to the document, the service provider has a better chance of delivering the client’s expectations.

2 - Finding and selecting suppliers

Unless you have a very specific need, there are a million different companies that could provide the service you are looking for. One way of finding suppliers is through recommendation, but the problem here is that you are limited to the past experiences of someone else and you risk missing out on a better service provider. Another way would be to search online, but in order to avoid low-quality companies, you should look at services that screen potential suppliers and can give you a better insight into qualifications.

3 - Requesting and evaluating quotes

After you have found the right supplier you need to get a deal for the right price and delivery terms, so they work for your company. Companies do not have a standardized format for the calculation of quotes, which makes it even harder to compare multiple offers. You should request quotes that specify exactly how the billing is calculated, how many hours should be necessary for the development, and the hourly fee they charge. This creates a better basis for comparing offers and makes it easier to select the best deal.

4 - Negotiating

You must come up with a deal that balances both your needs and desires. Then, you will eventually need to write up a contract to officialize the terms agreed upon. The price must be fair, but pushing for too low prices is not ideal, because it might affect the commitment level of the software company and jeopardize the quality of the final product.

5 – Service Level Agreement (SLA)

An SLA is a contract between the IT services provider and the client which specifies, usually in measurable terms, the services that are going to be provided. The document is used to measure and control the performance of the supplier. The SLA must be well-drafted because if the end-product does not match what was specified in the agreement the client can charge the supplier a penalty fee.

6 - Delivery

Defining the delivery process is important to align expectations and agree on communication channels. This step needs to be thoroughly planned in order to avoid delays and unforeseen costs. Creating a roadmap with defined milestones is a good way to keep track of development and identify potential roadblocks.

7 - Performing a quality check

Unfortunately, your work is not over when the project is delivered, you will also need to make sure the product is up to standard and of the quality it is supposed to be. Having a checklist with all the features is a good way to make sure that all essential parts of the product are verified. Using a group of beta testers that will use the software is another great way of identifying bugs that require fixing.

8 - Analyzing results

The last step is verifying if the project was worth it. Did everything go as planned or will some things need to be changed next time? Go back to the initial plan and identify what worked and what did not. Through this exercise a company can learn from its mistakes and apply the insights for future projects, creating a cycle of continuous improvement.