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Software Development: In-House vs Outsourcing [COMPARISON]

Software development is hard.

As a consequence, it’s time-consuming and expensive.

But it’s vital for growth. From world-changing SaaS platforms to niche e-commerce – if you want to stay competitive, you have to use technology and innovate.

The least you can do is to optimize this process. Make sure it fits into your flexibility, time, costs and culture requirements.

At the very broad level there are two paths you can take:

  1. Hire and grow your in-house development team
  2. Outsource the whole process to a software development company

How to decide which one is right for you?

Based on our experience from working with 60+ companies of different composition, we prepared a guide that will help you make the right call.

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TL;DR

# Cost of development & time to recruit

It takes about 43 days to recruit an in-house developer, and he can cost up to $270k per year.

It takes about 1-4 weeks to find an outsourcing company, and its average rate is $50-100 per hour, per person.

# Expertise & availability

The number of developers working locally is limited. The level of experience is highly dependent on the person.

Outsourcing grants access to a global pool of talents. Companies are more likely to have extensive experience.

# Flexibility of scaling

Hiring & firing people is difficult and time-consuming. Some skills are impossible to find locally.

Outsourcing to a software development company resembles an on-demand service – you can adjust the contract freely.

# Speed of development

The speed of building things in-house is limited by the number of people on board and time to recruit.

Temporary teams can be quickly set up with outsourcing, which might translate into faster development.

# Communication

Face-to-face communication is smoother and easier, but more prone to de-focusing and unnecessary chit-chat. In-house development ensures better language and cultural fit.

Online communication creates more friction and is less natural but limits distractions. Outsourcing to other countries may cause language and culture problems.

# Management

Onboarding in-house employees requires introduction and training. It takes time and effort but is very rewarding.

Outsourcing teams have experience in getting onboard quickly, are self-organized and independent, but are less likely to treat your project as their own.

# Security

Both solutions require Intellectual Property protection measures.

Software houses are usually more anxious about neglecting security than single developers.

# Building a team in-house might distract you from the core business

When growing a business you need to choose between investing 100% of your time and effort into what brings you money and spending a part of those resources on building and managing a software development team.

Consider whether this solution is beneficial for you.

1. Per-hire cost will surprise you

43 days to recruit

Based on a report from DevKillers, it takes around 43 days to find a new developer (+ you often need to wait 3 months before they leave their previous company).

The reasons are prosaic – limited local talent pool and high competition. Both the time and process will cost you between $22k-$32k, depending on whether you are doing it in-house or using an agency to do it for you.

In comparison, outsourcing provides a wider talent pool and better chances of finding a software house with experience and skills in the area your project requires. Once you find an agency, you typically need to sign a contract and can start working right away.

Winner: OUTSOURCING

It’s easier and cheaper to contract a company than to hire developers in-house.

Multiply base salary 2.7x

Have you ever wondered what the true cost of an employee is? Based on research from Joe Hadzima, a senior lecturer from MIT, the true cost of your new in-house developer could be 2.7x the base salary.

Considering average annual salaries of IT experts, which according to Glassdoor, in 2020 shape as follows:

  • Web developer – $69,000
  • iOS developer – $96,000
  • Android developer – $96,000
  • Front-end developer – $76,000
  • Back-end developer – $102,000

If you cover all employment taxes, benefits, rent, equipment, and all non-billable hours (organization, meetings, training, business trips, team integration events, etc.), the total cost could add up to $270k per full-time developer.

Toptal made a tool to calculate the true cost of an in-house employee and an outsourced one.

Based on their research, while the hourly rate for an internal employee per hour will double if you add up all the costs, the total cost of an hour of work of an outsourced developer will increase by about 20% of his base salary.

Cost comparison of in-house development vs outsourcing.
Image source

In outsourcing, you clearly know your total cost upfront, in most cases there are no hidden fees. Of course, the hourly rate of a single developer varies from region to region.

Worldwide map of software development outsourcing hourly rates.
Image source
Winner: OUTSOURCING

The average total cost per hour of an outsourced developer is lower than the total cost per hour of an in-house developer.

2. Consider the talent pool

If you’re developing applications in-house, you might have already faced situations when you had a great idea on how to expand your product with new features or integrations, but were limited by the skills and experience of the developers you had on board.

That’s where hiring new people in-house comes in.

However, finding specialists locally might be a challenge, especially when you don’t know the technology yourself, and thus have little to no idea how to verify their expertise.

Note: some technologies can be considered niche and may be unavailable locally.

Take a look at the map below. Did you notice how the number of developers varies from country to country?

Map highlighting the differences in a number of developers in European countries.
Image source

In the case of outsourcing, when you need new competencies, you simply contract them for the desired scope or period.

If a single agency doesn’t offer all of the skills you require, you can pick and choose people from various companies to build one team. With the myriad of companies in the world, the sky is the limit in terms of technologies and the expertise they offer.

A word of advice: the fewer the technologies the company works with, the more likely it is that they have real tangible experience and expertise. The reason for this is that they’ve probably used those technologies on multiple projects with different profiles, and it’s possible they’ve already built apps/features similar to yours.

Does that mean that the quality delivered by a software house is higher than that delivered by in-house employees?

Not necessarily, but it’s usually easier to contract an experienced software house than to hire a local expert in the field (unless you have an unlimited budget and can easily outbid the competition).

Winner: OUTSOURCING

Outsourcing grants access to a global pool of talents; developers working for software houses usually have more extensive experience.

3. Flexibility & speed

If you’ve ever worked for a large organization, you probably know that getting new things done takes time.

In many cases, it takes months to start a new development project, as the in-house software development team is usually scheduled for months in advance, and creating one from scratch might be time and resource-consuming, as well as costly.

What’s more, the flexibility of an in-house team is also limited.

You need time to hire and onboard people in order to increase the size of the team. When the number of people becomes too high for a specific set of tasks, it would be wise to reduce it. However, downscaling an in-house team is painful, as you’re forced to part with your co-workers.

Thing to remember: flexibility of an in-house team and speed of in-house development are limited.

In comparison, once you make a decision to start development and find an outsourcing agency, you simply contract them, and later can upscale and downscale the number of outsourced people. You can change that flexibly as if you were using an on-demand service.

Outsorced software development can be scaled like an on-demand service.
Image source

Of course, it may take a while (sometimes you can make a change right away, other times it will take a few weeks), but it’s typically a faster and cheaper solution.

Winner: OUTSOURCING

It’s faster to set up an outsourced team than the inhouse one, it’s also easier to adjust team volume and development speed.

4. Communication

Great language and culture fit

Hiring people locally means they communicate in your native language and have a similar culture. When you outsource (depending on where you outsource to), you’re more likely to cooperate with people who don’t speak your native language and have different customs.

If English is your native language, or you feel completely comfortable speaking it, you’re lucky. Most reputable providers are fluent in English and you won’t find it problematic. However, their culture may be far different from yours.

Winner: IN-HOUSE

There are rarely any noticeable language or cultural differences.

Prone to de-focusing

One of the main reasons companies stick to in-house development is the fear of communicating with and managing remote teams.

How is communication different when we talk about in-house development vs outsourcing?

Talking face-to-face is always easier and smoother.

However, this form of communication is more prone to off-topic chit-chat, which, although it helps build relations between colleagues, might distract people from work and make them less productive.

When working with an outsourced team, you typically communicate online. Online communication, in general, generates more issues.

Key take-away: talking face-to-face is easier, but more prone to de-focusing.

There are plenty of online communicators on the market and everyone can pick the solution they find most fitting. But it’s still harder to build natural, personal relationships between team members.

On the other hand, the advantage of talking online is increased productivity. Coworkers communicating online in most cases won’t call each other specifically to talk about things unrelated to their work.

Winner: TIE

If you want close relations and natural atmosphere, in-house will be better, if your focus is on productivity, outsourcing will be a good fit.

5. Process management

You are the caretaker

When you hire people in-house, your responsibilities don’t end at hiring. You need to:

  • onboard them,
  • train them,
  • introduce them to the company’s values and culture,
  • define their responsibilities,
  • answer their needs,
  • keep them happy and occupied.

You’re the manager and they look up to you.

However, this effort comes with a reward. If you take care of your team well, it will be loyal and will treat your project as its own, and do what it can to help it succeed.

When you outsource, the external team becomes your partner, it’s their job to get on board quickly. Their responsibilities were defined upfront, their direct employers keep them happy and their needs satisfied. And it’s their task to help you, so in most cases, they will self-organize and be proactive. Holding their hands every step of the way won’t be necessary.

However, it’s less likely that outsourced developers will treat your project as their own, and get as involved an in-house employees.

Winner: IN-HOUSE

Although employees require more attention, they usually are more loyal and personally involved in the project.

Time zones can bite

Working from one place/time-zone has surefire advantages. Your employees are available at the same time as you. They get up, start work, drink coffee, eat lunch, and finish their work at hours similar to yours.

In the case of outsourcing, it depends. You can work with a foreign company and still operate in similar hours, but you can also deal with a 10-hour time difference and operate completely unsynchronised.

This map of global time zones will help you choose the right solution between in-house development & outsourcing.
Image source

Does that mean you’re destined to fail?

Of course not. It’s your software provider’s job to run procedures that will ease cooperation. What’s important to note is that you don’t need to communicate all the time to get great results.

At Brainhub, when we deal with large time-zone differences, we set up regular meetings at times most suitable for both parties, gather all the necessary information about the task and requirements, and basically get the job done while our clients sleep.

Based on our experience, when working in such shifts, the workflow might even be more efficient than in the traditional style.

However, you need to remember that not all companies have the same approach, and working with some might be problematic.

Winner: IN-HOUSE

There are no time-zone differences, and the communication is smoother.

6. Security

Let’s talk about security for a moment.

When hiring employees, most companies sign contracts and agreements to stop people from giving sensitive information away. They usually include annotations about high financial penalties.

The procedure is pretty similar when starting cooperation with an outsourcing company. Usually, the scope of the agreement is wider and penalties even higher.

What about being deceived or scammed?

Both individuals and companies lie about their skills and experience. Triple checking your potential employee or partner will protect you from that.

Remember: both individuals and companies lie about their skills and experience, always triple check your potential employee or partner.

What about stealing intellectual property or money?

It’s easier to get away with this kind of fraud when you’re just one individual. Companies can’t disappear as easily, have the well-being of dozens of people at stake, and are usually easier to hold accountable.

Winner: TIE

Both solutions come with a certain risk.

7. Business focus

I hesitated to include this part earlier in the article, as it may not be relevant for everyone. However, if software development isn’t a part of your core business, read on.

So here’s the first thing you should consider when thinking about hiring developers in-house:

Will your business benefit from building an in-house team?

If building software isn’t a core of your business, it might become an unnecessary burden.

Building a software development department in your company is like building a company inside a company. It’s arduous and time-consuming, and might distract you from what’s really important in your company.

Always consider the potential gains and losses.

And the winner is…

Unfortunately, there’s no black-and-white answer to the question which is better when we talk about in-house development vs outsourcing dilemma.

In-house development teams may have a full and exact understanding of your project, values, and culture, but may also lack specific skills in unexpected situations.

Meanwhile, a software agency you outsource to may not know your inner workflow well but provide valuable expertise in addressing current needs, and be more flexible and cost-effective.

What’s my advice?

Consider hiring people in-house if:

  • Software development is the core of your business
  • Close relations between team members are important to you
  • You foresee a stable level of work and task loads
  • There are plenty of developers in your area
  • You have a large budget
  • You’re not in a rush

Consider contracting an external provider if:

  • Software development isn’t the core of your business
  • Your workload is unpredictable or fluctuates a lot
  • It’s difficult to find developers in your area
  • You’re looking for expertise in the field
  • You have a limited budget
  • Speed is key

 

Summary table

 

Software Development: In-House vs Outsourcing [COMPARISON] 1

Matt Warcholinski

Matt Warcholinski is the COO of Brainhub (a software house building awesome node.js web and mobile apps) who loves to build startups and play guitar.

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