In-house vs Outsource Software Development – The CTO Dilemma
Every software product company, large or small, has to decide how to optimize its performance and processes by choosing development teams for its projects. And this is where many CTOs might opt for the least effective pick since development is just the tip of the iceberg of how the project may turn out depending on the involvement of the tech team. The most popular options are in-house teams (usually office-based developers who are part of the company/startup) and outsourced developers (individual freelancers, IT consultants, software vendors, tech partners). Yet, who should the CTO choose?
The answer depends on many factors. The CTO should consider the financial side, the product’s features, the marketing strategy, the desired involvement level, etc. In this article, we’ll discuss these factors in detail, describe the difference between inhouse and outsourcing development, and list the benefits and disadvantages of both so you can make the right decision. Let’s start with the difference between the two and how each of them might affect the entire business.
The Difference Between Inhouse and Outsourcing
While both in-house and outsourcing teams/professionals work on the same thing – developing a software product – they differ drastically in their approach towards the company, its business model, and the end goal. Let me explain.
The In-house Development Model
The in-house team is an integral part of the company. The team members know all about the company’s internal processes, strategies, and the market they’re developing products for. The internal client principle is what makes every team member well-organized, motivated, and deeply involved in the project. Furthermore, the model offers the benefits of high flexibility, simplicity in organizing an agile workflow, and decreased response times when something needs a quick fix.
- High level of responsibility;
- Quick error correction;
- Personal devotion to the process and the end product.
- High investment, often with no returns (especially if it’s work on an MVP and not the ready-to-market version)
- Potential lack of specific niche knowledge (someone with skills/experience in fintech will provide a better product within a shorter time than a developer with expertise in gaming software)
Read more: How to build a fintech product successfully
Outsourcing Development Model
Outsourcing might be a perfect solution, since it allows you to hire a team/specialist to tackle a very specific task within a certain time. This works well when you have a one-time project and the product or service won’t require 24/7 maintenance.
- Cost-effective and tax-efficient
- No need to rent an office and equipment
- Recruitment available worldwide
- Project-orientedness over product-orientedness;
- Hired help may have poor knowledge of marketing nuances;
- Few possibilities for effective management and control
I’ll discuss the pros and cons of both models in detail later on, but you should know that they’re not the only options. There is a golden middle solution that puts an end to the inhouse software development vs outsourcing battle: a tech partnership.
A tech partnership is a type of outsourcing that includes the benefits of inhouse software development (like high involvement and management capability), minimizes the risks associated with classical outsourcing, and is a perfect solution money-wise.
Companies that position themselves as tech partners are usually better skilled in the niche industries (fintech, delivery, travel, etc.) and are well aware of market trends, customer demands, and competition.
But before you agree that tech partners offer the best of both worlds and are the most efficient options on the market, let’s move back to the in house versus outsourcing discussion.
NB: Hereinafter I’ll distinguish the terms ‘software vendor’ (the classical outsourcing model) and tech partners.
What Outsourcing Really is: Types and Opportunities
When we say “outsourcing”, what we often mean is different levels of involvement, commitment, technical expertise, and responsibility. Let’s review the three key types of outsourcing arrangements and what the differences among them mean to you as a customer.
When setting up a new team, the person responsible for the technical implementation – the CTO – has to make a crucial decision that will define the company’s future. Simply put, the CTO must choose between (1) staffing an in-house team, and (2) outsourcing the work to an external team. However, it’s not all about choosing between inhouse or outsource development. Instead, it’s about the possibility to partner according to different conditions, terms, and levels of commitment and trust. All this defines whether you should work with a vendor or a tech partner.
In this part, I will briefly describe each of the partnership types, their challenges, and when it’s best to opt for one or the other. I will conclude by explaining how working with a partner can be similar to having an in-house team.
Working with a Software Vendor
Outsourcing to a vendor means hiring a team for a specific task. Such companies have solid, cohesive teams and, as far as I’m concerned, are best at delivering fully functional products. Software vendors, also called software houses, assume full responsibility for gathering the requirements and managing and delivering quality software. Outsourcing to a software house presupposes giving them the requirements specifications and letting them define their approach, the tools to use, and the implementation of the software. Such a partnership excludes most micromanaging activities because you’re hiring a team, not a few developers – and in most cases, a team consists of business analysts, software developers and testers, and project managers. Vendors carry full responsibility for the quality and performance of the parts they develop. Here’s why.
Besides the well-known issues associated with software vendors – like the risk of data theft or cultural issues – the one I would like to emphasize is the level of engagement in your business. A vendor will do what you ask them to do, even if the requested solution is not optimal or doesn’t meet industry standards or best practices. This is not because they don’t care, but because there may be more effort put into achieving the goal stated in the contract than into achieving what the market demands. However, companies have been working with software vendors for decades, and by now, we’re well aware of how to mitigate problems that might arise.
Outsourcing software development to a vendor is not a bad solution, though. It just works best when you know exactly what your end-product should be. If you’re uncertain about the desired outcome or need expertise in matters besides the implementation of a software product, I suggest you consider a tech partner.
Working with a Tech Partner
A technological partner is also a service provider, just like a software vendor. Cooperation with a technical partner is often defined as “CTO as a service”. This reflects the difference in approach to solving business problems in comparison to the software vendors, as well as the level of engagement the tech partner has in your project. Unlike a vendor, a tech partner or outsourced CTO can challenge your ideas and stand up for their suggestions and approaches to solving this or that problem. Partners can also manage other vendors — by setting up processes, strategy, and frameworks – and provide technical advice on how to configure a particular part of the resulting application.
Imagine there is a system being developed that requires a phone number input. There are different ways to implement this feature, and one of them is shown in the picture above. Based on criteria like your brand positioning, the UX flow, current UI trends, the tech stack, and so on, a tech partner is more likely to suggest building a drop-down list with a country flag and code that detects the user’s country and provides input validation. With a plain outsourcing vendor, there are no user experience guarantees unless you specified them upfront.
While a technical partner’s solution may contradict what you had initially hoped for, they will always have a supporting rationale for their idea.
Unlike a vendor who is interested in project success, a CTO as a service for startups aims for product success. Because if your MVP is successful, you will come back to the tech partner after new investment rounds and will continue to work on the product with them. In other words, the tech partner has a long-term interest in your success, because it will inevitably make them more successful, too.
In addition to communicating the business goals, time frames, and resources, working with a tech partner presupposes giving them communication access to the various departments of a startup (marketing, communications, legal, etc.), because a well-developed application is not the only predictor of a startup’s success. More important, a partnership might require you to give them access to your data. Sometimes this can be scary, but no tech partner can come up with a strategy or improve a business unless they have full access to that data. I am sure that had Slack not trusted MetaLab with much of their strategic decision-making, the application would not have received the universal acclaim it has.
Hiring a Сonsultant
A consultant is a mature software development company that provides services to startups to help them with challenging activities, from setting up their own processes to optimizing the team’s velocity, to increasing the feedback loop. It follows that a consultant is not a team that can do the development for you, but can accelerate your team.
Consultants are best at three things:
- Validating your business idea with a fresh, objective opinion based on their experience in the field
- Setting up the processes in the development department, as well as the business processes
- Estimating the cost of developing the MVP, since they’ve done it before and have industry data and insights.
Read more: We explain what is closer to the prototype MVP, MMP and MLP
Choosing In-House Development: Advantages and Disadvantages
Now that we’ve covered the differences between in-house and outsourced development, it’s time to evaluate their strengths and weaknesses. A CTO must take these into consideration, especially if your company is just getting started.
The Pros of In-House Development
- Reliability. You can be sure your workers will test every tech solution before choosing the final one. Why? Because that’s their job – to come up with the best solution given the resources at their disposal. You don’t micromanage them, don’t choose the approach, but focus on the end result rather than on task accomplishment.
- High involvement level. Being able to perform ‘tailored’ tasks is one of the biggest in house software development advantages. It helps you gain expertise in a certain field, and makes the specialists very knowledgeable about the market and willing to run as many tests as needed to do their best.
- Product-orientedness. The end goal is the product, not the process.
- Safety. The in-house network and technologies have better security and keeping it safe is in the interest of every team member.
- Zero trust problems. Being able to track, control, and communicate right away frees you from having to worry about a lot of things.
- Convenience. You can fix the problems right after they occur.
- Team spirit. This is not an empty phrase, since collaborative effort goes a long way to foster corporate culture, work ethic, and commitment.
- Talent development. As your business evolves, so do your specialists, and this benefits both the company and them.
The Cons of In-house Development
- High recruitment/staffing costs. Think of thousands of dollars here, both when asking an agency to hire a specialist and when deciding to fire him/her.
- Office set-up. Hardware, software, rent, licenses, insurances – these are only the start of the Great Expenses story.
- Operating and administrative costs. These include medical coverage, insurance policies, and other social guarantees you should provide (they vary in type and cost from country to country).
- Possible lack of skills in certain fields. In-house developers are rarely universal soldiers, so teaching them how to deal with a particular problem may be beneficial in the long run. But it’s definitely time-inefficient in the short run.
Choosing Outsourcing Software Development
If both classical outsourcing and in-house development aren’t what your project needs, it’s time to consider the mix – hiring a team of tech partners. So, what are the outsourcing software development pros and cons?
The Pros of Outsourcing Development
- Cost-efficiency. Tech partnership costs less than an in-house team but has a lot of the features of in-house teamwork and approach, so you pay less for more than what you’d get with classical outsourcing.
- In-house involvement. The tech partners are interested in the end result – the product – which is why they will study your business, competition, and test as many options as they can. This is what their business product is.
- Transparency & control. You can inquire about the technology the tech partners use and ask for ad-hoc reports to track progress and see if anything needs a change.
- Safety in information processing. Tech partners know the price of working in a secure environment, just like they know that this is what differentiates them from traditional outsourcing. So you can rest assured that the privacy and security measures were in place even before you contacted them. And this is included in the invoice.
The Cons of Outsourcing Development
Perhaps the only downside of hiring tech partners as outsourced developers is its higher cost compared to traditional outsourcing. However, you have to keep in mind that this is not going to be one person doing it all at half-strength. This will be a team of experts in the niche with a deep understanding of the market and its peculiarities.
Knowing the general differences, characteristics, pros, and cons of every collaboration is necessary to seeing possibilities and options before you spend a cent. But what can be more descriptive than an example? Below we’ve left a few guides and pointers to help you make the best choice.
What Do You Really Need: In-House Team or a Tech Partner?
Now that you have a clear idea of the advantages and challenges of both approaches to dealing with the tech stuff in a startup, let’s go over a few situations and suggest when you should opt for in-house development vs. outsourcing.
Your Product is Your USP
If the technology used in the product is your value proposition – the main benefit of using your product – then you’re playing a long-term game. Developing such a product is non-stop, and it’s unlikely you’ll ever switch to support-only mode. Product development will drive bug fixes, new releases, and more feature requests. In this case, you’ll need to have a team that can quickly spot and resolve issues.
Go for: In-House Team
You’re an Industry Expert with an Idea
If the technology is only a medium for delivering a service, it’s best to choose outsourced CTO services for product development until your venture generates revenue and is ready to scale. This is the case for online shops and applications with basic functionality, like food delivery, and if your company is non-technical and all you need is short-term development services for up to 6 months. Note that even for a small project, it’s recommended that you hire a cohesive team and not a single freelance developer.
Go for: Tech partner
You Move Fast and Break Things
If you’re a startup according to Eric Reis’s definition – an institution designed to deliver a new product or service under conditions of extreme uncertainty – you will need a fast feedback loop and be able to react to market changes quickly. At some point, you might need to pivot, just like Slack did at some point, for the sake of not wasting even more money on a product for which there is little or no demand. Such a strategy requires swift action, so you might want to have an in-house team to avoid the day-to-day bottlenecks you’d otherwise have with an outsourced team.
Go for: In-house team
You Rely on Integrating into a Technical Ecosystem
If your product has some upfront technical requirements – integrations with enterprise software, specific language, and frameworks for backend components, etc. – it definitely makes more sense to find an experienced partner. The same applies to industry-specific solutions, like those for finance or healthcare. Many software development providers specialize in specific domains and can save you the time you’d otherwise spend on looking for qualified staff.
Go for: Tech partner
There are many factors to consider before delegating development to an outside team, hiring in-house developers, or considering insourcing. But knowing the financial, motivational, and operational differences between them is the first step to making a fact-based decision. My goal was to inform you about the details of inhouse vs outsourcing development and show you the perfect ratio of investments and outcomes that a tech partnership, as a type of outsourcing, offers. Many well-known tech companies have delegated parts of their work to other teams, or outsourced CTO companies, and the results have been incredible.
If you know you’re not going to build an in-house team, be very careful when signing a contract with a vendor. Discuss how much responsibility you want your service provider to have so that you can be sure that no part of the required solution will be missing or malfunctioning.