Software development outsourcing refers to an approach where businesses delegate engineering responsibilities to external partners to craft a bespoke product. According to the Business Research Insights, the global IT outsourcing market is anticipated to reach the value of 1318.28 bln by 2033 with an enhanced CAGR rise of 8.5% (from 2024 to 2033).
Despite the promising growth, it’s a misconception to consider cost-efficiency as a leading driver of IT outsourcing. 24/7 assistance, access to specialized talent worldwide, an increase in cybersecurity practices, and proactive maintenance all of which are critical for businesses to support their competitive edge. The article classifies the main software development outsourcing models by engagement, contract type, and location, shedding light on factors to consider when hiring third-party experts.
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Outsourcing presents a number of benefits, including operational flexibility, accelerated time-to-market, optimized budget allocation, etc.
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Stakeholders should define the product scope to select the most appropriate model of outsourcing based on the engagement, contract, and location types.
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Selecting the right outsourcing model is critical for both startups aiming to obtain a fully developed solution within a limited budget and enterprises who aim to gain scalable and strategically aligned development.
Benefits and Risks of Outsourcing Development
IT software development outsourcing is not a whim for saving costs; it’s a strategic and proactive investment into high-quality, top-notch products afterward. However, prior to making a decision to hire external experts, investigate the core benefits and challenges IT outsourcing can present, as well as explore the best outsourcing countries to know where to find a reliable partner.
Benefits
The benefits of cross-border software collaboration are multifaceted as they encompass the actual software development, reducing the need for internal office maintenance, enabling companies to focus on their core tasks.
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Streamlined Operational Flexibility: outsourcing is a winning strategy to scale up the performance during the increased product demand (e.g., high-traffic season) or contraction by efficiently resolving system failures.
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Accelerated Time to Market: by integrating external expertise to the software development, the businesses can speed up the development cycles, thanks to fast iterations enabled by agile methodologies, and minimized bottlenecks, as outsourcing provides access to specialized talent and extended capabilities.
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Strengthened Cybersecurity Protection: outsourced specialists have profound expertise in identifying and mitigating numerous types of cyber security attacks. Their experience enables them to integrate the top-notch security protection approaches, technologies, remaining compliant with security standards and protocols.
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Optimized Budget Allocation: last but not least, businesses can save up to 40% of organizational budget by hiring third-party software developers. This reduction is driven by the decreased onboarding time and lower expenses associated with office maintenance and administrative overhead.
Risks
Regardless of the promising benefits, don’t get a false impression or misconception that outsourced team integration imposes no challenges. There are a few software development outsourcing drawbacks you should keep in mind, as thoughtful strategic planning, clear documentation requirements, and well-defined contractual agreements might help resolve them.
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Contract-Relevant Conflicts & Vendor Dependence: a lack of clearly defined scope, vague product acceptance criteria, hidden costs associated with potential service-level adjustments may cause the conflict of interest. Unclear terms of contract termination, NDA, and property rights might complicate switching between parties, creating a vendor lock-in.
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Undermined Internal Expertise: small businesses that prefer delegating software development responsibilities to an outsourcing partner rather than an in-house team encounter the risk of the lack of internal specialized knowledge, which can lead to the mentioned above vendor lock-in.
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Communication Protection Concerns: this can emerge as a result of an unauthorized access of an outsourced party to the communication channel with the business partner. Even if not directly involved, the interception to digital communication or unauthorized access present the violation of the Electronic Communications Protection Act (“ECPA”), which requires protection for communications in storage and in transit.
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Talent Gap: although IT outsourcing provides access to global tech talents, there is an extreme lack of professionals in terms of the in-demand IT specializations, such as talent shortage in AI, ML development sector. This scarcity fuels high market competition and raises prices.
Outsourcing Models by Engagement Type
Software development models in the engagement context define the collaboration nature between a hiring company and the third-party, shaping the level of flexibility, control, and distribution of responsibilities throughout the development process.
Staff Augmentation Model
A staff augmentation outsourcing model relates to short-term collaboration, allowing businesses to bring in highly specialized professionals to address specific project needs. It resolves the talent gap challenge by integrating external experts into the in-house team and strengthening the company’s managerial & competitive edge:
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On-Demand Scalability: staff augmentation is perfect for seasonal work that requires covering the application’s or website’s scalability demands associated with holiday rushes, end-of-quarter deadlines, product launches, event-based performance/security demands (Christmas, Black Friday, etc.).
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Direct Project Oversight: business stakeholders maintain direct control of the hired IT professional’s performance, enabling real-time evaluation and the flexibility to adjust priorities, processes, and workflows if needed.
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Accelerated Time-to-Market: in staff augmentation, the highly specialized developers don’t take much time for onboarding. Their expertise allows them to tackle complex challenges efficiently, minimizing errors and significantly accelerating the path to product launch.
Dedicated Team Model
A dedicated team is a model of outsourcing applicable for long-term collaboration, full-cycle software development, and its ongoing maintenance, which brings the highest level of flexibility, costs, & distribution responsibilities, since:
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Full Team Commitment: the specialists are completely dedicated to your project. No switching between different business units & organizations. No sliding schedules. The team presents full-time product development, offering 24/7 support, and dedicating resources only to the project.
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Hierarchical Subordination Structure: usually, a dedicated team is driven by the PM who oversees task delegation and fosters structured collaboration and reporting across the team. This encourages the team to internalize their responsibilities, resulting in meticulous problem-solving and sustained commitment to the project's success.
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Cost-Efficiency & Improved ROI: a dedicated team can deliver a better ROI based on the minimized costs associated with onboarding or retraining, reduced reworks, and complete commitment to the project, which transforms into improved retention and a boost in productivity.
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Optimized Control: Business owners can either have an near-full control of the development process or assign an inter-team project manager to get 1-2 week reports on the progress based on the selected software development methodology.
Compare and contrast SDLC vs. the Agile methodology in software development.
Project-Based Model
Project-based outsourcing is a cooperation model mostly suitable for short or mid-term project development. It has well-defined contracts, clearly identified scope, requirements, and deadlines that come with a fixed budget. While project-based outsourcing offers limited flexibility and control during execution, it demands clear alignment and well-defined responsibilities from the very beginning to ensure success.
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Well-Defined Deliverables: business representatives clearly define the milestones, expectations, assessment measures, and timeline based on service-level agreement (SLA). With a structured nature of this outsourcing model, the stakeholders don’t need to have a direct oversight of the experts’ performance, they’re interested in the final result.
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Predictable Costs and Timeline: based on a fixed-price agreement, key stakeholders set clear cost estimates and deadlines due to a structured project decomposition.
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End-to-End Responsibilities: the outsourcing team assumes full ownership of the project completion in terms of team composition, task management, progress tracking, and risk identification/mitigation.
Outsourcing Models by Contract Type
Another classification of models of fintech development outsourcing relates to contract type collaboration. We’re going to discuss three of them, including fixed-price, time and material model, and hybrid/custom contract.
Each of these outsourcing models addresses key aspects such as scope definition, project changes, stakeholder control, and budget allocation differently. Therefore, a thorough analysis of the product and its potential requirements is essential to determine which model offers the best fit.
Fixed-Price Contracts
The fixed-price model of cooperation means that stakeholders pay a predetermined amount based on a well-defined project scope, a clear vision of the final product, and a strictly set timeline. The client relocates the responsibility of executing the project to the outsourcing team while retaining complete control over their other internal product development efforts.
Fixed-Price Model Suits for:
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Short-Term - Middle-Term Projects: fixed-price model best covers the projects of low-moderate complexity, such as MVP development, since the breakdown of the milestones is clear, easily traceable, and measurable.
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Clearly Defined Project Requirements: focusing on minimal or absent project alterations, the fixed-price model depends heavily on the upfront planning, so the client can provide in-depth specifications on wireframes, feature lists, and anticipated outcomes.
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Optional Client Control: the fixed-price model minimizes the need for stakeholders to oversee the vendor's daily performance, reducing time investment and indirect management costs. This allows clients to focus their attention and resources on core business activities rather than project execution.
Time and Materials Model
The time & material model is quite the opposite to the fixed-price cooperation since the client pays for the actual time spent on completing the phase and overall time dedicated and materials applied..
Time & Material Model Suits for:
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Altering & Evolving Scope: this model provides flexibility in software development since it’s open to alterations and adjustments. For instance, the stakeholders can alter the concept of the final product if they see the features in the launched MVP don’t encounter positive client feedback.
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Agile & Iterative Collaboration: time & material model aligns with the agile product development methodology since it enables task prioritization, dynamic sprint planning to incorporate alterations within 1-2 week development cycles.
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Long-Term Projects: the model fits perfectly with projects that require long-term development and its ongoing refinement and maintenance.
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Active Stakeholder Involvement: clients can actively participate in the development process by providing the vendor with frequent feedback. Through sprint reviews, they can share insights, clarify requirements, and suggest improvements for the delivered portions of the product.
Hybrid/Custom Contracts
A hybrid/custom contract model of cooperation enables intertwining different payment approaches to outsourcing collaboration. For instance, starting with fixed-price, the client can switch to the time & material model if drastic alterations to product development are required. The hybrid & custom contract model aligns with the product's unique needs, presenting dynamics in its development.
Time & Material Model Suits for:
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Projects with Mixed Scope: for instance, stakeholders clarify a precise feature set for MVP development, meaning the applicability of the fixed-price model. When MVP is tailored, the feedback is collected, and the actual product development can be based on the T&M model and be open to modifications.
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Enterprise-Grade Software with Evolving Needs: when some parts of the product development are clear in feature scope and development complexity, it’s possible to implement a fixed-price model. Nevertheless, if other modules require additional investigation and iterations, the ability to shift to the T&M model will be a strategic advantage.
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Budget Control with Flexible Product Adjustment: custom or hybrid contracts are well-suited for projects where initial requirements are clearly defined, yet the client remains open to adapting the scope based on end-user feedback.
Location-Based Outsourcing Models
Location-based outsourcing can be classified into three categories: onshoring, nearshoring, offshoring, all offering their unique benefits in costs, yet imposing some quality and communication challenges.
Onshore Outsourcing
Onshore outsourcing is a model of cooperation when the stakeholders hire developers within the same country. This location-based cooperation is characterized by the perfect cultural alignment, impeccable linguistic compatibility, and minimized time-zone differences. Nevertheless, onshoring might be cost-demanding in terms of hiring narrowly-specialized professionals regardless of their experience level. Additionally, local talent shortages may arise, prompting businesses to consider alternatives such as nearshore or offshore outsourcing to access broader expertise and reduce costs.
The applicability of onshoring:
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Projects with rigid regulatory compliance requirements (e.g., crypto exchange app development in the US legal landscape).
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Business requires real-time intervention (e.g., crafting an Electronic Health Record (EHR) system that requires zero-latency coordination during emergencies).
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Complex enterprise systems/legacy migrations (e.g., modernizing core banking systems by migrating from mainframe architecture to microservices, as it requires instantaneous reaction to time-sensitive deadlines, remaining regulatory compliant).
Nearshore Outsourcing
Nearshoring involves delegating software or project development to neighboring countries that share the same or similar time zones, making it quite convenient to run face-to-face meetings. Its core advantage lies in striking an optimal balance between real-time collaboration and cost efficiency, while maintaining cultural and linguistic proximity, as well as similar work ethics approaches.
The applicability of nearshoring:
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Regulatory-compliant expansion (e.g., a bank from Switzerland delegates engineering a customer onboarding platform that has to abide by the GDPR to the Czech Republic).
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Scaling for faster time-to-market launch (e.g., Germany hires a Ukrainian team of developers to create a basic MVP based on cost-effectiveness and linguistic competency).
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Saturating legacy systems with new features (e.g., a Canadian bank hires a Mexican team to integrate new APIs to their bank-specific digital wallets).
Offshore Outsourcing
Offshoring in the outsourcing context implies hiring a team of experts from countries located far from the domestic market. For instance, the US organization relocates its neobank development to Ukrainian outsourcing skills. IT offshoring presents a range of benefits, including cultural inclusivity, access to narrowly-specialized personnel, which can cover the domestic market skills gap, and labor cost reduction, as differences in living costs directly impact the final check.
Regardless of the aforementioned promising benefits, Stijn Broecke, in their working paper, indicates that 48% of high-skilled workers are at risk of being offshored with ‘less-educated’ employees, leading to the domestic market labor challenges. This, however, poses a challenge to the quality of outsourced performance as different cultural and communication alignment can cause misunderstandings, leading to reworks that lead to time-to-market delays.
The applicability of offshoring:
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Prolonged maintenance & support (e.g., UK-based company offshores their product maintenance and QA to Vietnam to reduce internal financial burden on product upkeep).
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Cost-preserving MVP crafting for small-scale and startup businesses (Canadian startup offshores its MVP development to the Philippines, to access full-stack teams at competitive rates).
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Transitioning legacy desktop system to cloud-based solution (The US healthcare company hires Polish developers to reengineer the legacy system due to cost-efficiency).
Key Factors When Choosing an Outsourcing Model
Choosing the right model is a strategic decision that requires in-depth outsourcing vendor evaluation that significantly influences the outcome, whether for a short-term project or a long-term partnership. Based on the abovementioned analysis of the outsourcing models, we summarize the factors to consider to promote informed decision-making.
Budget Constraints vs Flexibility Needs
Budget constraints refer to the limitations regarding the budget allocation, which will require the overall in-depth planning on feature prioritization, as well as analyze whether any adjustments are needed. In such cases, fixed-price offshoring can be an optimal choice, especially when stakeholders have a clear vision of the final product.
Flexibility needs reflect the ability to adapt the project’s direction, refine its focus, or adjust the feature set as priorities evolve. In this regard, the time and material model, whether onshore or offshore, can be a highly effective choice, enabling stakeholders to invest based on actual time and resources while optimizing costs through strategic location selection
On the other hand, if the business combines fixed and altering requirements - working with a hybrid and custom contract model with nearshore/offshore specialists may benefit feature adjustment with alignment to the rigid requirements of some project’s phases.
Scope Clarity and Project Complexity
The high scope clarity with well-defined feature set, clearly defined objectives, and functionalities influence decision-making significantly considering the overall time required to complete product development. Usually, it’s about short or mid-range time span with low complexity level, implying that working on a fixed-price project based outsourcing model can complete the required deliverables.
By contrast, if the scope cannot be defined per the product planning phase or needs the ongoing modifications during other development phases, the T&M or hybrid/custom nearshoring and offshoring will cover those needs perfectly.
When a project demands a specialized and advanced tech stack, particularly for developing complex features like AI and ML, the overall product complexity increases. In such cases, time and material or custom hybrid contracts, paired with offshoring or nearshoring models, offer a strategic advantage by granting access to global tech talent that may be scarce in the local market.
Required Control and Communication Flow
The control level determines the overall IT outsourcing team’s alignment with the project’s objectives. High control level and clear and consistent communication enable the stakeholder to provide timely responses, clarifications, and feedback, which is quite essential when it comes to maintaining security level, and adherence to regulatory compliance.
Establishing appropriate control mechanisms (e.g., access controls, security audits, contractual penalties for missed deadlines), parallel communication with brainstorming & joint decision-making helps minimize risks associated with safety, understanding, or requirements, etc., to prevent delays in product delivery and increase safety.
T&M model onshoring will mostly benefit complex software development and suit companies that require precise regulatory compliance, where daily communication and full control are needed.
If the product does not require any tech sophistication and the project has a precise set of requirements, direct oversight is not needed, only timely updates, enabling the outsourced experts to manage operations on their own. Project-based outsourcing for offshoring will reduce development costs by leveraging lower labor rates and predefined deliverables, making it ideal for standardized, low-risk projects where flexibility and constant communication are less critical.
Team Integration Level
Team integration level refers to the extent to which the IT outsourced specialists are integrated into the client’s in-house team. Integration usually matters for covering some of the company’s core tech operations, so offshoring/nearshoring staff augmentation will be the most appropriate solution based on a T&M contract, as the professional will work only within a required time span. If the project does not require direct integration, other models of outsourcing may be considered.
Risk Appetite and Legal Compliance
Risk appetite represents the extent of risk the company is willing to take when hiring an outsourcing team. Security risks, compliance challenges, operational threats, and hidden cost burden all these uncertainties require thorough planning to prevent any potential losses. In this aspect, there are no correct recommendations on what model of outsourcing to implement - it’s important to take into account the project overall complexity.
The overall onshoring will be beneficial to keep the product regulatory compliant, to integrate a staff augmented professional if the domestic market experiences a talent shortage. From this point, legal compliance is a must to reduce all the burden associated with the proper handling of sensitive data, adherence to industry regulations, and avoidance of costly penalties or operational disruptions.
Regardless of the chosen outsourcing model, the organization must adhere to SOC 2 compliance, a comprehensive framework and audit protocol designed to ensure the secure handling of customer data in accordance with the five Trust Services Criteria (TSC).
Why Choose Agilie as Your Software Outsourcing Partner?
Agilie is a European software development company with extensive expertise in mobile banking, blockchain solutions, payment systems, and diverse fintech projects. We turn unique business needs into fully realized digital products across various industries, including fintech, healthcare, logistics, and real estate.
With our iterative SDLC, our company provides a full-cycle software development:
Specializing in dedicated teams, staff augmentation, project-based models of IT outsourcing, Agilie supports the abovementioned location-based and contract types of cooperation.
Discover our broad expertise in delivering exceptional projects.
Summary
Presenting advantages and disadvantages, there is no one-size-fits-all model of outsourcing since the uniqueness of each project. Budget constraints, level of control, associated risk, cultural alignment, etc., all of these factors influence the selection of the external partners, requiring stakeholders to analyze the contract type of cooperation. Therefore, before initiating a partnership, it's essential to carefully assess the project scope, as it will directly influence the most suitable outsourcing model and contract structure.
