What Is Outsourced Software Product Development: Benefits and Pitfalls

In 2023, product development outsourcing led the IT services market, generating $484.86 billion, and it’s expected to grow to an impressive $812.75 billion by 2029. This approach is a perfect option for businesses of different scales and goals. For instance, giants like Google and Amazon also use it.

So, what is so special about product development outsourcing? In our new article, we’ll discuss:

• What outsourcing is and why delegating specific software development tasks or the entire project may be a real deal.
• Models of outsourcing: onshore, nearshore, offshore, etc.
• What you can outsource and how to handle business-vendor relationships.
• What are the pitfalls of outsourcing product development and how to avoid them (Spoiler: with the help of the right vendor).

Let’s go!

What Is Outsourced Development?

Imagine you’re building a home. You have a clear vision, a unique idea, and a perfect picture of the end result. However, you lack the technical skills and engineering knowledge, and you don’t have the experience, not to mention how much time it would take to build the house yourself. How many resources could be wasted due to mistakes and inaccuracies?

So, you act like a wise person, and instead of doing all the work yourself – designing, laying the bricks, wiring the electricity – you hire skilled architects, contractors, and interior designers. This is the essence of outsourced development: handing over specialized tasks to experts to ensure a high-quality result without stretching your resources.

So, what is outsourced product development?  It’s when companies partner with external experts to handle specific parts or the entire process of creating, maintaining, and updating software products. By tapping into the skills, technology, and knowledge of these third-party vendors, businesses can focus on their core activities while ensuring their software needs are met efficiently and cost-effectively.

When you outsource development, your partner essentially becomes an extension of your company. They help analyze your project requirements, refine your ideas, fill any technology gaps, and bring in the necessary resources to deliver a customized solution. Whether it’s designing a mobile app or building a large-scale enterprise software system, outsourcing helps companies reach their goals faster and at a lower cost.

Outsourcing models

Let’s begin with location-based software development outsourcing. In this case, the main decision a business like yours needs to make is how close or far away you want your outsourcing partner to be.

• Onsite outsourcing. An external team works directly from your premises for as long as you need them. While they remain employed by the outsourcing company, you don’t have to worry about hiring, training, or managing their payroll.
• Onshore product outsourcing. Involves hiring an external team based in the same country as your business. While it eliminates issues like language barriers, time zones, and cultural differences, it can limit the pool of talent and may not be as cost-effective as other models.
• Nearshore outsourcing. Expands your options to neighboring countries or regions, giving you access to more expertise while maintaining similar time zones and fewer logistical challenges.
• Offshore outsourcing. When discussing nearshore vs. offshore, the last one allows you to partner with teams located anywhere in the world, often offering significant cost savings and the potential for round-the-clock development.

Relationship-based outsourcing models

In this case, the three primary approaches are:

• Staff augmentation – hiring external experts to work alongside your internal team, helping to fill gaps in capacity, expertise, and skills. This model is ideal for quickly scaling up your workforce for a specific project or period. An example – virtual CISO services. You get an experienced chief information security officer with the same level of guidance as an in-house specialist.
• Managed (dedicated) team – a dedicated group that works exclusively on your project, providing flexibility and control over the project’s direction and timeline. This model is perfect for long-term projects where changes in scope are expected, especially in healthcare IT outsourcing. You get an experienced team that has already established strong working relationships.
• Project-based model – your outsourcing partner manages the entire development process from start to finish. You provide the project requirements, and they handle the rest. While this model minimizes your involvement, it’s important to choose a trusted development partner to avoid issues with misaligned expectations or unmet goals.

Examples: People.ai, Amazon, Google

Some of the world’s biggest tech companies have relied on outsourcing software product development at key points in their growth. For example, in 2018, Amazon acquired the startup Ring, which had a skilled programming team in Eastern Europe focused on outdoor home security, helping Amazon strengthen its market position. With Alcor providing accounting and payroll services, Amazon quickly set up a second offshore development team in the region, impressed by the high-quality IT talent available.

In 2020, Google expanded into Eastern Europe by acquiring CloudSimple, forming a software development team to enhance its VMware migration solution. Despite already having the world’s largest developer team, this move demonstrates Google’s commitment to innovation while reducing business costs through offshoring, with Alcor offering recruitment services for Eastern European IT talent.

People.ai, a B2B sales acceleration software company, successfully expanded its operations by outsourcing AI algorithm development to Eastern Europe. With Alcor handling back-office operations, recruitment, and logistics, they quickly built a team of over 25 skilled professionals and launched a fully equipped development team in just one month, exceeding all expectations.

What Development Can Be Outsourced?

To be honest, you can outsource most of the processes – from business analysis to post-launch maintenance. The main idea is to understand where you lack expertise, time, or resources to bring your idea to life. Then, find a vendor who can fully cover these needs.

This is the list of most common options.

Full (end-to-end) product engineering

Outsourcing full product engineering is becoming more common, as service providers now specialize in different stages of the product development lifecycle. In this case, you get access to a larger talent pool, save time, reduce costs, and increase overall productivity. It also lets you automate processes and focus on your business while leaving the technical work to the experts.

Complete product management

The pandemic has pushed companies to work on digital product management more than ever. Outsourcing product management helps you stay competitive by extending your team with the right expertise. This allows you to focus on growth and innovation while the outsourced team handles strategy, development, marketing, and feedback to keep your product relevant.

Building complex web/mobile applications

What if you have a vibrant idea, but your team doesn’t have the needed skills to work on it? Or, you start as a small startup but grow fast and need some external expertise in scaling and developing your product?

Outsourcing is a great option for developing complex web and mobile applications. Whether you’re building a client healthcare platform or a data-heavy enterprise solution, outsourcing lets you tackle challenging tasks while keeping control over the project.

Security services

There are a lot of companies in this world that have no cybersecurity vision and understanding of risks. Outsourcing security services is the perfect option for safeguarding your product and data against cyber threats.

What security processes can you outsource? Services like penetration testing, social engineering assessments, and virtual Chief Information Security Officer (vCISO) support can provide extra layers of security.

Penetration testing mimics real-world attacks to uncover system vulnerabilities, while social engineering services test how well your team can recognize and prevent phishing and manipulation tactics. A vCISO offers strategic leadership in cybersecurity, helping your business stay ahead of potential threats and remain compliant with regulations, all without the expense of a full-time hire.

In other words, outsourcing these services is like hiring a security guard to protect your digital castle – ensuring your business is fortified and ready for any threats that may come its way.

Testing and QA

Outsourcing testing and quality assurance ensures that your product works smoothly across all platforms. QA teams use various testing methods, such as functional, performance, and security testing, to identify and fix issues before they reach your users. With their expertise, you can confidently release a high-quality, user-friendly product.

Cloud infrastructure management

Managing cloud infrastructure is key to keeping your product scalable, reliable, and cost-effective. In this case, you buy the ability to work with experts who design, deploy, and optimize your cloud architecture based on your needs. This reduces your operational costs, ensures reliability, and gives you the flexibility to scale as your business grows.

Benefits of Software Product Development Outsourcing

For CTOs and entrepreneurs, outsourcing software product development is a smart strategy. Instead of investing in office space, building infrastructure, and assembling a full internal team, outsourcing allows you to focus on what matters most: running your core business.

Access to global talent and deep expertise across domains

Think of outsourcing as opening the doors to a global marketplace of skilled professionals. Beyond filling skill gaps, this approach brings fresh perspectives and innovative solutions that might not be possible with an in-house team.

Building a product often requires a diverse skill set, from UI/UX design to back-end development and quality assurance. Outsourcing connects businesses with specialists in these areas, allowing them to access expertise that might be scarce or costly locally.

Superior cost efficiency

Outsourcing provides the perfect balance of cost and quality. It eliminates overhead expenses like office space, training, and equipment while delivering top-tier expertise. According to Deloitte, cost reduction is the primary driver for outsourcing, cited by 70% of companies.

Better scalability

Scaling your team to meet project demands can feel like trying to squeeze into a one-size-fits-all outfit. It just doesn’t work. Outsourcing provides a tailored solution, enabling businesses to quickly adjust the size and capabilities of their teams. This flexibility is vital for both startups and big enterprises.

Optimized development processes

Experienced outsourcing teams bring well-established workflows and best practices, reducing inefficiencies and ensuring smooth project execution. For instance, Agile methodologies allow for iterative improvements based on real-time feedback, keeping the product aligned with user needs and market demands.

Also, outsourcing as a synchronized effort ensures faster product releases, helping you outpace competitors. This approach spares businesses the time-consuming and costly process of recruiting and onboarding talent.

When Outsourcing Development Will Provide Maximum Benefits?

Outsourcing software development may not be a silver bullet that can solve all your challenges. But in certain situations, this is the best solution in terms of expertise and cost savings.

Here are the most common scenarios where this approach can definitely deliver the most value.

When you lack tech expertise

If your in-house team doesn’t have the skills to handle every aspect of software development, outsourcing products is a wise choice. It provides access to experienced professionals who can navigate complex phases of the project, ensuring your product meets high standards.

When internal HR challenges arise

Persistent hiring and retention issues can strain internal resources. If you decide to outsource software product development, you bridge the gap by getting skilled specialists without the burden of recruitment and training.

When deadlines are tight

Such an approach is your go-to strategy when time is of the essence. External teams are often more agile and scalable, allowing for faster completion of critical tasks. By sharing the workload, you can meet tight deadlines without sacrificing quality.

When software development isn’t your core business

If software development isn’t your company’s primary focus, outsourcing is a smart way to delegate technical tasks to experts. This frees your team to concentrate on core competencies, driving value in areas where your business excels.

When facing market barriers

Launching a product in regulated industries or navigating barriers to market entry can be challenging. Outsourcing provides expertise in handling compliance and streamlining processes so you can overcome these hurdles without unnecessary delays.

When your product is unusual or unique

Creating a standout product often requires fresh perspectives and top-tier talent. An outsourced team brings diversity and creativity, injecting new energy into your development process.

When scaling resources is crucial

Outsourcing products allows you to scale up or down quickly, depending on your project needs. Whether you’re developing a prototype or refining the final product, having access to a dedicated and adaptable team ensures you’re always prepared to meet project demands.

Disadvantages of Outsourcing Product Development

If you’ve decided to outsource product development, you’ve made a smart move, but it’s also important to understand the potential downsides. Here’s what you need to know:

Unexpected costs

Outsourcing can seem affordable at first, but if you work with the wrong vendor, hidden fees or surprise costs often pop up along the way. This can mess up your budget and leave you paying more than you expected. So pay attention to choosing a reliable partner.

Lack of focus

Sometimes, external teams juggle multiple projects at once, which can mean your project doesn’t get the attention it deserves. This can lead to delays or results that don’t meet your standards. So, try to hire a dedicated team that will work on your project only.

Less control

With an outsourced team, you’ll have less direct control over the process. If something goes wrong and your partner is inexperienced, it might take longer to fix, which can throw off your timeline and leave you feeling frustrated.

The good news? All of these issues can be avoided with the right outsourcing partner. A reliable vendor will prioritize clear communication, secure your data, offer transparent pricing, and stay fully committed to your project. Choose wisely, and outsourcing can help your business flourish!

How We Can Help

At TechMagic, we make outsourced software development easy and effective for your business. Here’s how we support your success:

“No bullshit” approach and transparent pricing

Our focus is on delivering real value without overpromising or complicating the process. You’ll never have to worry about hidden fees or unexpected costs.

We provide clear, upfront estimates and maintain open communication throughout the project so you always know where your budget stands.

No fluff, no surprises – just honest collaboration and results you can count on in outsourced product development.

End-to-end development

From initial concept to final deployment, we manage every phase of the outsourced product development lifecycle, ensuring a seamless and efficient process.

Custom-built teams

Need extra hands or a dedicated team that can take care of the whole product development process? We provide experts tailored to your specific goals and business processes. They align with your project objectives, offering flexibility and scalability.

Rock-solid security measures

We have a team of certified cybersecurity experts with a proven track record. Our security services, including penetration testing, safeguard your data and intellectual property during the software development process. With us, you remain protected at all times.

Wrapping Up

Outsourcing product development may be a transformative force for your business, giving you access to global talent, cost savings, and the flexibility to scale as needed. It brings certain challenges, but they are not critical if you choose a reliable and professional vendor among outsourced development firms. Whatever collaboration model you choose, pay attention to their experience (both general and more specialized), successful projects, and communication.

By working with an outsourced product development company that values transparency, data security, technical expertise, and a strong commitment to your project, outsourcing can become a powerful advantage. Ready to move forward? We provide the full range of software product development services with a transparent and customized approach. Let us help you bring your vision to life with confidence.

FAQ

1. What is outsourced product development?

   To outsource product development means working with an external team to handle part or all of the product creation process. This can include everything from the initial concept and design to development, testing, and maintenance. By outsourcing, businesses can tap into specialized skills and expertise without needing to hire additional in-house staff.

2. What are the benefits of outsourced development?

   Software product development outsourcing offers several advantages. It allows you to access global talent, which means you can find specialists with the exact skills you need. It’s also more cost-effective than hiring full-time employees for every role. Outsourcing gives you the flexibility to scale your team based on project needs and can speed up development, helping you get your product to market faster.

3. How much does outsourcing product development cost?

   The cost of outsourcing product development depends on factors like the complexity of your project, the expertise needed, and the location of the vendor. To avoid surprises, it’s essential to get clear pricing upfront and set expectations with your outsourcing partner.

4. What should I look for in an outsourcing partner?

   When choosing an outsourcing partner, focus on their experience and previous successes. A vendor who has worked on similar projects and has a proven track record will likely be a better fit. Communication is also important to ensure your expectations are aligned throughout the process. Transparency and a shared commitment to the success of your project will help ensure a smooth collaboration.

5. How can I ensure the quality of outsourced work?

   To ensure quality, make sure to provide clear project specifications and set realistic milestones. Regular communication is key to keeping everything on track. Choose a vendor that follows strong quality assurance practices, such as thorough testing and code reviews, to ensure the final product meets your standards.