A Complete Guide to Outsourcing Software Development in 2024

In this comprehensive overview of software development outsourcing, we discuss the specific characteristics of four outsourcing models, introduce a step-by-step plan for choosing the right software development provider, and explore top countries where you can hire software teams for your next project. We have also compiled software development hourly rates in the context of popular programming languages and skills required for modern projects.

In the FAQ section, we outline the most critical questions to ask when contacting an outsourcing provider and address concerns about intellectual property ownership and project cost estimation.

What is software development outsourcing?

Outsourcing is a business practice in which a company hires a third party to perform tasks or provide services on a contract basis. In software engineering, such tasks include app development, legacy system maintenance, testing, and quality assurance services.

Historically, organizations have chosen to outsource software development to implement their digital transformation primarily because of cost savings. The practice of outsourcing software development to a third party aimed to reduce labor costs, including salaries, overhead, and office equipment. However, cost reduction is no longer the top priority. Today, the primary strategy is to shorten the long recruitment path and get quick access to cutting-edge technologies and the best engineering talent.

In addition to providing access to developers with specific skill sets and experience that might not be readily available in the local market, outsourcing relieves the company of the obligation to integrate new specialists into the internal team and develop a long-term plan for their career development. It also relieves the in-house team of non-essential tasks, allowing them to concentrate on core product development and more strategic tasks.

The IT outsourcing market, comprising software development, infrastructure management, cloud services, and technical support, is projected to reach $512.5 billion in revenue in 2024, solidifying outsourcing as one of the most influential and widespread business practices.

What are the advantages of software development outsourcing?

Companies opt for outsourcing to reduce development costs, relieve the in-house team of backlogged projects and non-essential tasks, or access engineers with niche expertise that may not be readily available in the local market. Moreover, outsourcing is a flexible business practice that proves useful when a project requires specific expertise that the company doesn’t have in its stack, and the company doesn’t need that expertise once the project is completed. Let’s dive into more details about the advantages of outsourcing:

    1. Access to a wide talent pool.

Outsourcing software development implies connecting with a robust talent pool to identify the ideal candidate with the required skill set, domain expertise, and professional preferences. The contracting company typically has internal recruiters to find the best candidates for the role or pre-vetted engineers who may have the skills required for your project.

    2. Cost efficiency.

Software companies choose outsourcing to cut recruiting and development costs. Partnering with companies that offer a wide talent pool of professionals allows businesses to avoid spending a lot of time and resources searching for an experienced developer or someone with highly sought-after expertise. In addition, third-party providers focus on specific tasks, which means they can perform them better, faster, and more cost-effectively than the hiring company.

Finally, with outsourcing, companies don’t need to concern themselves with benefits, retirement contributions, and other costs associated with hiring and managing an internal team, even though such costs are, in fact, included in the outsourcing development rates.

    3. Flexibility.

Hiring an outsourcing agency allows companies to focus on the core elements of their business, spinning off the less critical operations to outside providers.

Additionally, companies can ramp up their development to keep up with demand for the product without the long-term financial commitment of hiring in-house employees, which can take years to pay off. This makes outsourcing particularly valuable for projects with fluctuating demand.

In the case of hiring contractors through staff augmentation, if a software developer is not a good fit for the company, it is easier to end the relationship or replace them with someone else. In contrast, laying off in-house developers is more difficult because the company must provide advance notice and severance pay.

    4. Tapping niche skills without reskilling your in-house team.

It can take months for internal teams to learn niche disciplines such as machine learning, data engineering, and extended reality (XR) technology, or to master specific services such as cloud migration or automating manufacturing processes. Outsourcing instantly opens the door to professionals with comprehensive experience in these fields.

In other words, companies look to outsourcing providers as innovation centers with access to cutting-edge technologies and more specialized engineering talent. Shifting extraneous functions to companies with a history of handling them can lead to greater productivity and cost-effectiveness.

Another case of outsourcing is when a company has legacy software that needs upgrading. Therefore, it may need experienced contractors with knowledge of both the code structure of the legacy system and newer tools and languages.

For instance, cloud advisory services play a pivotal role in this transformation by offering companies the means to seamlessly bridge the gap between legacy systems and the latest technologies.

    5. Improved quality.

Outsourcing companies have well-established quality assurance policies and procedures. In addition, outsourcing providers can bring a fresh perspective to software development and help companies find new ways to improve their products and services. When an internal team is overloaded with tasks, outsourcing can be an effective way to invest in a new project or reduce old technical debt.

What are the disadvantages of software development outsourcing?

The most common pitfalls of outsourcing are often linked to a lack of communication and control, as well as language barriers:

    1. Language barrier.

Programmers need to be strong and competent communicators who can ask the right questions and seek clarification when necessary. Building and maintaining a software product is not only about developing a good application. A more important task is to ensure that the product meets the customer’s requirements while optimizing solutions for specific tasks.

Therefore, software developers must delve into the specific details of the product and communicate effectively with different teams within the organization, including the product team, customer support, and sales. With that in mind, a limited vocabulary can significantly reduce a developer’s ability to understand the complete picture and offer the right solutions.

    2. Changing developers in the midst of a project.

If the agency doesn’t have a well-defined procedure for maintaining project documentation, the departure of one or more team members can lead to delays and lower-quality results.

    3. Assigning an entire project to an outsourced team means transferring full responsibility for the project’s outcomes to this team.

When a company hires people through staff augmentation or builds an internal team, the responsibility for knowledge transfer and effective documentation rests with the company. Moreover, hiring full-time contractors or internal employees implies that the company has technical managers who can evaluate the team’s productivity and monitor development progress.

However, if a company decides to outsource an entire project to an agency, it typically has less control over it, and the compliance of the final product with the customer’s requirements and industry best practices becomes a matter of the agency’s diligence.

    4. Failure to understand the scope of the project can result in an increased budget and unmet expectations.

This scenario is particularly relevant to fixed price contracts. Before entrusting development to an outsourced team, a company needs to clearly define the requirements, expected outcomes, timeline, and overall scope of the project. Failure to communicate these details can lead to an uncontrolled scope growth and disagreements about the product’s vision and functionality. In project-based outsourcing, software engineers work in silos, so to bridge the gap between expectations and actual results, the company should clearly outline the desired elements and features in the specification.

Software development outsourcing models

We have outlined the most well-known advantages and disadvantages for each model of cooperation with an outsourcing agency. This section summarizes the key characteristics specific to each model. It is important to note that all the models share the common outsourcing strengths and weaknesses identified in the previous segments.

Fixed price contract

This contractual agreement has a clearly defined scope of work and a list of resources required to complete the project. A fixed-price contract outlines the project’s deliverables, milestones, and any specific requirements for the provider. The client and outsourcing provider then agree on a pre-determined, fixed price.

What are the pros of the fixed price contract?

    1. Financial predictability.

Clients know the exact amount they will pay for an outsourced project in advance. This pricing model implies that an estimated amount is agreed upon by the parties after the development company carefully reviews the project requirements and scope of work.

    2. Well-defined deliverables and outsourcing provider accountability.

The outsourcing service provider is responsible for completing the project within the agreed budget and timeframe, with the contract defining clear deliverables and quality standards that the provider must meet.

What are the cons of the fixed price contract?

    1. Inflexibility

The fixed-price outsourcing model is typically used for well-defined projects with a limited amount of expected changes. Many IT outsourcing companies avoid using this model because it can be challenging to formulate accurate pricing and determine the time required for software development, especially in the case of complex projects. For the providers who do offer this model, they often include a safety net to protect against possible project setbacks, which can result in fixed rates being overestimated.

    2. Changing the initial scope will incur both additional costs and time.

Changes in the project scope will trigger the signing of contract amendments and the allocation of additional costs. In the case of significant changes, the parties will need to hold meetings, update documentation, and renegotiate the contract. In other words, making changes will not only increase the project’s cost and duration but also require a lot of paperwork, as this model is closely tied to fulfilling the terms of the signed agreement. 

Preventing such an arrangement from becoming economically unjustified and causing complications can be challenging. Therefore, the hiring company should anticipate potential development difficulties and ensure it doesn’t run out of funds in the midst of software development.

    3. Conflicted interests can arise between the client and the outsourcing company.

Such a model can lead to conflicts of interest and unproductive cooperation. The developer may declare any new change as being outside the project’s scope and classify it as a change request that requires additional payment.

Moreover, fixed-price contracts often presume differing priorities: the outsourcing company aims to complete the project as quickly as possible to maximize profits, while the client prioritizes the best quality result and is less concerned with the time frame because it does not directly impact the development cost.

Time and materials contract

The time and materials (T&M) outsourcing model is a type of contractual agreement that involves regular payments for the work delivered. The client pays for the actual time that the outsourced team members spent on development and covers material costs associated with the project, such as hardware, software licenses and subscriptions, or travel expenses.

What are the pros of the time and materials contract?

    1. Flexibility for both the client and the outsourcing provider.

The tech industry widely uses the Agile methodology, which assumes that project requirements evolve during the development process. The time and materials model aligns with this principle, allowing teams to continuously implement changes and improvements – meaning they can add or remove features at any stage of the project without wasting time for renegotiation of contract terms.

    2. A good fit for projects with dynamic requirements.

​​Expanding on the previous point, this model allows development teams to start working on a project even when the hiring company has only business requirements and key functions, making it challenging for them to calculate the exact scope of the project. As digital products are becoming more and more complex, with the time and materials approach, functionalities can be adjusted after their core is created.

    3. Transparency.

The development process is divided into short sprints, each accompanied by testing and verification of compatibility with business ideas and goals. Providers are required to provide detailed reports on hours worked and analyze the development team’s performance, allowing clients to closely monitor progress.

What are the cons of the time and materials contract?

    1. Risk sharing.

This model relies on a high level of trust between the client and the development company, since the client is essentially paying for the supplier’s time and expertise rather than a predefined scope of work.

However, regardless of the level of trust, this approach still shifts some of the risk to the client. If the project takes longer than expected or if the scope of work unexpectedly expands, costs will increase accordingly. This can lead to a shortage of funds and subsequent delays in project execution.

    2. Careful monitoring and management are crucial to prevent costs from exceeding the client’s budget.

For the above-given reason, business owners should stay actively involved in the project’s progress to avoid undesired deviations from the plan. The T&M model requires a high level of discipline in project management and continuous monitoring of workflow and performance. A comprehensive analysis of potential contractors typically starts with reviewing the experience and qualifications of their project managers. This assessment includes checking their language proficiency, budget management skills, understanding of the scope of work, and ability to motivate outsourced team members.

Hiring a dedicated team

Companies hire dedicated teams when they require continuous software development and support. In this approach, the outsourcing provider, with the active participation of the client, forms a team that will be fully dedicated to a specific long-term project. They interview internal or external candidates to assess whether their skills and experience match the project’s specific requirements. The client can scale the number of dedicated team members up or down over the course of the collaboration, depending on the actual project requirements and goals.

What are the pros of hiring a dedicated team?

    1. High predictability and transparency.

In this partnership model, the outsourcing provider forms a team of developers, quality assurance engineers, a DevOps, a project manager, and other tech professionals who work exclusively on the client’s project. Essentially, the dedicated outsourced team functions as an extension of the company’s internal team.

This model implies the highest level of control and offers a flexible, transparent cost structure, including team salaries and an administration fee, which ensures clear and predictable budgeting.

    2. Scalability and flexible workload for each role.

The client can scale the number of team members up or down over the course of the collaboration, depending on the actual project requirements. This scalability allows the hiring company to optimize resources according to changing needs.

Moreover, hiring a dedicated team doesn’t mean that you are obliged to use all its members full-time. Some specialists may have partial workloads. For instance, if a company requires a quality assurance engineer for only 20 hours per week, it can discuss this with the software development service provider and include this condition in the contract.

    3. Ideal for complex projects that require ongoing maintenance and support.

Hiring dedicated teams is ideal for labor-intensive projects that require special attention from developers.

This model implies long-term cooperation, where the client participates in the selection of team members to ensure they are a good fit for the company and monitors their performance throughout the project. This approach ensures the maximum concentration and commitment of developers to achieving quality results.

What are the cons of hiring a dedicated team?

    1. Responsibility of the hiring company.

With full control comes full responsibility. Unlike the fixed price and time and materials contracts, where the client has less day-to-day involvement, the dedicated team model supposes that the customer controls the development process from start to finish. Therefore, it is responsible for carefully planning and assigning tasks to each team member.

A diligent, mature outsourcing company also monitors developer productivity and has a strong interest in the successful and timely completion of tasks. However, in this model, it is the client who sets the goals and directly manages the team’s activities.

    2. The team formation process can be relatively lengthy.

This hiring model might not be the best choice for short projects with a limited timeframe. Interviewing and selecting the right engineers for the project can be time-consuming, especially when a service provider doesn’t have all the required talent pre-vetted and instantly available to join the team.

    3. Time zone differences can hamper effective collaboration.

A dedicated team often works remotely or in different locations. In the case of significant time zone differences, the client will need to consider modern project management tools for asynchronous work and coordinate the timing of daily stand-ups and retrospective meetings.

Staff augmentation model

Staff augmentation is a business practice where full-time contractors, employed by an outsourcing agency, are hired to perform a specific amount of work under the direct supervision of the client. This approach effectively resolves all the communication issues that project-based outsourcing can involve. The difference between dedicated teams and staff augmentation is that the latter doesn’t involve hiring a project manager from an outsourcing company. The staff augmentation practice shares both the advantages and disadvantages of the dedicated team model.

One point we need to clarify is that when we discussed the dedicated team model, we mentioned that the team formation process can be relatively lengthy. This same point can be applied to staff augmentation services offered by outsourcing companies.

However, staff augmentation marketplaces offer a much quicker hiring process because they function as networks of outsourcing agencies. Therefore, it is much easier to find and hire pre-vetted developers due to the significant talent pool of such marketplaces.

Top destinations for outsourcing software development

When we think about outsourcing, we often consider countries like Poland, Ukraine, Taiwan, India, or Mexico, which have a growing pool of talented software engineers and significant investments in technical education and scientific research.

In addition, the rates for outsourcing services in these countries are typically lower than in North America or Western Europe, where software development services can cost $100/hour or more. Next, we will explore the top destinations with a long history of outsourcing which are home to providers who have extensive experience in software engineering.

Eastern Europe

A “tech talent goldmine,” Eastern Europe produces highly competitive software developers who are constantly striving for knowledge. The region is home to nearly 1 million professional software developers, offering an attractive cost-to-quality ratio, with software developer average rates ranging from $35 to $75 per hour.

Eastern European countries have cultural and linguistic histories influenced by both the Western and Eastern worlds. They have deep economic and cultural ties with both Western Europe and North America, with most of these countries being members of the European Union (with Ukraine as an EU candidate).

The region is historically recognized for its education with a focus on technical knowledge. Modern education continues this tradition, with software engineers earning computer science degrees at both bachelor’s and master’s levels. These programs focus on theoretical computer science, telecommunications, artificial intelligence, distributed computing, and software engineering.

According to Coursera’s 2023 Global Skills Report, which evaluated the skills of 120 million registered learners in 100 countries, five Eastern European countries – Slovakia, Ukraine, Bulgaria, Belarus, and Poland – ranked in the top 25 countries in the areas of business, technology, and data science. In Europe as a whole, European learners prioritize data science skills such as artificial neural networks and deep learning, which are crucial in the emerging AI market.

Eastern European countries like Ukraine, Poland, and Bulgaria are globally recognized as top outsourcing destinations, having developers with extensive commercial experience and proficiency in various programming languages and frameworks. The region is also known for its cybersecurity, deep learning, and data science specialists. However, Europe’s tech sector faces pressure to maintain its reputation as a hot source of IT talent due to the Russian invasion of Ukraine, which has put the rapid growth of innovation in the territories near the conflict zone at risk.

Asia

India is known as the most popular outsourcing destination, primarily serving U.S. and U.K. companies with its exported IT services. The country has numerous high-profile universities that place a significant emphasis on technical education in fields such as engineering, quantum physics, artificial intelligence, telecommunications, computer networking, and machine learning.

India offers access to more than 5 million software developers, providing services at relatively low rates ranging from $15 to $50 per hour for custom software development. However, due to disproportionately low salaries, Indian software developers often turn to moonlighting in pursuit of additional sources of income. The reasons for seeking side projects are not only limited to low salaries but also include factors such as rising inflation and entrepreneurial ambitions. As a result, working an additional 4-5 hours after their regular 8-hour workday may affect their performance and agility.

China follows India as a country with one of the largest talent pools of engineers. However, the rates for Chinese offshore developers are higher than in India, with product development costs ranging from $35 to $60 per hour.

Other countries where hiring a dedicated offshore development team is popular include the Philippines, Vietnam, and Bangladesh. The total number of developers in the Asian region is around 15 million.

Latin America

Latin America is currently experiencing significant growth in the software development industry, with top locations including Argentina, Mexico, Brazil, Colombia, and Costa Rica. Hourly rates for offshore developers in these countries can vary from $40 to $70 per hour, depending on the developer’s qualifications.

Offshore software development companies in the region specialize in working with North American projects and are good at understanding their clients’ needs and requirements. One particular advantage of Latin America is its favorable time zone alignment with the United States. In addition, closer proximity allows software development teams to gain a thorough understanding of U.S. intellectual property laws. IP protection and data security are often top concerns for U.S. businesses of all sizes and industries.

The region is known for its vibrant tech communities, strong education, and thriving startup culture. Latin American countries are home to some of the most prestigious universities offering engineering and technology careers, such as Tecnológico de Monterrey in Mexico, the University of São Paulo in Brazil, and the University of the Andes in Colombia.

Brazil is particularly well known for its large talent pool, with more than 7,000 companies in the software development and production sector and more than 12,000 companies registered in the IT services segment as of 2021.

A step-by-step guide for software development outsourcing

Here are the crucial steps that will help you find the right outsourcing partner for your development project.

We also believe that the best position to outsource software development is when the hiring company has a CTO or VP of Engineering who will run daily standups and monitor commits and pull requests. That kind of person will notice even subtle changes in performance and code quality, making it significantly more challenging for the agency to sell him an underperforming engineer.

Step 1. Define the project goals and requirements.

Documents for project planning and execution should include a summary of objectives, methods, tools, and frameworks to be used. They should also outline the desired set of skills and experience. In addition, the company’s technical specialists and hiring managers define performance-based requirements to set clear expectations for the software development vendor.

Project charter and scope of work documents are essential. The more specific you are about what you want to build, the better the outsourcing company will understand your business goals, leading to better results.

Step 2. Estimate the budget roughly so that you can discuss it later with the outsourcing provider.

Identify the number of professionals to be hired, their average rates or salaries, and take into account the outsourcing company’s commission.

Consider lower outsourcing rates with caution. Not only can they imply lower-quality output, but some agencies may cut prices significantly in order to increase the budget at some point in the future. The nature of outsourcing means that the longer you work with an agency, the more you depend on it, and the more expensive it will be for you to replace it. So, if you find an agency with rates significantly lower than the market, without an obvious reason, consider it a warning sign.

Step 3. Explore countries for outsourcing.

The general criteria for choosing a country for outsourcing include talent quality and experience, cost-effectiveness, time zone overlap, language skills, political stability, and regulatory standards and compliance frameworks.

Eastern Europe and Latin America are expected to witness a growing number of software development contracts in the coming years. Engineers from popular outsourcing destinations such as Ukraine, Mexico, and Brazil often offer significantly lower rates than their U.S. counterparts. These engineers have hands-on experience in building products for U.S. companies, even though it’s done indirectly through their work at agencies.

On the other hand, software engineers in the United States will continue to advance their careers. If you prefer working with a company located in the same time zone and familiar with legal and intellectual property protection practices in the United States, consider outsourcing to U.S. software companies.

It’s also a good idea to collaborate with local or global hiring partners and marketplaces that are familiar with top universities and reliable software vendors in specific territories. They can provide valuable references.

Step 4. Choose the right software outsourcing partner.

You can visit review websites and online platforms to find contract software developers and development teams, depending on your project timeline and requirements:

1. YouTeam: A staff augmentation marketplace where you can hire full-time vetted contractors;
2. G2, Clutch: Review websites where you can find an outsourcing partner and assign the entire project to them or hire a dedicated team.

You can also search for outsourcing providers on LinkedIn by filtering location and industry, or visit software developer events and tech conferences to meet developers in person.

Before deciding to reach out and sign the contract with a development agency, you should focus on their portfolio, industry expertise, and customer reviews. You should also check whether an outsourcing company follows international security standards and contractual agreements on intellectual property transfer and data protection.

Finally, ensure that the outsourced provider follows current software development best practices and can build reliable systems that verify identity, protect user data, and secure information exchanged within the app.

After reviewing the aforementioned criteria, you’ll narrow down the shortlist of the most suitable outsourcing companies.

Step 5. Protect your data and intellectual property.

When a company outsources a project, it must share confidential business information with the outsourcing partner. In a world where data breaches happen every day, it’s crucial to effectively manage sensitive information and control access to internal accounts to prevent it from falling into the hands of competitors or malicious actors.

Outsourcing companies are required to sign a non-disclosure agreement before starting cooperation. Additionally, you should verify whether the service provider conducts regular network and security audits at their workplace.

How to choose a development partner: Small outsourcing companies vs. large outsourcing companies

When choosing an outsourcing company, whether small, medium, or large, you should consider the scope of work and the required skill set.

Some people believe that when you have a small project, it’s better to approach a well-established brand with significant project management experience. However, such an agency is unlikely to take on a small project because it primarily deals with larger enterprises.

In contrast, small outsourcing companies can often be more proactive and offer a more personalized approach to clients. (However, it depends on how busy they are with projects.) In addition, when you choose a small boutique software development company, you often have the opportunity to communicate directly with top management. This allows you to gain valuable insights and advice on your project from experienced executives.

The advantage of large outsourcing companies is that they often invest heavily in security measures and strictly adhere to industry development standards. This is particularly crucial for companies that prioritize data privacy. Furthermore, large outsourcing companies have a diverse talent pool, increasing the likelihood of finding specialists who can meet complex and niche requirements.

How much does software development outsourcing cost?

We’ve listed the popular programming languages and skills required for modern software projects. The figures below reflect the average hourly rates of software developers registered on the YouTeam platform who have specified a particular skill or discipline as their core specialization.

*Average hourly rates. Source: YouTeam.

Hiring software developers with YouTeam

The process of hiring software engineers with YouTeam looks like this:

1. You request a call and describe your development project goals and vision of the ideal candidate.
2. Your Matching Expert creates an Ideal Candidate Profile that meets your criteria, such as tech stack, industry experience, and professional development preferences.
3. Alternatively, if you don’t have enough time to make calls, you can start with our AI assistant, which will gather all the necessary information to find and screen candidates.
4. YouTeam finds suitable engineers among hundreds of partner outsourcing agencies. Our experts pre-screen talent to create a shortlist of candidates who most closely match your Ideal Candidate Profile. The first batch of profiles will be ready in 48 hours.
5. You receive and review your candidate shortlist and select which software engineers you want to interview. If you are not satisfied with your shortlist, the Matching Expert will source new candidates. [We have not encountered such cases in our practice, but we are ready to handle them upon your request.]
6. The final stage is contract signing. YouTeam contracts are locally-compliant and standardized, saving you time in case of hiring several developers from different agencies.
7. The platform ensures secure intellectual property (IP) transfer and guarantees the implementation of security measures to prevent unauthorized processing of personal data.
8. YouTeam offers free replacements, a 1-month risk-free trial period, and a money-back policy.

Frequently Asked Questions