3 Types Of Product Development Outsourcing Compared
By Alvaro Chacon, founding partner and president at Stateside Co. Sourcing, retaining and managing stellar digital talent on your behalf.
High-growth companies need to keep developing their digital platforms while also managing resources. So what do you do when the budget gets tight, team members reach the limits of their skill and the available talent pool is too expensive? In my experience, companies at this juncture should consider outsourcing, but first, need to ask:
1. Is outsourcing right for my business?
2. What type of outsourcing will fit our current and future needs?
3. How do we start integrating outsourcing into our hiring strategy?
To help you answer these questions, I’ve explained here the three types of outsourcing. With this knowledge, you can effectively strategize why, when and what you should or should not outsource.
I divide outsourcing into three categories:
- Local: Hiring through a staff augmentation agency in your home country. (I use the United States as the model here as it’s what I know best.)
- Nearshore: Hiring in countries that are in similar time zones or share a border with your company’s headquarters.
- Offshore: Hiring in countries geographically distant from your company’s base.
The key differences between the types of outsourcing are geographic proximity, time zones and cultural similarities. Offshoring and nearshoring involve staffing from countries other than where your business has its headquarters or where the internal team works or lives. I separate nearshoring from offshoring because, while both are forms of “offshoring,” they have distinct benefits and challenges.
All outsourcing differs from hiring freelancers because a freelancer works for themselves, while an “outsourced” employee works for the company, staff augmentation agency or both. You can technically outsource freelancers, but I’ll only be discussing outsourcing through an agency.
One of the biggest benefits of hiring through a U.S. agency, in my experience, is cultural affinity. Hiring with a local agency provides the highest likelihood that your team and the outsourced staff will align in areas such as language, social norms and etiquette. While cultural affinity is unique to every business, generally a U.S. company can expect staff hired through a U.S. agency to speak English, for example, and have similar understandings of U.S. laws and the workplace.
Hiring in the U.S. also brings logistic and bureaucratic benefits: U.S. employees will be legally liable, it’s easier to meet them in person, and they are likely to work in your same time zone. This detail can be a huge advantage in workflow and communication.
The downside of outsourcing locally? Cost. Typical hourly rates for U.S. developers range from $150 to $250. The hiring process also tends to be slow, in part because it can be hard to find a solid agency or talent pool.
Cost is the main benefit of hiring offshore: hourly rates in parts of Asia and Eastern Europe, for example, tend to be between $15 to $45, a fraction of a U.S. developer’s rate. But as appealing as it is to save money, offshoring can come with non-financial costs. After all, it was Bill Gates who said, “a great writer of software code is worth 10,000 times the price of an average software writer.”
If hiring offshore, keep in mind potential communication challenges. It’s probably no surprise that getting messages across effectively can prove difficult when teams work in very different time zones. You might not get an answer in real time unless you put energy into finding overlaps in your working hours or you ask one team to work irregular hours. Members of offshore teams may also speak other languages than many of your in-house employees or your clients. Lastly, the distance simply makes it very hard to meet in person. I’ve seen that accountability can suffer, especially deadlines, simply because you and your development team are in different countries.
For my business and clients, nearshoring is the goldilocks outsourcing solution. In the U.S., nearshoring typically entails hiring from countries within the Americas. The hourly rates I’ve seen for developers in Argentina, Mexico, Costa Rica and Colombia, for instance, range from $45 to $90. As with U.S. (“local”) outsourced teams, if the nearshore agency has operations in the U.S., all developers you hire through them should be fully insured and all agreements covered under U.S. laws.
Communication is easier with nearshore teams than offshore since many Central and South American countries are in similar time zones as the U.S. Likewise, it’s relatively easy to travel between the U.S. and this region. You can not only meet your outsourced teams in person, but also—and this is my favorite perk—network and explore these close, yet international, destinations. As is to be expected, the culture, language, norms and talent pools vary from country to country, even city to city within a country. It’s important to do your homework and find the right fit for your business.
The Bottom Line
Outsourcing works well when you need to scale or fill skills gaps, but can’t, or don’t want to, expand your in-house team. You can use all three outsourcing methods, but keep in mind each type has different requirements and processes. Pick one to start with, then adapt as your staffing needs change.