Outsourcing vs. in-house: pros and cons of different software engineering services models

Businesses that want to build, maintain or improve their technology systems and products need software engineering services. Companies have two main options when it comes to obtaining these services: An external provider or an internal team at your company.

The advantages and disadvantages of both models are costs, quality control, security and flexibility. Companies who need to meet their software needs the best way possible need to understand these trade offs.

Outsourcing Software Engineering Services

Outsourcing software development, testing, maintenance, or other IT services has become an extremely common practice among companies of all sizes. The outsourcing provider takes care of managing an offsite team with the appropriate technical skills while the client company can focus resources on core areas.

Cost Savings

One of the biggest appeals of software engineering services is lower overall engineering costs. External providers, especially those operating overseas in countries with lower wages, can offer significant hourly rate reductions for services. Outsourcing shifts recruitment and human resource overhead to another company. Service contracts also allow flexibility to scale resources up or down to meet changing needs.

Specialised Expertise

Experienced outsourcing vendors build specialised expertise in particular technologies, domains, or types of projects. They can take on and deliver complex or innovative development initiatives. An individual company may have difficulty or even be unable to cultivate access to skilled talent and niche capabilities in-house.

Focus on Core Priorities

This frees up internal resources from software projects, allowing companies to concentrate more energy on core products and competencies instead of technology. Outsourcing can be absolutely crucial for keeping the burn rate low for startups and smaller businesses.

Potential Downsides of Outsourcing Services

While cost effective and effective, offshoring software engineering to third party vendors brings with it risks regarding quality, security and control.

Quality Control Challenges

Depending on the way we monitor outsourced teams remotely, we can have problems with oversight, products that don't meet specifications, products that aren't robust, and products that don't integrate well with existing systems. Communication issues are exacerbated by language and time zone barriers.

Security & Compliance Risks

Giving external access for development or testing is a potential data breach and cybersecurity threat.

Partners may be outsourced outside the industry and do not comply with the standards required by industries such as finance or healthcare. Another thing to consider is the loss of intellectual property, especially when working with offshore vendors.

Lack of Responsiveness & Control

Lack of internal control and the ability to dictate precise development times are two things that can be given up when using an outside vendor. Agreements in a contract can limit flexibility to pivot on product direction or respond to an urgent need. It’s hard to replace poor-performing outsourced teams.

In-house Software Engineering Teams

To reduce the uncertainties introduced by outsourcing, many companies opt to handle technical initiatives strictly with in-house staff and leadership.

Better Alignment with Goals

Internal engineering is very closely aligned with business objectives and the strategies. Instead of splitting their attention between other clients, teams focus on the precise products and systems that are driving the organisation. Having software specialists on staff also helps to make collaboration between departments much tighter.

Protection of IP & Assets

In-house development allows for full control and protection of proprietary systems or architectures as well as confidential customer data, financials, or trade secrets. External access channels can be avoided to significantly improve cyber risk profiles.

Agility & Responsiveness

In-house teams operate on the company’s schedule and can respond faster to shifting priorities or operational needs. Critical systems issues are addressed quickly without waiting for external ticket resolution. Internal teams also stay on top of system evolutions versus outsourced relationships that may churn through different staff.

Trade-offs of Maintaining Internal Teams

However, committing to perform software engineering completely through in-house staff requires accepting some key downsides compared to outsourcing alternatives:

Recruiting & Retention Challenges

Hiring and keeping top notch technical talent represents a key obstacle, especially for companies not primarily in the software business. Salary and equity expectations may not align with budgets for supporting rather than revenue-generating departments.

Lack of Flexibility in Scaling

Supporting workloads through salaried employees limits ability to quickly grow or shrink resources. Having sufficient buffer capacity for spikes in needs requires over-building teams. Budget for full staff must be maintained even during slower periods.

Distraction from Core Focus

While aligned with internal needs, dedicating resources to software engineering may divert key leadership attention and operational bandwidth from executing on primary lines of business. Pressure mounts to deliver external revenue rather than internally focused outputs.

Evaluating Outsourcing vs In-House Approaches

Determining the right balance of outsourcing versus in-house skills for software engineering depends heavily on a given company's size, budget, and centrality of technology. Startups and smaller companies typically benefit more from outsourcing, while large enterprises with sufficient resources can absorb the demands of internal development.

When Outsourcing Makes Sense

For companies without large engineering departments or technical leadership, outsourcing provides the best opportunity to punch above their weight class in terms of launching and maintaining software products.

Early Stage Startups

Early-stage companies need to maintain lean operations while proving their core product direction and market viability. Outsourcing minimises costly burn while still allowing robust prototypes and even full-featured MVPs.

Small Companies & Non-Tech Industries

Organisations without large engineering teams capable of tackling specialised projects or tangential internal tools gain affordable access to skills through outsourcing partners. External oversight works for companies focused outside tech.

Temporary Projects

Outsourcing one-off development initiatives, new modules outside core platforms, or modernising legacy systems prevent overstaffing for non-recurring needs.  Contracting specific project scopes maintains flexibility.

When In-House Teams Deliver More Value

Larger and more mature companies with regular, business-critical software engineering needs that outweigh the overhead of internal teams gain advantages by keeping work in-house.

Large Enterprises

At the enterprise scale, outsourcing risks around security, IP loss, and agility start outweighing the cost savings. Resources exist for large internal teams, leadership oversight, talent development programs and infrastructure.

Software/Tech Companies

For organisations directly in the software business, engineering represents an irreplaceable core competency rather than a supporting function. Institutional knowledge around proprietary IP lives on internal teams.

Frequent Upgrades & Enhancements

If products constantly need to be improved, have new features, or integrate with systems that change quickly, it is better to keep the staff in-house who are intimately familiar with the codebases.

Key Considerations for Structuring Software Services

It’s about more than just outsourced versus in-house, there are important decisions around team structure, development methodology, and flows of communication to consider when executing effective software engineering.

Team Structure

Engineers must collaborate within structured teams focused on specific product modules and components. Several approaches exist to appropriately segment efforts: 

●      Feature Teams: groups own implementation of specific user-facing functions

●      Component Teams: focus on foundational services shared across features

●      Platform Teams: concentrate on core infrastructure other groups build atop

Development Methodology

The process for task breakdown, assignment, progress tracking and delivery should follow established frameworks: 

●      Waterfall: sequential staged progression through requirements, design, coding, testing

●      Agile: iterative approach with continuous integration and short feedback loops

●      DevOps: emphasises automation and collaboration between developers and IT operations teams

Communication Flows

Clear channels for collaboration, coordination, and leadership direction must run between product owners, engineering managers, and team members:

●      Daily Standups: regular intra-team status updates

●      Backlog Grooming: planning sessions to prioritise work

●      Retrospectives: reviews of what worked and what to improve post-sprint

●      Code Reviews: peer feedback loops to maintain quality and spread knowledge

Key Takeaways: Choosing the Right Software Services Approach

When considering whether to outsource or to do the software engineering in house, you need to consider cost, control, security, flexibility and strategic focus, amongst other things. Company size and maturity have a big bearing on the optimal balance.

Yet, regardless of the approach, strong teams, methodologies and communication guarantee the successful delivery of technology products and platforms. These process considerations are prioritised to scale engineering efforts and capabilities over time.