Outsourcing Software Development: Types of Vendors

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70% of companies choose outsourcing because it saves costs, says Deloitte. But you can only enjoy this benefit if you’ve partnered with an experienced IT outsourcing vendor. Otherwise, you risk overpaying. So your task is to take vendor selection seriously, and our task is to explain how to find an ideal IT outsourcing fit.

The best way to start looking for an IT outsourcing provider is — no, not to blindly trust reviews. You need to understand how different types of outsourcing vendors work to choose the right one for your project. Read on to discover how outsourcing companies differ according to their location and pricing and what the pros and cons of differently sized vendors are.

But first, let’s get to the bottom of this question.

Why do companies outsource software development?

Having a team of in-house developers committed to your values is great. But, such teams also have limitations that slow down your progress. Fortunately, you can tackle most of them with outsourcing. And yes, dedicated outsourcing teams can be just as loyal.

In-house vs. outsourced software development

To show you the advantages of outsourcing, let’s look at the typical restrictions of an in-house team.

In-house employees are expensive

On average, you spend about 30% of a private employee’s payment on benefits: taxes, vacations, leaves, etc. That is, if a developer’s average salary is $107,000, you give up about $32,000 on benefits.

Fortunately, outsourcing cuts most of these expenses, depending on the vendor and the country where it operates. You only pay for a service, a product, or employees’ work hours with an affordable monthly sum, while the vendor covers all employment taxes, benefits, sick leaves, and days off.

An in-house team should have an adequate amount of work to pay off

You pay employees a regular salary, no matter how much work they do daily. So it’s in your best interest to give them enough tasks. Then again, you can’t throw dozens of projects at them at once since the quality of their work will drop. And they’ll probably just leave after several months.

So, if your workload constantly varies, keeping in-house specialists may not be the best idea. For example, if you’re a startup building an MVP, you don’t need to hire an in-house team to create it since recruiting costs at this stage will be too high. Instead, try outsourcing this work to a dedicated team.

By the way, on top of outsourcing custom software development, you can outsource all kinds of additional services:

• Quality assurance
• UI/UX design
• Cloud infrastructure setup and maintenance
• Software modernization
• Big data management
• Technical documentation writing

The trick is to find a vendor who can handle your tasks.

In-house talents are difficult to find

Skilled employees are as expensive to retain as they are hard to find. According to Manpower Group, talent shortage in IT reached 76% in 2022. So, the chances of finding an in-house employee in your city are pretty low.

Outsourcing, on the other hand, opens up the global talent pool for you. It helps you find professionals with highly demanded or rare skills. Best of all, you can hire freelance engineers from anywhere in the world for the duration of the project, or an outsourcing company will take care of recruiting for you. No endless recruitment, no hassle, no strings attached.

Speaking of freelancers and outsourcing vendors, which option do you think will fit your project better? If you’re still on the fence, let us give you some food for thought.

Freelancers vs. professional outsourcing companies

Freelancing and outsourcing are similar because, with both, you hire specialists to carry out a specific project, and they work remotely. That’s where similarities end.

Finding freelancers for your specific project looks easier: you go to freelance websites and choose among hundreds of specialists with a narrow focus. Once you find a match, you can start working almost immediately. Their fees are also lower than that of companies. For example, according to the Payoneer survey, the average hourly rate for IT professionals is $21, while the average rate for outsourcing firms is 30-55$.

Still, working with freelancers is a huge challenge in itself. First, freelancers usually don’t work as a team, and, contrary to what they all write in their profiles, they’re rarely responsible. So you’ll need to micromanage each additional freelancer separately or hire an in-house manager for that.

Secondly, freelancers may disappear without a word, and you won’t be able to track them down. Worst of all, you don’t know what happened to them. Are they having connectivity problems? Are they in a hospital? Did they not feel like finishing the project? Or maybe they stole your confidential information for their own benefit? Even signed contracts and NDAs won’t help you at this point.

That’s why, in most cases, it’s much easier and safer to pay a little more to a professional outsourcing company but feel confident in the results. The vendor takes care of all recruitment and management issues, so you can easily scale the team, focus on your core activities, and be sure that your project is taken care of.

Of course, outsourcing companies also have their drawbacks. For example, an agency may charge you hidden fees you didn’t know about. Or your outsourced specialists will work on several projects at once, sharing their focus and lacking integrity. Still, most outsourcing shortcomings won’t even come up if you choose a trustworthy vendor.

Types of outsourcing vendors

People classify outsourcing vendors depending on the price, size, location, and other factors.

Pricing models

Projects come in different shapes and sizes; they vary in the time frame, number of tasks, complexity, resources, and so on. And the vendor should account for every peculiarity of the project. Some companies use several of these models at once to offer customers convenient options for different needs; others focus on a single one from this list.

• The fixed-price model. The vendor and the client discuss and agree on a fixed price for a fixed scope.
• The time & material pricing model. The customer pays for the hours the team members spend on the project.
• The milestone-based pricing model. The client pays for the time spent on the project, but only after each milestone is achieved.
• The dedicated team pricing model. The client covers the salary of each team member plus the monthly company fee. The team works exclusively on a particular project, devoting all their time to it.
• The service subscription model. The client buys a subscription to the services or products of the company and enjoys all its benefits.

If you want to learn more about each of them, read our article about software development pricing models.

Location-based types of IT outsourcing vendors

Types of outsourcing also differ by the location of the company you are hiring. Let’s say, you’re located in Europe. This is how different types of vendors will look to you.

• Onsite. You work with outsourced employees, but they operate from your office. This option is ideal if you lack one or two specialists in the team to launch a product.
• Onshore. The vendor’s team is located in your country, but they work remotely (perhaps, in a different city). The pros: a shared culture, values, language, and communication methods.
• Nearshore. You hire a vendor from a neighboring region and get employees in the same time zone, with similar values and approaches to work, but at a lower price. For example, you can hire a company from Ukraine, where the average hourly rate of a senior developer is $45.
• Offshore. You hire a vendor from across the globe, often in a different time zone. This includes Asia or South America. While the time difference of five or more hours is inconvenient, you get high quality at a reasonable rate.

Still, the location is not always the deciding factor for selecting vendors since you also need to consider their size and offerings.

Size-based types of IT outsourcing firms

Different websites and companies classify vendors by size differently. There are no specific numbers that define a company as big or medium. But since you need to understand the difference, we will give you some references.

Note: Instead of relying on “We are a big player” on the vendor’s landing page, check the company’s number of employees on rating and review platforms like Clutch and GoodFirms. This is important because size does matter: prominent international players, medium-sized companies, and small-sized agencies have their own pros and cons.

Large international players

Such vendors are usually well known and have no less than 500 employees. You’ve probably already heard about them. And if you haven’t, Google’s top search results will tell you who they are.

There are definitely huge benefits of hiring huge vendors:

• A wide range of specialists. Big companies can afford to keep specialists on the bench between projects. This means they may fill the necessary positions for your project quickly without having to hire additional people.
• Rich expertise. These companies rarely work in a niche; chances are, their offering is very broad. Plus, their employees have worked on many types of IT projects, outsourcing for different businesses, and they will put this experience to use in your project.
• Resources, partnerships, integrations, products. Vendors this big often have opportunities others don’t when it comes to outsourced IT solutions. Like partnerships with other famous companies or integrations with adjacent tools.
• Recognizable brand. This company’s brand attracts the best specialists who can become a part of your outsourcing team.

And though there are a few flaws, they’re hard to ignore:

• High prices. Big companies use their brand and resources to increase costs, so not every customer can afford them.
• Bureaucracy and little flexibility. Multiple approval stages may stretch pre-project and change-making processes for weeks.

So, although large players have their benefits, they lose attractiveness once you start thinking about the overcomplicated bureaucratic processes and enormous prices. Perhaps, you’d be better off looking at smaller companies?

Small companies

We identify small companies as having up to 60 employees. Some of them are just starting out and haven’t grown yet. Others prefer to stay small and keep their headcount to a minimum. Regardless of the reason, small companies have the same benefits:

• Unparalleled flexibility. A couple of calls or messages are enough to make changes to your project.
• Low cost. Smaller companies don’t charge for a big name and huge offices. They charge affordable fees for high-quality work.
• Enthusiasm. Smaller teams are more emphatic, and they genuinely want to add to every client’s success.

Still, a small agency has cons that may outweigh the pros for some:

• Narrow specialization. A small team has a limited offering. Plus, they often lack the resources to create something big, like a platform or SaaS.
• Limited team. If you decide that you want to expand your solution with native mobile apps, and they don’t have the necessary experts on their team, you’ll probably need to ask another company to create them.
• No-name. Small companies don’t have recognizable brands, which can hinder the recruitment of top specialists.

All in all, you can hire a small-sized vendor if you’re not planning to create something big or complicated. Otherwise, it’s best to hire a mid-level IT outsourcing company.

Mid-level companies

Medium-sized companies already have an established brand that’s usually known locally. They have up to 500 employees and an optimal structure with significant benefits:

• High flexibility. These companies are still pretty flexible and adaptable to client demands.
• Affordable prices. Relatively low costs allow you to implement projects within reasonable budgets.
• Extensive portfolio. Their employees have a vast expertise in developing all kinds of solutions for clients from various industries.

On top of that, the flaws of medium-sized companies are pretty easy to overcome.

• Limited resources. While industry leaders attract top talents, medium-sized companies are less attractive to them. But that doesn’t mean they aren’t. The recruiting efforts of these companies are still very successful.
• The brand isn’t widely recognizable yet. But that’s okay because you can read their reviews, case studies, and descriptions online before contacting mid-sized companies for more information.

Acropolium perfectly fits the description of a mid-level company with all its benefits and more. It has a great track record of successful projects in healthcare, fintech, automotive, retail, construction, and other industries, so you can be sure your project will be in good hands.

Plus, Acropolium offers a convenient and flexible pricing model: you can get the full package, including development, consulting, and risk management, by subscribing to our services. A great deal with minimal risk.

Final thoughts

Outsourcing is an excellent way to meet your business goals when hiring in-house employees is too costly and inefficient. An outsourcing team frees up your resources for critical processes, reduces administrative, operational, and recruiting expenses, and allows you to find skilled specialists for projects quickly. But you must distinguish between the types of outsourcing companies and their features to select the perfect vendor.

Depending on the nature of your project, you may prefer onshore, nearshore, or offshore IT outsourcing companies with different pricing models. You can also choose vendors of different sizes, depending on your needs and capabilities. Usually, though, mid-size firms are the optimal choice for most businesses.

Contact Acropolium to experience the benefits of working with a middle-sized company. We’ll be happy to answer your questions about our prices, services, and processes, so drop us a line.