The lowdown on outsourcing and offshoring: Which is right for your startup?

With the recent shift of the business landscape due to Covid-19, tech startups and small and medium-sized enterprises will have to keep a close watch on their outgoing expenses and maintain a healthy cash flow for survival.

Photo credit: Mimi Thian

Unfortunately, IT labor costs are escalating due to the high global tech demand, which is also causing maintenance expenses in sustaining a good software engineering team to jump significantly. This has led startups to face huge technical debt with only a few software engineers to handle development projects.

So instead of letting this happen, leaders should lean toward a combination of outsourcing and offshoring software development as a sensible budget-friendly solution.

There are four models to scale your teams:

1. Onshore insourcing: work with an in-house tech team in the home country
2. Onshore outsourcing: work with a software consultancy firm in the home country
3. Offshore outsourcing: work with a software consultancy firm in a foreign country
4. Offshore insourcing: work with an in-house tech team in a foreign country

While there is no one-size-fits-all solution, here are some ideas on which model is best for startups and small businesses from two different angles:

1. Cost, control, and performance: Which of the three factors are more important to your company?
2. Growth stage: What is the current growth stage of your company?

Cost

If cost is the greatest concern, then offshore outsourcing is the best bet. A trustworthy outsource provider from a lower-wage country can help to reduce up to 70% of a startup’s operational costs. However, it is worth noting that project management will need to be efficient to avoid any hidden costs chipping away from the budget. If founders prefer to keep a good balance between adequate management and sufficient costs, then an offshore team is the optimal option.

Control

There is no doubt that in-house (onshore or offshore) strategies are the king when it comes to gaining complete control of operations. By keeping things internally, there is less exposure to risk. But startups must keep in mind that having an in-house, onshore team is costly to build and maintain. In some cases, IT talent is simply unavailable in the country where a company is based.

Thus, to retain a high level of control without burning through the budget, many firms are building their own offshore teams across the globe, which can save up to 60% of operational costs.

Performance

Outsourcing is a powerful strategy when you need to deliver a product on a constrained timeline. However, depending on the performance of the outsource provider, the result can vary drastically.

On the other hand, having an offshore in-house team means greater performance, since coordination and quality control are only second to an onshore in-house team while the costs are much lower. Therefore, if your priority is long-term planning, you may choose the offshore insourcing strategy.

Angel, pre-seed, and seed stages

Series A and B stages

Wrapping it up