Why do companies outsource software development?

Why do companies outsource software development?

There are many ideas to outsource software development projects, from closing skills gaps to preventing incoming cyber threats to solving the growing customer experience (CX) challenge. In 2016, the leading driver for outsourcing was cost...

There are many ideas to outsource software development projects, from closing skills gaps to preventing incoming cyber threats to solving the growing customer experience (CX) challenge.

In 2016, the leading driver for outsourcing was cost reduction, according to business leaders. In 2019, a joint report by Harvey Nash and KPMG found that the top reason technology leaders outsource is "access to skills not available internally."

Another survey, CGS's 2020 Business Process Outsourcing Trends (covering IT/software projects including accounting or manufacturing and others), found that 45% of executives surveyed cited improving the customer experience as the primary motivator for outsourcing, while 36% said it was to reduce costs.

In this article, we answer why companies outsource software development - which, by the way, is much more complex than simply looking for "cheap labour."

Outsourcing is the key to digital transformation. By and large, outsourcing is a critical factor in digital transformation.

IDC foretells that by 2022, 80% of revenue expansions will depend on digital donations or operations. Today, this means that the survival of organizations depends on how well they can deliver solutions.

Steve Bates, Head of Global CIO at KPMG, says: "It's just strategy and technology driving it. The opportunity for IT here is to make it accessible to everyone, enable it without friction and empower teams to use technology to unleash creativity - without the burden of technology."

Regardless of the reason, outsourcing, if done right, can be a catalyst for "unleashing" the creativity that technology can provide and removing the burden that comes with it. These burdens can be labor costs or a lack of in-house talent.

However, outsourcing software development without a sound strategy will not do you any favors. Julio Plascencia, head of software development at Tiempo, warns, "If IT goals are not aligned and synchronised with business goals, the impact will be negative no matter what development methodology you choose."

CX factor

According to Adobe, CX leaders are far more successful than their peers. They are three times more likely to exceed their 2019 business goals than those who have not yet developed a "customer obsession."

Data from the 3rd edition of Salesforce's State of the Connected Customer report shows that consumer expectations will continue to rise shortly.

Overall, 75% of customers expect companies to use new technologies to deliver better experiences, while 73% say an "exceptional" experience will raise the bar for brands across the board.

While new technologies enable businesses to understand customer intent, behavior, and sentiment - and how these affect the bottom line - the Adobe report also notes that customer-centricity is creating a kind of "digital inequality."

In essence, high consumer standards widen the gap between companies that can afford to evolve with their customers and those who struggle to overcome the barriers and friction caused by lower technologies.

It is worth noting that both Salesforce and Adobe released their findings just before COVID erupted into a massive global crisis, forcing everyone online. For brands, "great experiences" must now inspire, engage and deliver tailored insights with a dash of empathy.

Ultimately, it seems that we are reaching a point where CX may be the most compelling reason to outsource, as technology and data are now essential to building direct and long-term relationships with customers.

Increasingly, we see companies turning to more sophisticated technologies to improve the customer experience, including AI-based applications, and intelligent chatbots, robotic process automation (RPA). In many cases, however, they lack the expertise to develop these solutions themselves.

Working with a team of outsourcers enables companies to deliver innovative solutions and capitalize on new trends - allowing them to evolve with their customers' needs and gain a competitive advantage.

The growing skills gap

According to SAP's 2019 report, finding, retaining, and retraining the right talent is vital to developing new capabilities and staying competitive, SAP says.

It's certainly no surprise, but the standards for what it takes to "stay competitive" are rapidly evolving, and companies are struggling to play a vital role in several key areas, including

Artificial intelligence and automation:

According to Gartner, within the next 12 months, 85% of consumer interactions will be with "non-humans." Leading companies across industries respond by reorganizing a more automated environment, with knowledge workers and machines replacing management staff.

Organizations need to rethink their recruitment and create teams with new strengths. These include programmers and engineers designing, building, and training AI tools and workers with soft skills such as empathy and problem solving to complement the speed, accuracy, and predictive ability of machines.

Data science-

Data is arguably a company's most valuable asset. However, only if you have the skills, technology, and company culture to capture that value.

According to a recent report by MicroStrategy, there is a significant gap between leaders and data laggards, but investing in more intuitive, accessible self-service solutions can help close that gap.

And while it's often difficult and expensive to find local data science talent (at least in the US), companies can instead leverage external teams to build custom data analytics platforms that enable better decision-making at all levels.


With the rise of big data and IoT and soon 5G, cybersecurity is becoming increasingly important and complex.

Organizations face the challenge of addressing the new security risks posed by the rapid shift to remote working while delivering more excellent value to consumers. The World Economic Forum advises businesses to prepare for a "COVID-like global cyber-pandemic" that could have a devastating impact on the global economy.

In addition, businesses move from on-premises servers to an ecosystem of connected cloud-based applications, requiring new infrastructure, new security strategies, and experienced teams to meet the new challenges. And, of course, to prevent potential cyber pandemics.

According to KPMG, companies respond to the talent shortage by creating on-demand networks where partners, providers, and internal employees work together to meet new demands.

  • 35.3% of survey respondents said the main reason for outsourcing software development is to fill "critical" or "hard-to-fill" technical positions.
  • 28.4% of respondents said they have an ongoing relationship with an external professional team.
  • 25.5% say they use teams of external partners to augment their internal staff.

** Outsourcing for value creation**

In general, outsourcing is a strategic initiative in which a company leverages external resources to achieve key business objectives.

Strategic objectives vary from company to company. However, the general trend is that more and more companies turn to outsource services to create business value with limited resources.

According to the results of this survey, respondents reported using outsourcing to overcome various challenges that make it challenging to achieve their big-picture goals. 18% said that labor costs were their most significant challenge to growth, 16% said that ensuring quality was their biggest challenge, and 12% said that expanding capacity was their biggest challenge.

Unsurprisingly, clients' most significant challenges and their reasons for outsourcing go hand in hand.

  • 36% want to increase their production capacity
  • 36% want to reduce labor costs
  • 36% want to improve the quality of services
  • 35% want to focus more time on their core business.

With an outsourcing team, you can get more done in less time. The advantage of having more resources in less time is that you can do more work in less time.

However, achieving these goals requires significant effort and coordination.

In our recent employee survey, Angel Almada, Director of Software Delivery at Tiempo, advises that companies looking to accelerate time-to-market and reduce costs should look for a vendor that has mastered the methodology they use internally to develop products.

Let's say you are used to using the agile process. You want to work with a team of experienced Agile professionals. Otherwise, you may inadvertently be working with a company that uses outdated (slow) waterfall practices, leading to delays, quality issues, and financial losses.

Companies still rely on outsourced service providers to save money. Increasingly, the reasons for outsourcing are related to the biggest challenges of the modern business landscape.

From meeting growing customer demands and creating seamless omnichannel experiences to data protection and system security, outsourcing software development is the only way for many companies to survive in the digital world.

However, not all outsourcing businesses are the same. Companies should focus on choosing partners that align with their overall strategy and provide long-term value.

Top outsourcing companies in India can help you navigate this space and find a partner with the technological knowledge, communication skills, and resources to deliver results.

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