3 types of product development outsourcing compared

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By Alvaro Chacon, Co-Founder and President of States Co. Recruit, retain and manage great digital talent on your behalf.

High-growth companies need to keep developing their digital platforms while managing resources. So what do you do when budget becomes tight, team members reach the limits of their skills and the available talent pool is too expensive? In my experience, companies should consider outsourcing right now, but first they should ask themselves:

1. Is outsourcing right for my company?

2. What type of outsourcing fits our current and future needs?

3. How are we going to integrate outsourcing into our recruitment strategy?

To help you answer these questions, I’ve explained the three types of outsourcing here. With this knowledge, you can effectively devise strategies for why, when and what you should or should not outsource.

Outsourcing 101

I divide outsourcing into three categories:

  1. Local: Hiring through a staffing agency in your home country. (I’m using the United States as a model here, because I know it best.)
  2. Near the coast: Hiring in countries that are in similar time zones or share a border with your company’s headquarters.
  3. Offshore: Hiring in countries that are geographically distant from the base of your company.

The main differences between the types of outsourcing are geographical proximity, time zones, and cultural similarities. Offshoring and nearshoring include personnel from countries other than where your company is headquartered or where the internal team works or lives. I separate nearshoring from offshoring because, while both are forms of ‘offshoring’, they have clear advantages and challenges.

All outsourcing differs from hiring freelancers because a freelancer works for himself, while an “outsourced” employee works for the company, an employee enhancement agency, or both. You can technically outsource freelancers, but I will only talk about outsourcing through an agency.

Hire locally

One of the biggest benefits of hiring through a US agency, in my experience, is cultural affinity. Hiring from a local agency offers the best chance of aligning your team and the outsourced staff on areas like language, social norms, and etiquette. While cultural affinity is unique to each company, a US company can generally expect personnel hired through a US agency, for example, to speak English and have comparable knowledge of US laws and the workplace.

Hiring in the US also brings logistical and bureaucratic benefits: US employees are legally liable, it’s easier to meet them in person, and they probably work in the same time zone. This detail can be a huge advantage in workflow and communication.

The downside of outsourcing locally? Cost. Typical hourly rates for US developers range from $150 to $250. The hiring process is also often slow, in part because it can be difficult to find a solid agency or talent pool.

Offshore

Cost is the primary benefit of hiring offshore: Hourly rates in parts of Asia and Eastern Europe, for example, are typically between $15 and $45, a fraction of a US developer’s rate. But as attractive as it is to save money, offshoring can incur non-financial costs. After all, it was Bill Gates who said, “A great software code writer is worth 10,000 times the price of an average software writer.”

When hiring offshore, be aware of potential communication challenges. It’s probably no surprise that communicating messages effectively can be difficult when teams work in very different time zones. You may not get a real-time response unless you put effort into finding overlaps in your work hours or ask a team to work irregular hours. Members of offshore teams may also speak different languages ​​than many of your internal employees or your customers. Finally, the distance just makes it very difficult to meet in person. I’ve seen that liability can suffer, especially deadlines, simply because you and your development team are in different countries.

near shore

For my company and customers, nearshoring is the solution for outsourcing goldilocks. In the US, nearshoring usually involves hiring people from countries within America. The hourly rates I’ve seen for developers in Argentina, Mexico, Costa Rica, and Colombia, for example, range from $45 to $90. As with US (“local”) outsourced teams, any developers you hire through them must be fully are assured if the nearshore agency has operations in the US and that all agreements are governed by US law.

Communication is easier with nearshore teams than offshore, as many Central and South American countries are in the same time zones as the US. Likewise, it is relatively easy to travel between the US and this region. Not only can you meet your outsourced teams in person, but also – and this is my favorite perk – network and explore these near but international destinations. Unsurprisingly, culture, language, norms and talent pools differ from country to country, even from city to city within a country. It’s important to do your homework and find the right match for your business.

It comes down to

Outsourcing works well when you need to scale or fill skill gaps but can’t or don’t want to expand your internal team. You can use all three outsourcing methods, but keep in mind that each type has different requirements and processes. Pick one to start with, then adapt as your staffing needs change.

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