Insource vs. Outsource vs. Hybrid
Outsource, or build my own team?
Startups need the fastest route to market and the best people on board – how can they achieve both?
Founders have a clear vision of what their startup will look like, including the people working for it – an expert team, strong workplace culture, and robust processes.
But creating a ‘dream team’ is one of many long-term goals. First, the startup needs to focus on product build to scale-up and get to market.
Investment is like a lit fuse. As the runway diminishes each day, every dollar counts to turn an MVP into a consumer-ready product.
This is when startups face the most pressure from investors to deliver both product and revenue as forecasted – fall short, and they might not make it through their scale-up journey.
The most critical decision to make about product build is how to get the best people on board – insource or outsource? Build a team or bring in experts from elsewhere?
We’ll explore each option, clear up some myths, and compare the two choices faced by a startup or any business undertaking a new project. We’ll also explore the new third option – a potential gamechanger for ambitious startups.
Let’s start with the option we all know well...
Insourcing – keeping it old-school
Insourcing is a perfectly valid option – and it’s undoubtedly the best way to go for leadership roles in the business. Hiring for ‘core’ positions in sales, marketing, and product development is essential to forming the ‘dream team’.
But, when preparing to accelerate to market, many startups allocate precious hours and investment dollars to hiring software developers as employees.
It’s important for growing businesses to consider other options before deferring to the traditional method during such a critical time in the scale-up journey.
Despite insourcing often being preferred by their investors (who may have misconceptions about outsourcing), hiring a full in-house team of software developers can put the brakes on productivity – when pressure to deliver is at an all-time high.
Finding and hiring talent involves many demanding tasks:
- Shoulder-tapping familiar resources
- Working with recruitment agencies
- Budgeting for salaries
- Roadmapping internal processes
- Interviewing candidates
- Building a team and in-office culture
- Setting up development best practices, standards, technologies to use
- Managing the team when it comes to HR, leave, work spaces
Although this process is essential for making sure the best permanent employees are brought on board, insourcing soaks up time and capital as the deadline for development looms.
Plus, it’s very difficult for any business to set up an in-house team of effective, high-functioning, collaborative programmers, let alone for growing businesses under such high stakes.
It can take 35 days on average to hire a software engineer, then further resources to bring them up to speed and get them started, typically 2-3 months. When scaled to 3-8 roles in a software development team, a startup finds itself far behind set targets with investors.
Rather than going straight for the most traditional method of hiring, we’re seeing customers enable far more flexibility for sourcing talent by broadening the possibilities to outsourcing and hybrid methods.
Outsourcing – busting the myths
Outsourcing has seen a surge in popularity for many industries in recent years, and the pandemic has transformed the way we work and collaborate remotely.
Today, many successful tech companies use freelancers and contractors in areas such as marketing, web development, lead generation, and even customer service.
Engaging software developers involves:
- Seeking out partners (via known networks, recommendations, or searching online)
- Providing a list of requirements
- Assessing estimates
- Background checking for credibility
- Aligning with technology choices and product development methodology
Rather than allocating a large proportion of capital and time to interviewing candidates, negotiating salaries, and offering employment benefits, startups can outsource work to developers on a pay-per-project, hourly, or retainer basis.
Outsourcing brings five clear benefits to startups:
- Scale: a flexible team to meet short-term targets
- Speed: a fast hiring process and plug-and-play approach
- Talent: access to the best people with expertise in a particular niche
- Cost: minimise overheads by avoiding salaries
- Accelerate: increase productivity by delegating tasks to experts
Outsourced software engineers ‘plug-and-play’ into company processes, reporting to an in-house head of development or product owner and keeping track of their hours.
In our experience outsourcing to a team of experienced software developers well versed in the same domain is more beneficial for start-ups than body shopping individual resources. They invariably come with substantial experience in developing platforms of a similar ilk, bringing their knowledge to projects while adapting to new requirements.
Plus, a team that has worked together many times before is well-prepared for collaborative tasks and can communicate effectively.
At YouDo we’ve been employed on a project by project basis very successfully. We find engagements on a per project basis can be much less hit and miss than contracting individual resources, sometimes also referred to as "body shopping. Once trust and credibility is built our customer partners have a partner for life that they can tap into at times of need.
Misconceptions about outsourcing software development...
Despite the way that companies in all sectors have shifted to work with contractors and freelancers, startups may face scrutiny from investors who have pre-conceived assumptions about outsourcing.
Of course, there will always be some risk associated with outsourcing. Like with any hiring process, success depends on engaging the right partner that fits with the company.
But, many concerns about outsourcing are inflated and outdated. Today's outsourcing environment has evolved to mitigate risk and offer robust processes that break down barriers that may have existed in the past.
Let’s address some of these misconceptions…
“Outsourcing is expensive”
Cost varies on the project and talent requirements but outsourcing is a cheaper long-term option when compared to paying a salary.
“Outsourcing makes quality control and project management difficult”
Quality control and project management becomes far easier when work is outsourced to reputable developers who report directly to in-house product owners and who work with industry standard collaboration tools that align with Agile development practices.
Management tools, such a Jira or Confluence, helps ensure clear communication and quality control. While real time messaging tools such as Slack and Microsoft Teams help teams stay connected on a day to day basis.
“IP can be lost through outsourcing”
As long as contracts are clear, IP is not lost through outsourcing. In fact IP can be bolstered by leveraging developers who have deep experience in topics such as security and scalability.
“Outsourcing is a high risk activity”
With access to a larger talent pool, it’s easier to choose the right partner and mitigate risk by outsourcing. Businesses can start small, build trust, and develop outwards from there. Outsourcing is also a great way to figure out what skills, experience, and personality is most desirable for future employees.
Stop and think - grab a coffee and compare
Side by side – which model is best?
Let’s compare the two, bearing in mind that different factors carry more or less weight depending on where your startup sits on the scale-up journey.
| Factor | Insource | Outsource | Discussion |
|---|---|---|---|
| Cost | Cheaper up-front cost but expensive long-term as employees are paid for unproductive hours, sick days, holiday, and other job benefits. | Potentially expensive up front cost but expenses lower long-term as startups only pay for resources used. Cost will usually tail off as projects are completed. | Costs also vary depending on talent and project requirements. Outsourced software developers can be hired on an hourly, pay-per-project, or retainer model basis, which may also affect overall cost. |
| Control | Control is perceived high because all resources are in house. | Extent of control varies depending on the relationship and project methodology applied with the development partner. | It’s important to note that employees can be unproductive if tasks aren’t delegated. Creating a strong process for outsourcing can enable high control. |
| IP | No issues. | No issues. | Investors often cite IP issues as a reason not to outsource. With the right contract terms in place, ownership of IP can be just as strong with outsource. |
| Asset | OPEX/CAPEX | CAPEX | |
| Resource Requirements | *CTO *Product owner *Development Team *Dev Ops | *Product Owner *Project Manager | |
| Management Overhead | High | Low | With insourcing, every developer needs leadership and mentoring as well as training. The advantage of outsourcing is that startups have to manage a partnership, not staff. |
| Risks | High | Low | Insourcing comes with substantial risks to startups as they are reliant on the talent, cultural alignment, and experience of a small team of hired staff. With outsourcing, startups have access to a much greater pool of talent. Choosing the right partner is essential. |
| Time to Market | Slower | Faster | The hiring process of insourcing can leave startups with major setbacks on targets. Outsourcing is much faster as development partners ‘plug-and-play’ and come with specific experience. |
| Support | High | Low | Support costs are high for insourcing as it is an operational responsibility and increases based on the size of the team. Support for insourced developers depends on the SLA requirements in the contract, but is generally much lower. |
Regardless of whether you choose to insource or outsource, creating a strong process for both approaches can take time.
Introducing the Hybrid model
By choosing between two vastly different methods, scale-ups rarely find the perfect fit. A complete in-house team risks burnout when their workload increases. Outsourced software developers may lack direction and context without executive support. The choice of model can greatly depend on timing. As an example a start-up may choose to outsource initially to get over the first significant product roadmap hump and then over time develop their own team to take on more and more of the long term roadmap implementation.
This Hybrid model enables startups to build their own team while offloading major work to a development partner. This parallel structure takes advantage of the benefits of both insourcing and outsourcing, while at the same time mitigating both sets of risks.
Here’s how:
| Challenge | The Hybrid Solution... |
|---|---|
| “I need to build my product rapidly, but don’t want to rush with expanding my team” | Enables fast product build using outsource developers while startups take their time creating a ‘dream team’ in-house. |
| “I need to be able to scale-up and down alongside product roadmap demands” | Allows rapid expansion and contraction of the resource pool as the product roadmap and targets change. |
| “I’m aware of the benefits of outsourcing but my investor has doubts” | Addresses investor fears up front while taking advantage of outsource benefits. |
| “How do I explain my concept to outsourced developers who aren’t going to be with me long term?” | Enables a good handover of code and repositories from ‘core’ in-house managers to outsourced partners. |
| “I can’t insource talent from overseas due to the pandemic” | Enables rapid progress on product roadmap unhampered by shortages of in house talent. |
Startups that should consider the Hybrid model:
- Small teams wanting to get ahead of the market as soon as possible
- Well-funded startups who are encountering unprecedented customer demand and therefore need to scale and grow quickly to accommodate that demand.
- Scale-ups who have just completed a capital raise to build out their value proposition.
- Requirements and goals that change responsively and dramatically
Conclusion: it doesn’t have to be black or white
There’s no one-size-fits all way for startups to get the best people on board. Insourcing and outsourcing methods continue to be equally valid approaches, depending on the ever-changing factors affecting startups.
For start-ups who choose not to align with outsourcing alone, the Hybrid model has emerged as a powerful alternative solution. Startups can scale-up and get to market rapidly while investing in their own team and minimising risk.
While this option isn’t cheap, it undoubtedly saves the cost of potential mistakes and risks of decisions made in such a high-pressure environment.
At the end of the day, a startup will be far more robust, able to pivot and scale quickly, if they have an external software development partner primed and ready to tap when required. It’s a far riskier alternative going it alone ….
