The outsourcing industry often sees external engineering as a matter of lower hourly rates. In doing this, the industry ignores the significant risk to product viability.
It is easy to purchase development hours; however, transferring domain expertise for a complex business application into an external team is a large operational risk.
Why Agencies Get It Wrong
This article shows how standard marketing claims made by agencies are wrong. We will explain how to replace those claims with a framework for managing costs, scopes and code ownership in real life, plus provide data to support it.
Why Companies Fail When Outsourcing SaaS Development
Many companies fail when trying to develop software with an outside developer. They tend to fixate on hourly rates or hourly banding versus the overall cost of ownership for the application.
The global software industry is projected to reach $790 billion in revenue. Due to the tremendous growth of the cloud sector, demand for cloud-based skills is at an all-time high, making in-house hiring slow and costly.
The Hourly Rate Trap
Agencies sell the concept of cheaper talent available globally for outsourcing SaaS development. But the price of an hourly rate is irrelevant if the outsourced team takes three times as long to develop a proposed feature as the in-house developer would.
The speed at which a working, secure application is introduced into the market is the true measure of success for evaluating partners. The past achievements of potential partners with similar applications and cloud architectures should be evaluated, not solely their price.
How to Match Your Project to the Right Contract
The quickest way to ruin an outsourcing SaaS development project is by choosing the wrong contract model to execute the project. Thus, it is critical to align the contract model with how much you can effectively manage the project internally.
The clarity of the team members' understanding of your product's vision should also be taken into consideration when aligning the contract with your internal capacity for management.
Fixed project models only work for projects where requirements will be consistent and predictable throughout the development process.
When scaling products, dedicated team models allow for sufficient internal technical leadership flexibility, eliminating local hiring delays.
Using a full-cycle managed model provides you with an agency-managed architecture, testing, and delivery process, regardless of how strong your internal product management is.
True Cost Drivers and Financial Facts
Guides will frequently advertise the ability to build a simple application for under $20,000. This number is often a trap set to get you to sign the contract.
Minimum Viable Product Costs
Data indicates that the real budgets for MVPs will be $30,000 to $100,000. These values assume standard features and basic integrations. But as soon as you add multiple user roles, complex logic, or multi-tenant billing on tools like Stripe or Chargebee, the start date of 2 months moves to 4 months, instantly.
For every integration added, it will take weeks longer to complete.
Scaling to Enterprise Levels
Once your application has an enterprise-grade level of security, it becomes financially feasible. The cost of moving your application to a sales-ready state can be between $100,000 and $250,000.
Once you achieve a large-scale deployment with compliance standards, your budget will likely exceed $500,000. A large portion of the expenses will consist of invisible work, including an automated testing environment, scaling databases, and performing thorough deep security reviews.
Regional Hourly Rates
While rates differ by region, lower rates can be due to high communication impediments between you and your vendor. Developers in the United States and Canada charge from $80 to $150 an hour. In Western Europe, the rate is $70 to $130, Eastern Europe charges $40 to $70, Latin America (including Mexico) charges $30 to $60, and India remains at $20 to $45.
The key when selecting a region for your development team for outsourcing SaaS development is not finding the cheapest hourly rate. This is about building your daily workflow around timezone matching and cultural communication styles.
Strategic Benefits Beyond Software Delivery
Speed is one of the primary motivating factors for leaders to look for support from outside of their organization. Building an internal team can take months of interviews, negotiation, onboarding, etc.
Speed to Market
When you utilize an external agency, speed to market can be dramatically accelerated. For example, one vendor, Clockwise, stepped in and supported one organization that took six months trying to hire for a specific position locally. Clockwise completed a complex route-planning system in less than nine months.
Another vendor, Technource, shared that they were able to outsource certain medical module components, which resulted in approval times that averaged 65% faster than their normal approval rates. You are purchasing speed.
Access to Specific Cloud Skills
To build a modern cloud product, you need specific technical expertise in areas like AWS or Azure, PostgreSQL database management and either React or Angular as a front-end framework.
Being able to outsource these specific skill sets provides you access to highly skilled team members without needing to employ them on a long-term basis. Once the project has transitioned from build mode to maintenance mode, the size of your team can be scaled down without the sacrifice of terminating any employees.
Hidden Risks and How to Defend Your Product
Lack of control over what happens with your product after you engage an external team is your most significant threat. If you allow access and control without implementing checks and balances to protect yourself, you may receive a product you don't possess.
Governance and Security Protections
When creating and/or developing medical and/or financial products, there are strict data protection laws, such as HIPAA and GDPR. If an external vendor does not enforce security and access control policies, your company is at a significant risk.
Make sure to require your vendor to utilize automated tools for security scanning before any code goes out to production.
Maintain full visibility and control over your primary source code repository and your cloud hosting account from day one.
Make sure you have a clearly defined agreement with your vendor regarding your intellectual property rights for all code, design files, and documentation produced.
Technical Debt and Vendor Lock-In
Many firms wish to launch a product rapidly but do not make sure that the code produced is clean and readable for future developers. This is called technical debt. When the time comes for your agency to sell or to move away from outsourcing SaaS development and bring the software internally, the technical debt becomes problematic and can cause issues with the transition process.
The continued rise of artificial intelligence (AI) used for software development has added an additional layer of risk. While the use of AI can provide for a fast delivery of a software system, it is also possible that it will produce hidden logic errors or could inadvertently copy other companies' protected code. It is absolutely required that you implement an internal procedure to ensure that humans review the logic generated by any AI tool prior to being released for production.
How to Succeed with External Developers
To be successful in this marketplace, companies will need to be extremely disciplined in their dealings with external firms. Companies that view external firms as cheap labor are destined for failure. Companies that view external development firms as strategic technical partners will ultimately be the winners.
The emphasis on the technical architecture, on the consistent maintenance of security compliance, and on the development of an accurate handover plan for the software must remain a top priority. No project should commence until the enterprise clearly defines how that project is intended to end.
Strategic Questions for Software Projects
How do we avoid scope creep in the early stages of the project?
You should ensure that every feature request is linked to a specific cost and a date at which the request will be completed. For example, if an end user requests that a new reporting module be added halfway through development, the vendor should be required to bid how much the request will cost and how long it will take to be delivered. Once stakeholders see this relation between their request and the financial reality, they are likely to stop making requests indefinitely and direct their attention back to the core functionality of the software product.
What will happen to the code produced by an agency that utilized AI technology?
The contract between your agency and the vendor should include a clause that clearly states the vendor is responsible for ensuring that any machine-generated code does not inadvertently contain licensed code from other companies and that exclusive intellectual property rights to all software code produced remain with your agency. All code generated by a human or a machine must undergo both a manual code review and automated static and dynamic application security testing prior to being released for production.
How should your internal product managers communicate with and collaborate with external developers?
Your internal leaders must consider themselves to be, and act like, the ultimate authorities on the product vision. They should not stand back and assume that the agency will determine what the product requires to meet market needs. Your company must establish daily communication with external developers, constantly review the misuse reports for the product, and hold sprint planning meetings regularly to prevent the delay of project decisions.
What is the true cost of transitioning software from an external firm back to your internal team?
The entire process of transitioning the operations of a software system from an external firm to an internal team requires a phenomenal amount of knowledge transfer. You are not merely transferring a software application; you are also transferring an understanding of the operational parameters associated with that application. You should budget for approximately 60-90 days of simultaneous operations, during which time your external software vendor trains your internal employees, documents the software system architecture, and provides your internal personnel with access to the cloud-based infrastructure associated with the software system.
