As a tech-based business grows, leadership is faced with the decision to either partner with an external development firm, or to form an in-house IT division. Let’s analyze what works and what doesn’t.

When you onboard a qualified external development firm, it is possible to have a robust SaaS platform or mobile app in the hands of beta testers in months. A qualified firm, as a unit, is a highly optimized machine – training, team-building and process-building efforts are entirely avoided, as these come straight out of the box.

Needless to say, if the project is one of limited scope, building a purely in-house technical team would require either maintaining the additional overhead or going through a messy ‘downsizing’ process. Recruiting, hiring and setting up a development team (or an IT department) takes time. Time is the one thing you don’t have when your competitors are rushing to market.

This works because of specialization. Rather than taking six months to get the hang of a new platform or technology, outsourcing allows a company to immediately jump into the very latest trends. As Accenture’s Jane Linder explains in Harvard Business Review, “Companies have tended to use mergers and acquisitions to get themselves into new industries and change the boundaries of what they were doing. That’s a very blunt instrument—and hard to do right. With outsourcing, you get a finer point on your pencil.”

Winner: Outsourcing

Communication

Although North America spans multiple time zones, continental video conferences are quite easily accommodated and do not pose much of a challenge. Regularly calling your team in India or China, however, is a completely different thing. It is common to lose an entire business day waiting for a response. On top of that, working through language barriers – even minor ones – causes wasted efforts and misunderstandings.

According to a PWC survey, nearly 70% of all outsourcing projects fail, and the biggest reason is communication. In a collaborative process that involves developers, project leads, designers, marketing teams, customer service teams and even legal matters, a communication breakdown can lead to a devastating end result.

Gabriel Fuchs, a managing consultant at IBM, puts it more succinctly: “What happens when when communication doesn’t work? Anything can happen—and whatever happens is likely to do so in an uncontrolled manner, where the key players no longer know what is going on and therefore cannot steer things in the right direction.”

Winner: In-house (or local agency)

Overall Cost

Getting a team in India, China or Russia (for example) to build your platform is, at face value, a tempting way to begin a large project – their rates cannot be beaten, and the up-front capital investment is minimal.

As the saying goes, however: you get what you pay for. Platforms that are of any importance whatsoever need to be architected correctly – and using the right technologies – from the very beginning. To rewrite a platform after it has launched is famously costly, as it is has the triple impact of affecting business, delaying new feature development and requiring an investment (at least) equivalent to the one made in the platform that is being rewritten.

To put it bluntly: the brightest minds in software engineering and architecture do not gravitate towards $25/hour offshore shops.

A local development agency – if chosen carefully – provides the best of both worlds. You’ll get the face-to-face communication that an in-house team provides, while avoiding the significant up-front expenses that building an in-house team comes with. Quality firms are also battle-tested due to their involvement in a wide variety of sectors and technologies, and are used to adhering to timelines and budgetary constraints.

Of course, an in-house team will also require an increase in office space, subscription to a variety of software/tool licenses and fees, development hardware (both mobile and workstation) and training, just to name a few items – and none of this is cheap.

In a recent Deloitte global survey on outsourcing, it was found that the top two reasons for outsourcing are reducing costs and focusing on the core business.

Winner: Local agency

Corporate Culture

While starting up with a new team does have an inherit learning curve, sticking with the same team for a longer time period brings increased communication and efficiency. If you expect to be working on a given project for 18+ months it makes sense to have a team dedicated to that project that will know it inside out.

David Semerad, head of STRV, a global digital agency, believes there’s a middle path: “From a client perspective, the best of both worlds would be an outsourced team that feels in-house. Such scenarios may seem rare, but they are out there.”

When a team knows or expects to be working with you down the line, they tend to plan for the future of the product better. When they have a real stake in the success of the project (either financially or otherwise) they’re even more motivated to do excellent work and not cut corners.

Winner: Dedicated & corporately compatible local agency, or in-house

Management Factors

Once the contract is signed, some companies lean back and wait for the ship to come in. Weeks later nothing has happened, and they’ve wasted the speed advantage of outsourcing. As Susan Cramm writes for Harvard Business Review, “Delegating to a vendor is no different, on a day-by-day basis, than delegating internally. You have to stay close in the beginning to ensure that objectives and success measurements are well understood, the approach makes sense, accountabilities and roles are clarified and the team jells.” It can be done, but by no means should the entire project be outsourced—just the work part.

Winner: In-house (or a quality local agency)

Other Considerations

The hybrid approach to technical development – enlisting the services of a local agency that feels in-house – is the superior choice in many situations, but there are some subtle items that should be considered when deciding:

• Ensure a linguistic and corporate cultural fit.
• Make sure you can know who, exactly, is working on your project. Choose an agency that you can regularly meet face-to-face.
• If going offshore is something being considered, ensure that the country has a legal system that is fair to outsiders.
• If possible, be transparent about the agency that you have partnered with, as they will become reputationally tied to the quality of the product.