With the recent shift of the business landscape due to COVID-19, tech startups and SMEs will have to keep a close watch on the company’s outgoing expenses and maintain a healthy cash flow for survival.
Unfortunately, IT labor costs are escalating due to the high global tech demand, which is also causing maintenance expenses in sustaining a great software engineering team to jump significantly. This has led to the common scenario of a stressed-out CTO facing huge technical debt and only a few software engineers to handle the development projects.
So instead of doing just that, an excellent business leader will lean towards a combination of outsourcing and offshoring software development as a sensible budget-friendly solution.
In our previous article, we analyzed the four models to scale your teams:
- Onshore Insourcing: work with an in-house tech team in the home country
- Onshore Outsourcing: work with a software consultancy firm in the home country
- Offshore Outsourcing: work with a software consultancy firm in a foreign country
- Offshore Insourcing: work with an in-house tech team in a foreign country
While there is no “one-size-fits-all” solution, we will share our thoughts on which model is best for your tech startups and SMEs from 2 different angles:
- Cost, Control, and Performance: Which of the three factors are more important to your company?
- Growth Stage: What is the current growth stage of your company?
Cost vs Control vs Performance
If cost is your greatest concern, then offshore outsourcing is your best bet. A trustworthy outsource provider from a lower wage country can help to reduce up to 70% of your operational costs. However, it is worth noting that the project management aspect will need to be efficient to avoid any hidden costs chipping away your budget. If you prefer to keep a good balance between adequate management and sufficient costs, then an offshore team is the optimal option.
There is no doubt that in-house (onshore or offshore) strategies are the king when it comes to gaining complete control of your operations. By keeping things internally, there is less exposure to risk. But do keep in mind that onshoring is costly to build up and maintain. In some cases, IT talents are simply unavailable in your country.
Thus, to retain a high level of control without burning through the budget, many firms are building up their own offshore teams across the globe, which can save up to 60% of operational costs.
Outsourcing is a powerful strategy for a short term goal where you need to deliver the product on a constrained timeline. However, depending on the outsource provider performance, the result can vary drastically.
On the other hand, having an offshore in-house team means greater performance since coordination and quality control are only second to an onshore in-house team while the costs are much lower. Therefore, if your priority is long term planning, then we recommend choosing the offshore insourcing strategy.
Growth Stage of your Company
Having a small onshore tech team means gaining all the beneficial aspects of operating a team efficiently, including high control/visibility and clear communication. However, firms may not be able to afford the high budget burn-rate in the early stages of business.
As a compromise, onshore/offshore outsourcing can be considered for startups, especially if the companies don’t have any tech specialists in their teams or need a way to save costs. Outsourcing allows the companies to get their first prototype/MVP out in the market to test for market viability, before committing more funds to build a tech team and a better product.
However, we need to bear in mind that while this approach de-risks the initial software development approach, the company will have less control over operations and may be subject to high project costs in the short term.
Offshore expansion is not preferred at these early stages due to the time, complexity, and costs of setting up oversea operations. Instead, companies should focus on getting their first software product (prototype/MVP) out in the market, to test product-market fit and grow a bigger customer base.
On the other hand, if the companies are better funded, have more certainty on product direction and market fit, and good tech leadership, setting up overseas operations will be viable and definitely give long-term advantage and success.
Another case of when setting up overseas operations at the early stage makes sense, is when the Founder(s) themselves are willing to travel frequently to (or even base themselves out of) overseas, together with the offshore tech team. This is pretty challenging for the Founders but does indeed drive down costs and resolve scaling challenges in the long term.
Series A/Series B Stage
At the Series A/Series B stage, the company would already have some internal tech capabilities to manage a small software development team and deliver on a working software platform. The CTO starts to brush off the sweat on his accomplishments of piecing together what seems like an incredible feat with the limited tech development resources he had. However, his journey is just starting – having prioritized speedy delivery over performant codes and functions, he is well aware of the accumulated technical debt.
Furthermore, customer feedback and internal business ideation have added an overwhelming list of additional functionalities to the product roadmap. The CTO needs to scale his tech development resources to keep pace with the business’ growth.
While onshore expansion is still a viable option, this strategy is not sustainable in the long run due to increasing costs. Though the company has raised good funding round and has good customer traction, the investment monies must be conservatively shared between sales, marketing, operations, and product development.
At this stage, offshoring to a lower-cost country becomes the next best option as the offshore team is less expensive to maintain, and can work in conjunction with the core onshore team to develop additional functions and modules for the product roadmap.
We should also add that outsourcing (onshore or offshore) should no longer be done at these stages because a tech company eventually needs to own its tech capabilities and not be dependent on external parties.
Wrapping it Up…
What we have shared above is based on our experience working with many different tech startups of different growth stages. The disclaimer is that all businesses are unique and each startup team may have special affinities to specific team scaling models. As an example, if the software development company is a shareholder of the company, it may make sense to strike a win-win bargain by outsourcing to the software development company.
Between outsourcing and offshoring, there is no fixed right or wrong answer—it really depends on what is important to the company, and whether the company is ready to undertake the offshoring journey.
Choosing the right strategy requires careful research and considerations. If you require earnest advice on whether you are ready for the offshoring journey and how to go about doing it, the team at Tech JDI will be happy to give free expert consultancy on building your best offshore team in Vietnam!