Offshore Software Development: The Ultimate Guide for Business Owners

Read this guide to become aware of all risks and possibilities offshore software development has to offer.

Many industries prefer offshore software product development due to a shortage of expertise in the local talent pool. Among other reasons are high salaries on the market or a pressing need to scale quickly with little time left to set and maintain operating processes. Other companies prefer to use offshore software development services as a part of a well-considered growth plan, evaluating all options and costs far ahead of when it becomes a necessity. The second ones are in a more advantageous position. They have more time to figure out what model will work for them, where and how to find a reliable offshore software development company, form all requirements, and streamline management and communications.

Whatever of these types resonated with you, in this guide, you will find all answers on how to benefit from offshore software development while avoiding possible pitfalls.

Five Offshore Software Development Benefits

Suppose you’re starting to use offshore development services in 2021 for the first time. In that case, you’re the lucky ones. This year’s market studies show that both vendors and their clients synthesized previous experiences and learned how to build the win-win cooperation. Below we unveil traditional offshore development benefits and new priorities that arose during a pandemic crisis.

Cost-effectiveness

You can save up to 25–40% of software development costs playing on differences in developers’ rates in offshore countries. Even in the case of end-to-end software development, when you pay for the end product and not for the developers’ time, offshoring the development of such a project will cost you less than the in-house option. Offshore software engineering costs are naturally lower than in the main client-countries from the Western World. Moreover, increasing competition makes IT outsourcing companies apply damping policies. We should say that those who do it aren’t the most reliable vendors, so it will be better to inquiry companies by country when choosing offshore development service providers. Offshore IT companies are not all the same. Even if you’re new to the Indian or East European IT market, you can easily find companies that proved their expertise and reliability through many years of work in the Western market. Always check a company’s portfolio. You’ll be impressed by how many offshore IT companies stand behind the success of Fortune 500 companies. According to the Atlantic council, Ukraine serves over one hundred Fortune 500 companies with software development.

The motivated, skilled, and diverse talent pool

Most popular offshore countries prioritize the software development sector and support its growth on governmental and private levels. IT product companies are usually more attractive and competitive employers as they provide better career growth options. However, due to their lack, most offshore software developers join the IT outsourcing sector. For this particular reason, for example, it’s easier to find senior-level developers in Ukraine or Russia than anywhere else. There are, of course, those who chose to relocate to the US or Western Europe. Still, most IT specialists prefer to stay in their mother country because the IT sector is prestigious and the cost of living is lower. IT outsourcing SMEs dedicate a lot of time, money, and resources to train their employees constantly to stay competitive in the international market.

No administrative hassle

Choosing the offshore model, you control the result, not the whole operational process. Hiring, employee retention, salaries, schedules, team load distribution, insurances, training, and all accompanying nuances aren’t your burden. While the vendor takes care of all the processes, you can devote your precious time to building a strong business strategy and product positioning.

Flexibility in time and resources

While developing your software offshore, it’s fast and simple to scale your team or reduce the number of its members when needed. Mostly, offshore software development providers dedicate internal resources to your project so that they can be flexible with your changes. Even if they have to find a developer with a rare skill set, it won’t take them more than 2–4 weeks, thanks to partnerships with local IT clusters.

If you need to develop or fix something urgently, you’ll pay less for extra working hours due to general lower rates for offshore developers. Some offshore companies have night shifts working 24/7, so there are pre-established abilities to increase working hours on your project. Still, it will be better to negotiate its terms at the very beginning of cooperation.

Different work models for each use case

You may have different purposes for using offshore IT resources. Startups in the early stages often hire a dedicated offshore team as a cost-effective hiring strategy. A driver of innovation in the face of a CTO or Product Owner is normally the only in-house tech team member.

SMEs tend to hire 1–2 offshore developers to fill the talent gap or support themselves in meeting burning deadlines.

Medium and large enterprises are hiring offshore dedicated teams to develop new lines of products or subproducts. They also use end-to-end offshore software development for products of internal use.

Tech leaders go even further and open offshore R&D development centers. It responds to the co-sourcing trend, as the offshore R&D center team works under the owner’s legal entity and is equally responsible for the final results of the project. The offshore R&D center is also helpful in establishing a brand presence in the foreign market and, as a consequence, attracts the best talent of the local pool.

The Top Five Offshore Software Development Risks and How to Avoid Them

The benefits are obvious — it’s cost-efficient, agile, and has solid work principles worldwide. At the same time, risks are well-learned by many years of software outsourcing practice of all types of businesses, from MVP startups to tech leaders, making them predictable and manageable. Let’s consider them below.

Communication and control

Every offshore IT company that works with foreign customers speaks English, but it doesn’t always mean that all developers who work on your project are fluent in English. There may be situations when the only person who can speak English is a project manager or team lead. If you need your offshore team to be in close contact with your in-house developers, it’s not a good option.

It will be better to ensure that you can communicate directly (and fluently) with all team members already at the first meeting. It’s also possible to see how an offshore IT provider communicates by reading their previous customer’s testimonials on Clutch. If you see that customers emphasize excellent communication and responsiveness apart from technical expertise, it’s rather trustworthy, especially with some collaboration story.

Most offshore vendors have their own best practices. Their streamlined workflow includes various management approaches, team cooperation, project management tools, regular reporting, and communication channels. Still, you should decide what level of engagement you need before signing the contract. Answer these questions:

  • Do you want to perform project management tasks on your side, or will you delegate them to your offshore team?
  • What kind of project management would you like to apply?
  • How often do you want to receive updates on your project?
  • How often do you want to have online meetings? Who should attend them?
  • Do you need your offshore development team to participate in some of your planning sessions?
  • Do you need any overlap in your working hours?
  • What kind of project management software are you familiar with?
  • What kind of reports do you need?
  • Do you need your offshore team to be dedicated to your project exclusively or part-time?
  • What do you need to see in your project estimation? What payment model is the most transparent for you?
  • How does your contract regulate deadlines?

Legal issues

Every country has a complicated tax policy. Companies develop whole schemes for lowering taxes or even avoiding them, so you should ensure that legal entities’ information in invoices is true, accurate, and transparent.

You also shouldn’t forget to sign a non-disclosure agreement to protect yourself from any kind of data breaches. Vendors may want to make a case study for their portfolio based on your project. In this case, you’ll also need to decide if you allow them to create an association with your company name in public space.

Also, pay attention to the jurisdiction legal issues will be solved according to the contract. The offshore companies that understand the importance of this factor to the client often have headquarters or legal entities in countries with the more developed judicial system.

Quality

Small (and some middle) offshore IT companies have problems with developers’ retention due to high market competition. It may lead to some team members’ replacement in the middle of the project. There is also a risk that those members will be replaced with junior-level specialists to save time. Of course, you more likely won’t know about it until you’ll see it on the final result. You’re risking getting bad quality code with time and material model when offshore developers are involved in your project on a part-time basis. It makes them unfocused and may lead to imperfections.

The severest quality issues may even be intentional. Some IT service companies aim to charge you for every amendment they do, the more — the better. To avoid this risk, you shouldn’t necessarily negotiate a fixed-price model with amendment inclusions. It will be enough just not to have business with companies that offer too low rates.

You should remember that quality is not only about partial technical performance but also final product success. According to the Deloitte Outsourcing Survey, 2020 is a year of co-sourcing, value networks, and result-based outsourcing trends. It means that to achieve better results, you need to engage with your offshore team more deeply and spend more time on provider selection. Let them work with you stage by stage, share opinions, face and overcome challenges, and search for new ways for improvements. A co-sourcing approach will make them more value and result-oriented, and that will have a direct positive impact on quality.

Data protection

Offshore software development will save you a reasonable sum of money, but not good enough to cover the consequences of data breaches if such occur. Choose an offshore software company that offers the strongest security policy and protect yourself with NDA and non-compete agreements.

Some companies also protect themselves through controllable remote access and fake data while offshoring software engineering. That means that they should handle a significant part of the work in-house. It’s not the most convenient option, so it would be better to ensure security on the legal level.

You should also keep in mind security standards that your software must comply with and make sure that your vendor has related certificates to ensure such compliance.

Knowledge transfer

No matter which way you want to transfer your knowledge — from your CTO to the offshore vendor or backward, you’ll need to do it as formal as possible. If some knowledge gets lost, no matter tacit or explicit, it may create further development and maintenance difficulties. Knowledge transfer relates not only to pieces of code but to the whole project logic and tactical approaches.

Form the knowledge transfer strategy at the very beginning of cooperation. Include a list of documents, number of meetings, and participants involved in the transfer process to save yourself from the time-consuming chaos of the knowledge transfer process in the future.

Offshore Software Development Pricing and Management Models

There are two commonly accepted billing models for offshore software engineering — pay-per-hour/time and materials and fixed-price model.A fixed-price model is perfect when you agreed on a strictly fixed budget within your company before starting any development activities. In this model, you pay for defined deliverables, and it sounds good, but it doesn’t always work seamlessly in practice. To go with a fixed-price model, you should already have a clear, detailed, and realistic technical task for the entire project. Otherwise, you’ll pay extra costs for all edits and any type of changes you may need to make in the process. It may bring frustration to understanding what should be done within a fixed-priced plan and what should be paid on top of it because many tasks are interconnected, and if you make even small changes in one part of the project, it will probably impact the rest of the tasks. Those companies that offer time and material billing models do this to avoid the situations listed above. In the time and material model, all tasks are estimated in hours and are paid by hour rates. This approach is more flexible for ongoing changes.

We can classify OSD services by what they are based on. Project-based services may include end-to-end software development when both management and delivery are on the vendor’s side. It also may be a dedicated team model when you control a vendor’s offshore team that works on your project exclusively (or part-time in some cases).
The developers-as-a-service model is mostly represented by the staff augmentation approach — the provider’s developers work as a part of your core team for any number of projects that were agreed upon — and a more complicated service-based model of building an offshore development center.
Offshore IT companies such as Fayrix may help you build and administrate a Software Development Center, creating your brand presence in the chosen country. This way, offshore developers also become a part of your own team and inherit your corporate culture. ODC model includes real estate, recruitment, legal, accounting, and payroll services with all administrative processes curated by the provider.

The Best Offshore Software Development Countries

Russia

Average hourly rate: $35

Russia wins second place in all HackerRank challenges after China with a general score of 99.0. According to Statista, Russia had 561,000 specialists who graduated with STEM degrees, according to Forbes. There are many large IT companies and clustered networks in this country. This allows one company to handle big long-term projects and set R&D centers for foreign customers at the same time. The programmers’ English level in Russia is generally Intermediate or higher.

Poland

Average hourly rate: $40

Poland is the third champion in all HackerRank challenges with a general score of 98.0 points. Nearly all of the Poles speak English at a close to native level. Their talent pool is rich for various technical skills. They are also known for their strong working ethics.

Ukraine

Average hourly rate: $37

Ukraine ranks in 11th position with a general score of 88.7 by the results of the all summed up HackerRank challenges. The government supports the advance of the IT sector with educational programs, investments, and improving taxing policies. 80% of the Ukrainian IT community speaks English at an Intermediate or higher level. Ukrainian developers are number one in cybersecurity expertise among offshore countries, according to HackerRank.

Romania

Average hourly rate: $26

The country’s government makes the progress of the IT sector its priority and invests in it accordingly. Romanian developers have access to free, egalitarian education. The talent pool in Romania is saturated with the most diverse skills. Around 90% of their IT community speaks English, but in Romania, you are more likely to find developers who can speak some other European languages; the second popular is German.

With a headquarters in Israel, Fayrix has been operating for more than 12 years now. Based on eight R&D offices in Russia and Eastern Europe, we offer a range of services for different business purposes. We empower early-stage startups by building product-oriented teams from scratch. We also offer team augmentation for growing businesses among our services for startups. We can provide you with a dedicated team cherry-picked out of the 1,500 in-house talents we possess.We build offshore software development centers with full legal and administrative support for big technology companies and large enterprises.

Asia

China

Average hourly rate: $25

China takes first place in HackerRank’s Olympics Challenges. The country produces the largest quantity of programmers; every year, there are 4.7 million graduates with a tech degree. Seems alluring, doesn’t it?

Despite high and rapid technological engineering, only 1% of the whole Chinese population speaks conversational English, which forms a significant communication gap with foreign customers. The other tricky point is the weakness of this country related to the enforcement of intellectual property law.

India

Average hourly rate: $25

As the second-largest English-speaking country, India attracts a lot of clients from the US who’re looking for the outsourcing of IT services. There are many outsource IT companies with a well-established reputation. You’d better do your research to find them, especially paying attention to case studies. Otherwise, you may get yourself into trouble. India might become a trap for the low rate seekers. Despite India’s average hourly rate being $25, which is already lower than their European colleagues have to offer, many Indian developers apply the dumping policy to compete. Of course, that’s where low quality lies.India is the second country in the world according to the number of STEM graduates — 2.6 million people. It has resources to make your outsourcing software development cost-effective, but you’ll need to choose providers carefully and double-check everything.

Philippines

Average hourly rate: $25

The Philippines is the most Westernized country in Asia; it has a lot of cultural similarities with the US; still, a 12-hour difference is quite challenging. The country provides respected technological education with 15,000 graduates every year. The Philippines are known in the global community for their strong skills in PHP and Python.

Latin America

Argentina

Average hourly rate: $55

According to a study by Agile Engine around Latin America, Argentina was named the 14th best country for offshore software engineering. The country intensively invests in education and innovation. Local developers are multilingual — Argentina surpassed even India in English proficiency.

Brasil

Average hourly rate: $40

Brazil is home to young English-speaking programmers. — nearly 40% of Brazilian developers are under 25 years old. Brazil took 38th place on HackRanker’s Olympic challenges, and it’s good for hiring junior developers.

Panama

Average hourly rate: $37

Panama has long-lasting business relationships with the United States. It’s an attractive destination due to its low taxes and fluency in English.

Final Thoughts

Overall, offshore software development has more pros than cons. Nowadays, there’s no question like ‘to use offshore or not to use offshore software development?’ The only question left is how to do it right. Analyze your business needs, resources for management, your current team’s skill set, and match all this data with general offshoring options. After doing that, you’ll see what type of offshore service provider you need and what cooperation model will work the best for you.

For the last 12 years, Fayrix has been co-sourcing development with startups, enterprise corporations, and technology companies based on eight R&D centers in Eastern Europe and a Management Office in Israel. We offer you offshore development services to build your product and team from scratch, well-selected developers for your team augmentation, or end-to-end custom software development.

An increase in market demand in 2020 made us focus more on our advanced service for building offshore R&D centers for our clients. We see and recommend this kind of service for all businesses looking for a long-term strategic approach for their software development. Don’t hesitate to contact us if you need a consultation for your particular case.

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