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Offshore Software Development - Benefits, Costs, Best Practices, and More
Almost daily, many non-tech companies have to deal with the lack of qualified software engineers. When it comes to software development, business owners are looking for ways to fulfil their lack of necessary resources or balance the cost of IT expenditures. This has led to the gradual traction of offshoring software development due to its cost-effectiveness, flexibility, and accessibility to specialised talent.
By providing needed human resources at scale, offshoring can be a prominent option when the project’s requirements, scope, and specifications are not well-defined or the business just wants to scale up the dedicated development team quickly for a particular time.
Offshore software development is not an unfamiliar phrase, but thoroughly understanding it and knowing how to set up an effective one is a completely different story. This ultimate guide will provide everything you need to know about offshoring software projects.
What is Offshore Software Development?
Offshore software development refers to the practice of contracting with a third-party service provider located in a different country to take on the responsibility of developing software/apps or providing IT services.
Besides, the term Offshore development centre (a.k.a ODC) is a dedicated oversea facility with all necessary experts and infrastructure to provide technology services. The ODC serves as an extension of the company's internal development team, allowing them to leverage the benefits of offshore development while maintaining control over the development process.
Some IT services that can be offshored include a mobile app and platform development, software testing, data analytics, business technology consulting, and a dedicated team.
Here’s an example of an offshoring IT project:
An Australian-based bank would like to build a fundraising platform and contacted an IT service provider in Vietnam to offshore its project. The ODC in Vietnam would be a separate, dedicated software team who works exclusively on the bank's projects.
By offshoring software development, the client also had direct control over the technology service vendor, managing the team's work, performance, and communication, while the service provider would be responsible for delivering high-quality software development services.
Read more in the case study: How an Australia Bank scales up Digital Team by 6 times with KMS’ talents.
What are the Benefits of Offshoring Software Development?
There’s a myriad of benefits a business can reap through offshoring software.
Offshoring software projects to a country with lower labour costs can result in significant cost savings for companies. Moreover, as most ODCs will have their own infrastructure, you’ll only need to pay for services scaling your requirements without considering any other costs. This can help you reduce overhead expenses while still maintaining high quality.
2. Direct access to best-in-class resources
People are a decisive factor in a company’s success. By tapping into a more extensive and diverse pool of skilled talent, you can complete the business’s technical requirements that your internal team might lack the capabilities to do.
As Vietnamese tech workers are well-known for their proficiency in IT and computer science, corporations that choose to offshore here can find the right people for their development projects and ensure they have the skills and expertise needed to deliver high-quality results.
3. Improved productivity
Offshore development businesses often need to follow the requirements and orders from the main office. Thus, you can effortlessly control the performance of the dedicated software teams, ensuring that they are working efficiently and productively.
Moreover, all the tasks the third party provides should be aligned with the client's development processes, ensuring consistency in methodologies and project management practices. This will help streamline the process and faster time-to-market.
4. More concentration on core activities
Instead of devoting countless hours daily to developing and taking care of an IT system while neglecting your core operations, you can offshore it to a development team full of skills and experience. ODCs are often committed to delivering high-quality products within a timeframe, so you only need to concentrate on the primary responsibilities.
5. High scalability and flexibility
Development processes can be complicated. You may never be sure the accurate time or resources it will take to develop a product. An offshore software development company can help you ramp up necessary developers and add services and support to your immediate needs. After making it through the hectic season, organisations can quickly shrink the development team to internal personnel only.
Offshoring and Outsourcing: What are the Differences?
Outsourcing is the practice of contracting work out to a 3rd party, while Offshoring refers to performing in a foreign country, usually to leverage cost advantages.
It’s feasible to outsource but not offshore work; for instance, engaging an outside technology company to upgrade software rather than maintaining an internal team of developers. It’s also possible to offshore a project but not outsource it, such as setting up a Dell customer service centre in India to specifically serve customers in America.
Here’s a comparison chart of two distinct business strategies:
Hiring a third-party company to perform a specific task or function, regardless of the location of the provider.
Hiring a company in a different country to perform the same task or function.
Involves the delegation of a wide range of functions
Focuses on a specific function or task
Outsourcing can be more expensive in the short run but may be cost-saving in the long term.
As offshoring is typically used to take advantage of lower labour costs in other countries, the costs for offshoring software development may be less expensive.
Challenges can be unfair negotiation, misaligned interests of clients and vendors, etc.
Challenges involve language barriers, geopolitical risk, poor communication and collaboration, etc.
How to Hire an Effective Offshore Development Vendor?
If you want to have a development team abroad but don’t know how to start yet, here are the best practices to help you offshore project effectively.
Step 1: Determine your business goals and objectives.
Step 2: Choose a proper location, considering the availability of skilled talent, time zone differences, language and cultural compatibility. Research the tax system and business law of that chosen country. Common offshore locations include India, Vietnam, the Philippines, etc.
Step 3: Select the appropriate foreign software team based on relevant expertise, proven track record, and experience.
Step 4: Conduct interviews with potential IT services providers to know whether their technical skills, technologies and infrastructure are matched your business requirements.
Step 5: Check references to verify the centre’s experience, quality of work, and reliability.
Step 6: Review contracts and service level agreements to ensure that they are aligned with your requirements and provide adequate protection for your intellectual property.
Step 7: Onboard and transfer knowledge to ensure a smooth process between internal & external teams as well as the time-to-market.
Step 8: Set up regular meetings to update about the project progress, feedback, changes, and bottlenecks.
Cost of Offshoring Software Development Team
1. Pricing Models
The costs for an offshoring development project can be calculated based on the different types of models you choose. Here’re three common models:
- Fixed Price Project: The offshore development provider agrees to complete the project within a fixed budget and timeline. The provider assumes full responsibility for the project's completion and time-to-market. There will be an incurred fee if an additional requirement occurs outside the predefined scope.
- Capacity Model: Under this model, you will need to pay the offshore development provider based on the actual time and resources used for the project. This provides greater flexibility and allows changes to the project scope and requirements over time.
- Dedicated Team Model: Companies will have an Agile software development team work as an integrated part of their internal team. The client retains complete control over the project and manages the team's work and deliverables. When choosing a dedicated software team, you will need to pay a monthly sum of employee salaries, plus overheads and infrastructure expenses. Team scaling up or down will affect to your expenses.
2. Costs Component of Hiring Offshore Development Team
The recent report of Delloite indicates that one of the essential reasons for offshore development for 70% of companies is cost optimisation reduction.
Evaluating offshore software development costs can be tough since there are tons of expenses to consider. Some common factors that may affect the price of software developed offshore:
- Project Scope: The scope of the project has a direct impact on the software outsourcing budget since it determines the time and effort of the team involved. As the complexity of the project increases, both the cost of software development and the size of the offshore team required to complete it will rise proportionally.
- Technical Requirements: The project’s scope and budget, such as the architecture, UI/UX designs, software testing, applied tool and methodology, are all impacted by the decisions made by professionals during its development.
- Competencies and Areas of Expertise: The cost of offshore software development is also impacted by the team's level of knowledge and experience. The total project cost will rise if a skilled team of senior developers and experienced consultants is hired.
There are some other costs associated with offshore development, such as training expenses, auxiliary costs, licenses, infrastructure, etc.
Why is Vietnam the Best Place to Offshore?
1. Low-cost labour with high skills
The cost of offshore outsourcing services in Vietnam is 70% lower than that of Australian services and is much more affordable compared to those costs from other ASEAN countries.
Moreover, Vietnam is among the top nations with the most significant number of engineering graduates. According to TopDev, it has approximately 400,000 IT engineers and over 50,000 skilful IT talents coming out yearly from its over 153 technology institutions.
HackerRank indicates that Vietnamese engineers with the required skills and experience can provide the workforce for the most labour-intensive projects out there with quality compromised.
2. Transformative growth
The recent report shows that by 2050, Vietnam is forecasted to be one of the fastest-growing economies and emerge as one of the top 20 in the world. In addition, with the help of the government in business, it has also become one of the most stable economic growth in the local economy.
The government also concentrates on guiding the youth start-up, contributing to the development of the offshore market.
3. Cutting-edge technologies
Offshoring a software project to Vietnam not only offers cost benefits and access to a highly skilled workforce, but it also provides access to cutting-edge technology. Vietnam's technology sector is rapidly growing, and the government is investing heavily in research and development in areas such as.
Vietnam is in the top 50 of the ICT Development Index, and is one of Asia’s fastest-growing economies. Developers here are well-versed in the latest programming languages, frameworks, and tools and are eager to adopt new technologies and best practices.
4. No VAT for Software Services
Due to the Government’s strategy of encouraging Technology development and turning Vietnam into an industrialised country, the Software sector received diverse support and benefits. Therefore, transferring of technology, software and other IT-related services is entitled to a 0% rate.
In Vietnam, KMS Solutions is the Prominent Choice!
With a proven track record of helping enterprises scale their digital transformation in all critical areas, including IT modernisation, software and mobile app development, customer experience improvement, or back-office operations, KMS Solutions has become a trusted IT service partner for offshoring software development projects.
Moreover, the company has 3 ODCs operated in the APAC region, incubated MOBA, and won many prestigious awards, including the Corporation Excellence Award at APEA 2023, ranked #9 in Clutch’s Top 100 Fastest-Growing B2B Provider.
Through its global reach and strategic partnerships with leading software companies across the globe, KMS Solutions brings the most advanced and innovative technologies to the Asia Pacific. The concentration is on helping corporations achieve their business goals through world-class fit-for-purpose solutions and excellent industry best practices.
If you’d like to know more about how KMS Solutions can help your company achieve business goals and complete project effectively and in a timely manner, click the button below and contact us 👇