In-house vs Outsource. Which is Better for a Startup?
Every enterprise, whether it’s a huge international corporation, a well established mid-sized company, or a small local startup (with major international business ambition) faces the very same problem: maintaining an additional – or sometimes even primary – development workforce that will drive their product or service to the heights it deserves.
What varies is the price of possible failure for each of the above-mentioned entities. Where a corporation sees a loss of a fraction of its profits (in a best-case scenario, of course), for a small startup this matter could turn into a question of life and death: will it ever become a unicorn (or maybe a decacorn, who knows?) or will it roam in the Valley of Death forever?
We hope the following guide will help young startups make an informed and grounded decision when striving to determine which option is best for their needs: in-house or outsourced dev team?
A quite obvious principle to follow here is that you can outsource everything except key competencies and crucial processes. But if you have doubts, you can perform a simple test.
Just ask yourself this simple question: Where does the main innovation of your startup lie? Is it in your technology or business model?
If the answer is technology, and you’ve yet to confirm your basic hypothesis in that field, then it would likely be better to develop your pilot product in-house, without much involvement from an outsourced development workforce, or without one at all. This is important, because this way you will be able to embody your idea in the most precise manner, according to your own vision, and will have complete control over both the creation process and the end result.
On the other hand, if your business model is the cornerstone of your enterprise, and the technological aspect is relatively trivial, you need to scale or implement your technical solution as soon as possible in order to get feedback from the market. In this case, outsourcing the development team is not only possible but is highly recommended for a small startup. This will save scarce resources like time and money for the development itself as well as for in-house team formation, and will propel your enterprise faster into the next round of financing.
Additional factors to consider
Needless to say that the factors described above are not the only ones a startup should take into account when deciding how to organize its development process: with or without external help.
Since startups by definition are enterprises that operate in a highly volatile environment where changes are rapid, unpredictable and sometimes devastating, they should not only be able to adapt quickly and effectively, but also find a way to build a business in which changes will have positive rather than negative impact.
A truly innovative startup might seem to have no competition at all. But this could be a false impression, since at the very same time when you are trying to build your unique company, a dozen or even a hundred other teams out there are building the same thing. And the sad fact is that most likely only one of you will build a proverbial unicorn and become a billionaire. Thus the ability to respond to a change satisfactorily and rapidly is of extreme importance.
Everything is at stake
Risk management in a startup is drastically different than in an established business. Normally a startup doesn’t have a steady and predictable source of income, being dependant on venture or other external financing, constantly finding its way between the investment stages. Because of this, a company risks failing at any time and everything it has is constantly at stake. That’s why it’s necessary to be flexible enough to react to changes on time while maintaining focus on what’s important for the project.
PROS&CONS OF IN-HOUSE DEVELOPMENT
Pros of in-house:
- Potentially better control over the process and the end result. Since the whole engineering happens within your own company and is executed by your own employees, you have the ability to exercise better control over both the development process and its outcome. You have better opportunities for tweaking and customizing the engineering process.
- Higher in-house expertise & specialization. Since internal specialists constantly deal with the same or similar scope of problems and challenges, they learn to master their skills better, becoming highly-focused professionals. This raises the quality of their work and the development process drastically.
- Technical independence of the project. Naturally your project gains more technical independence from external experts in the case of in-house development. All key technical competencies remain within the company. This impacts not only the development process itself, but also tech support capabilities of the core team as well as the possibility to maintain the product/service over time.
Cons of in-house:
- Huge costs. Building an effective and fully capable in-house dev team requires significant investment of both money and organizational efforts, especially at the initial stages (including paying a large amount of related costs like equipment, insurance, premises, social packages, taxes, etc). Plus you will be spending money even at times of forced or natural inactivity (since your own staff need to be paid anyway). In most cases, an in-house dev team will cost you much more than any alternative option.
- Brain drain risk. Along with the high cost, this is the biggest risk of maintaining your own in-house devs. While your company has invested significant amounts of money into finding and raising internal specialists, they can always go away to the competition or to pursue their own projects, and your company will end up with needing to find and invest in new team members all over again.
- Narrow-mindedness & limited expertise. This is the other side of the coin in terms of higher specialization of your staff. Your own team and its individual members become more and more narrowly specialized, which is good in terms of performance and effectiveness when conducting typical and project-specific tasks. But in case external or internal fluctuations require any changes to be made, this could become a huge problem. As a result, your company lacks the needed flexibility and sufficient adaptation potential and speed that is so important, especially for a startup.
Specifics of in-house dev for a startup
Most startups can’t afford a full-scale in-house dev team for simple budgetary reasons. Unless their founders are engineers and developers themselves, but then they’re likely to encounter other types of problems. Or their project specifically requires their tech to be developed in-house only, or primarily (see above). Brain drain risk and narrow-mindedness seem to be lesser problems for a young startup, but could become more pronounced over time. On the other hand, higher in-house expertise and specialization as well as deeper technical independence advantages could be of lesser importance and relevance at the early stages of an enterprise lifecycle.
PROS&CONS OF OUTSOURCED DEVELOPMENT
Pros of outsourcing:
- Streamlined & optimized development processes. This is probably one of the most crucial advantages of outsourced development. All development and accompanied business processes are well established and properly set up by the external development agency. This is something a young startup lacks by definition since it is a newly created company with no pre-set processes.
- Better TTM (Time To Market) index. Another important benefit of outsourcing that could be decisive in an ultimate win-or-lose game most startups are playing against existing (or hidden) competition. An outsourced agency typically offers a ready-to-go highly experienced team without the need to go through time-consuming and problematic hiring and staffing processes, saving significant amounts of time and effort. Thus a startup could deliver its vision to the market much faster and with less hassle.
- Easy & more effective workforce scaling. In case a situation requires fast or temporary team expansion or vice-versa and you need to cut workforce or staff, you can do so seamlessly and without additional financial losses in terns of outsourced development set up, which is not the case if you do it all by yourself and in-house.
- Better cost effectiveness. This is probably one of the most essential benefits of outsourced development that is also very important for a smaller enterprise like a startup which typically has a very limited budget. External specialists will cost you significantly less than forming a dedicated in-house team. Plus they potentially will have more practical experience and your company can react faster and more effectively if an unusual problem arises. In this case you won’t have to hire and adapt new team members – you can just outsource the needed expertise. The result of this will be that you can reach the same goals with a better optimized budget.
Cons of outsourcing:
- Expertise stays outside the company. An obvious drawback of dev outsourcing is that technical expertise comes from outside the company and stays out there. This however may be not that critical if engineering itself is not the main area where your enterprise innovates (see the test part above). Or you can just outsource less critical and more trivial parts of your tech to an external contractor while keeping the key components for your own in-house specialists.
- You can end up with unsupported code. When outsourcing the development, make sure that your in-house team can maintain your ready-made product or service independently and by yourself. Or you can become dependant on that very contractor for an extended and unspecified period of time. But you can avoid this by choosing the right outsourced partner with a good reputation and history. Plus, the right planning and briefing always help.
- Potential transparency & miscommunication risks. This is another obvious potential issue with having an external team working on your internal tasks, since your in-person control and lack of direct communication with external team members could lead to miscommunication and lesser transparency. This however could be fixed by choosing the right contractor and proper preliminary agreements on effective communication procedures, reporting, etc.
Outsourced development specifics for startups
Since a startup is typically a newly established company with very limited budget and organizational possibilities as well as the lack of pre-setup business and technological processes, the option of outsourced product/service development looks very attractive. But it is important to be aware of the potential risks and limitations. The problem of expertise that stays outside the core team could be a major issue for some startups, but in many cases it could impose no problem at all. The remainder of the potential risks are generalized and have no specific startup-related implication and should be properly addressed regardless of the type of company that’s turning to the outsourced dev option.
Hybrid solution: outsourced + in-house approach
Why limit your choice with only two options when you can have the best of both worlds? The hybrid approach lets you compose the right mix for your specific project’s needs and tweak all the knobs for the most effective set-up. This way your in-house dev team could concentrate on key aspects of your technology and strategic matters, while the external team will handle everything else.
This approach will create a favorable environment for more efficient planning and analysis and provide the ability to choose which tasks to delegate to which team, so you can fine-tune your processes in the most effective way while optimizing the costs.
But of course this way of doing business has its downsides too. You will need more time and effort for additional communication, analysis and planning. Managing both internal and external teams requires more versatile skills since these two types of work organization differ greatly from one another.
We understand the challenges a startup faces on its way to not only survive, but to bring its vision to the market. In this article, we’ve tried to summarize our experience to enable you to make an informed decision on one of the most critical issues startup founders encounter: Can I build my own in-house dev team or should I outsource the technical development to an external contractor?
Both options have their pros and cons, and of course there is a hybrid best-of-both-worlds approach. Which one is the best for you? The final decision is yours to make.
Feel free to contact Blaize Tech for further advice and help in this regard. We have deep knowledge and experience that we will readily share with you for our mutual benefit.