Outsourced vs In-House Software Development: Which one is better for startups?

Software development has come to define the activities of many startups. Whether a firm is attempting to solve a core business issue, or propose a disruption to existing models of business strategy, developing an easy-to-use software is an essential part of making a significant market impact. Startups can choose to build their software in-house or outsource the process to firms that specialize in software development. The difference between the approaches represents an important decision that should be taken after careful consideration of the pros and cons of these choices.

Outsourcing promises a stable product while saving the organization valuable time and resources. In-house development presents the opportunity to build a product that is differentiated and specialized. Both of these methods are widely approved of and have supported the growth of successful companies in the past. Slack outsourced their software development to MetaLab, a significant interface design firm located in Victoria, British Columbia. PayPal takes the in-house path to the development of their unique online payments platform. Neither road seems to be the less-traveled by, in this case. 


What Are The Factors I Should Consider?

Clearly, there isn’t a short fundamental formula that helps determine the correct choice for a startup. While there is no way to foretell the consequences of business decisions that are taken in a market as dynamic as the twenty-first-century information economy, further disrupted by the seemingly infinite possibilities of technological innovation — while there is no such formula, there are logical frameworks that can help entrepreneurs determine the optimum way forward. 

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One such framework is developed by Christensen and Overdorf in an essay on meeting the challenge of disruptive change. They note that the three factors which “affect what an organization can and cannot do” are “its resources, its processes, and its values.” “When thinking about what sorts of innovations their organization will be able to embrace, managers need to assess how each of these factors might affect their organization’s capacity to change.” Keeping these three factors in mind, we can begin to discuss the various ways in which the decision to develop software in-house or outsource the process impacts the startup. 

Factor In-House Development Outsourcing
Resources Require investment in, hiring the right professionals, skill development, and, setting up the right processes. The development process can be resource-draining, especially in the testing phase, when any underlying design or technical errors are addressed.  Is a very cost-efficient process and does not require the additional expenses of building and developing an in-house team. There is absolutely none to minimal spending on buying necessary hardware and software tools. This also limits the capacity of the business to determine the resources being put to use toward the development of their software product.
Processes Setting up processes for an in-house development team is extremely crucial. Software development requires a sense of collective and transparent communications. Internal managerial procedures need to ensure that the various developers working on individual elements of the product are on the same page.  Firms that specialize in outsourced software development have established processes that streamline the development of software products. Entrepreneurs can focus on more urgent tasks without worrying. The entrepreneur, albeit, has less control on timely implementation, and there are some security concerns to consider in communicating the details and purposes of the product to the outsourced team.
Values In-house software development can move the company away from its primary product and vision. It is essential to ask yourself if the software is central to the primary offering of the organization. Does the software represent a fundamental demand for the company’s target consumer segment? While the in-house path ensures that the development process is optimized for the company’s values, it also serves to divert the attention of the entrepreneur from what is their value offering to the market. While outsourcing the development ensures that the firm can focus on its primary value offering, it also lessens the level of specialization and differentiation that forms the software product. Outsourcing firms shape the products to the needs of the startup but do not have a personal commitment to the company’s vision, to go out of their way to make the product absolutely perfect.


In-House Development – Pros and Cons.

There are several advantages to developing your software products in-house. These include;

  • Greater Control – Entrepreneurs have greater control over the development process when the team dedicated to it is based in-house. Managers can ensure that the resources put aside are being used optimally and methods are implemented with the right timelines. This also helps in the development of a work ethic and company culture, which are necessary foundations for successful startups.
  • Greater FlexibilityThe greater control also translates into increased flexibility in adapting the product to the needs of the start-up as an in-house team can address any queries or demands with greater urgency. This also helps in developing a product that is aligned with the company’s vision and integrates flawlessly with the various other operations of the firm. 
  • Personal CommitmentAn in-house team, because of its understanding of the company’s values, is likely to be more committed to the development process. This leads to products that are specialized and differentiated and can stand out in the crowd of software that is developed by the outsourcing industry.


Even with these advantages, entrepreneurs must remember the golden quote, “Do what you are good at, and outsource the rest.” This is said because setting up an in-house team requires intensive channeling of financial and human resources. It is often the case that setting up such specialized in-house teams leads to divergence from the core organizational values and confusion in the primary focus of the company. 

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Outsourced Development – Pros and Cons. 

While outsourcing the development of software ensures that there is no leakage in the financial and human resource allocation of the firm-in-question, it also removes the higher degree of control and flexibility. The absence of personal commitment leads to the production of software, which is generic and has less impact as a stand-alone product. The advantages of outsourcing the software development process include;

  • Cost and Time Efficiency – Outsourcing is more cost-effective because the resources of the startup are not channeled toward setting up foundational structures, but are transacted as payments for short-term contracts and associations. The outsourcing firms have set up processes and, hence, do not require as much additional time commitment to start developing software products.
  • Versatility and VarietyJust as there is greater flexibility in the in-house development process, the outsourcing path allows for access to a broader talent pool. This access may restrict the control and flexibility of the entrepreneur is asking for changes or additions to the software product but presents a more versatile product. The technological space is shaped by specialization, and while the startup’s employees might be specialized in a particular technology, the outsourcing firms usually maintain a set of developers qualified in various standards. 
  • Greater FocusAn important question to ask yourself before determining the chosen path of software development is if the software lies at the core of the company’s primary value offering. In the case that it doesn’t, or not entirely, setting an in-house team will likely divert the attention, efforts, and resources, toward an unimportant goal. Such a diversion can be crucial to startups that are looking to make their mark in an ever-changing market.

Questions to Ask Yourself.

Christensen and Overdorf provide a concise list of questions to ask yourself before determining the path of organizational growth and innovation. These are the questions that should determine if a company should undertake setting up an in-house software development team or outsource the process to a firm that specializes in the same. They are, in particular, order;

  1. “Does my organization have the right resources to support this innovation?”
  2. “Does my organization have the right processes to innovate?”
  3. “Does my organization have the right values to innovate?”
  4. “What team and structure will best support our innovation effort?”