OUTSOURCING PRODUCT ENGINEERING VS. IN-HOUSE DEVELOPMENT: LESSONS LEARNED

Looking back over the years, the memories still bring a smile. When my co-founder and I began visualizing the workflow for our soon-to-be-created mobile app and its accompanying web-based admin and data analytics portal, we took an admittedly unsophisticated path. I can vividly recall us standing at his dining table, sketching flowchart-like lines and boxes on the back of a roll of wallpaper. This unconventional “methodology” sparked a highly interactive discussion. As we walked around the table, occasionally sipping coffee, we examined our Da Vinci-like sketches from different perspectives—speaking, thinking, bouncing, and evaluating ideas while embodying the personas of our future users. The old-fashioned wallpaper approach proved to be lively and fun, serving our purpose for this initial step, although not sufficient for what lay ahead.

Perhaps a hybrid approach, combining both? I am certain these questions resonate with many early-stage startups. Here are the key learnings we gained during and beyond this decision-making process.

Lesson 1: In-House Expertise is Vital for Survival

Regardless of your chosen path, hiring a knowledgeable in-house engineer proficient in writing and evaluating code is indispensable. If you lack technical expertise, enlist someone who possesses it—it is your product development’s life insurance. Ideally, this person should have some background in managing engineering teams. Even with a small team, ensure he or she can propel your company to the next level of evolution. If opting for outsourcing, additional considerations are necessary. Why?

It’s a perilous illusion to believe that an outsourcing partner, once provided with product specifications, will handle everything. Managing an outsourced team entails dealing with significant geographical distances, diverse time zones, and cultures. This raises the bar for you and your head of engineering. The decisions made, e.g. regarding development tools and architecture must align with your and your future customers’ requirements. Lack of control in these areas can be detrimental or catalytic for your company’s success. Ensure intimate involvement in designing and building your product, avoiding too much reliance on a third party.

Lesson 2: Outsourcing seems Easier and Less Expensive, but…

After careful consideration, we entered into a development partnership in South-East Asia. Although near-shore options had their pros, the cost proved to be a significant con. The closer we circled Germany to find the right partner, the more substantial the price tag became. Even Eastern Europe, at that time, was beyond our budget. However, our decision wasn’t solely based on financial considerations.

Not only are people and rent more expensive in Germany (like in most other European countries), but replacing the wrong hires takes more time due to labour law and labour market reasons. In contrast, an engineering team provided by an outsourcing partner is more manageable and adds flexibility. However, challenges unique to outsourcing, such as communication hurdles, must be acknowledged. Decisions involving a remote team require in-depth knowledge of technology and the local situation, maintaining clear visibility, and control over development processes. Communication, whether in person or online, is typically more challenging than with an in-house team. We underestimated the language barrier, an oversight partly rectified by building good relationships with extended developers, regular visits and frequent online meetings. This is also useful in overcoming any other issues that might arise. Personal relationships with the outsourcing team and its Management are valuable and not to be underestimated.

Lesson 3: Your Customer’s Opinion About Outsourcing Matters

Navigating the intricacies of handling customer-employee data, a core function of our application, presented unforeseen challenges in terms of data security. Some customers were worried about the access of the outsourcing partners’ staff to those data. A guiding principle surfaced: the larger the customer’s company, the more pronounced these concerns tended to be. Likewise, considerations about intellectual property may come to the forefront. When your product is developed in a distant country, unfamiliar to them, additional sales efforts may be necessary to secure deals at home and ease any resultant concerns.

Lesson 4: Talking about Legal

Outsourcing can save money but introduces legal complexities. If you are based within the EU ensure the selected company has a legal entity in its jurisdiction, preferably headquartered in your own country. The latter certainly applies if you are in a non-EU country. Otherwise, suing your remote partner for damages becomes challenging. A “parent company guarantee” with the local representation of your outsourcing partner is advisable. This ensures the parent entity steps in if the local entity faces financial challenges.

Conclusion

Sounds like too many caveats? The answer is “no.” Whether using personal funds or investor capital, anticipating the best and preparing for the worst is crucial. Our experience with the outsourcing partner was positive and indeed saved money for use in sales and marketing activities. If finances are not a concern, consider an in-house approach. If budgetary considerations are significant, outsourcing can be a preferred choice, provided you handle it with the outlined considerations.

Jürgen Müller is an IT industry veteran, founder, coach, book author