Strategic Considerations When Outsourcing Your Software Development - Start Up Gazzete
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Strategic Considerations When Outsourcing Your Software Development


Engineering talent exists in all parts of the world, not just in Silicon Valley, and I have worked with several global companies, including some based in Silicon Valley, that have successfully built and sold products leveraging an outsourced software development team.

I also expect the use of outsourced software development teams to grow with the rise of remote working due to the pandemic and companies rethinking the traditional working model of being in the same physical location.

Below, I discuss some implications that entrepreneurs should consider when using an outsourced software development team.

There are clear benefits to using outsourced development teams, such as:

Capital efficient model
Hire software professionals in cities like Austin, New York, San Francisco, etc. It can be expensive and difficult to retain given your options from other competing employers for the same talent.

Companies can tap into talented software professionals in geographies where costs are lower and skill sets are equivalent. The cost savings here can be used to grow in a capital efficient way. I have worked with several clients who have successfully used an outsourced software team and reached out to Fortune 100 buyers and private equity firms.

A recent buyer from one of our clients noted that the costs of hiring a local software developer was equivalent to having more than five developers of similar skills on our client’s outsourced software development team, making the transaction attractive.

Follow-the-sun model
With software teams in different time zones, work can be done around the clock, allowing for acceleration in product development.

Companies can build a highly competent, low-cost engineering team that can work to “follow the sun” in a fast and agile response schedule.

Companies must take care to develop the tools (Slack, Jira, collaboration and video conferencing software, etc.) and procedures necessary to stay aligned given geographic, linguistic and time zone dispersion.

Focus on core competency
Some areas of software development are critical to the business; these aspects can be performed at headquarters, while low-end tasks can be outsourced providing operational leverage.

Considering your future funding or exit is key when using outsourced software development.


Four main considerations:
Transfer of outsourced software development staff after control change: It is often easier to go through a third party agency to hire staff rather than setting up a captive team in another country. Following the change of control due to a financing or exit event, the investor or buyer will likely want the company to have a direct relationship as an employer or contractor rather than working with a third party agency.

Tip No. 1: Care must be taken to ensure that outsourced software development personnel can be contractually transferred to the company from the third-party agency.

IP Ownership: Buyers want to make sure that the companies they acquire own their intellectual property in full.

Tip No. 2: It is important to ensure that the outsourced software development professionals involved in creating IP sign an Invention Assignment Agreement, otherwise this will cause a transaction to go down the drain.

Geographical preference of buyers and investors: Our firm was involved in a situation where a known buyer wanted to acquire a client of ours. However, the location of most outsourced software development teams made buyers pause, given their focus on keeping their workforce only in certain geographies.

Fortunately, we were able to find another interested buyer who preferred the location as he had a substantial presence in the region. Additionally, investors, depending on their fund strategy, invest in companies incorporated in certain geographies, and they can generally be fine if some of the outsourced software development is done correctly with some of the considerations outlined.

Tip No. 3: We also suggest avoiding having outsourced development teams in multiple geographies and focusing on a particular location where there is a pool of software talent to source. This is the practical approach for most companies unless they are large.

Culture development: An organic team tends to enjoy social activities throughout the company that create a company culture or “DNA”. This is rarely the case for outsourced development teams that are typically left out, which can affect their potential transition to the company upon exiting.

Tip No. 4: Consider including outsourced development teams in as many team building events (virtual or in person) and sharing successes and milestones to give them a sense of ownership and belonging. This will go a long way towards building a better relationship and higher quality engagement, and will aid in the transition from the outsourced development team to the buyer on departure.

In summary
Depending on the type of business buyers are looking to acquire, outsourced software development teams can have an impact on the valuation.

If a company is being acquired for a premium revenue multiple as they go on their growth journey, buyers might be less concerned about outsourced engineering teams. However, if a company is being acquired for its engineering talent and technology (for example, Google’s purchase of artificial intelligence startup DeepMind for more than $ 500 million, with high-quality engineering talent as a driver deal), outsourcing most of the engineering team can affect the valuation and provide additional scrutiny from buyers.

Outsourced software development can be beneficial to businesses if done correctly. It is important to take into account the risks that can affect a financing or exit.

Author avatar
Joshua Smith

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