As the world is moving towards specialization, more companies are opting to outsource some of their business processes so as to focus on what they do best. Software development is one of the many segments that companies require expert knowledge.

Cost efficiency, customized software creation, utilization of new technologies, ability to choose from a vast pool of experts, are some of the reasons why companies may opt for outsourcing their software development.

According to a 2020 study by Deloitte, 70% of companies outsource their IT and software development services, as part of their cost reduction strategy. 

Before diving into best practices in outsourcing software development, it is helpful to define what it actually is. 

What is Outsourcing in Software Development?

Software development outsourcing is the utilization of external or third party resources to effectively administer software projects. Depending on varying levels of flexibility, scope, level of control and capacity, there are three outsourcing models:

  1. Staff Augmentation – Software projects are developed by outsourcing provider, then managed by you. Better in case you want to scale on an existing inhouse development team or fill a skill gap.
  2. Managed Team – Partnering with an outsourcing provider to share ownership and responsibility of the development of the project. This option is best when priorities and responsibilities are clearly defined among the team.
  3. Project-Based – Based on your requirements, the outsourcing provider will be responsible to develop and own the project from scratch to end.
AreasStaff AugmentationManaged TeamProject-based
ScopeFlexibleFlexibleFixed (well defined)
Project ManagementClientOutsourcing ProviderOutsourcingProvider
Overlap with in-house TeamHighMediumLow

Software development outsourcing can bring several benefits if done right. However,  there are significant risks and challenges involved in managing and negotiating outsourcing partnerships. In order to gain maximum benefits, here are some of the best practices you should adhere to when outsourcing software development.

Best Outsourcing Practices for Software Development

1. Background Check

The very first thing you should do is to have a shortlist of possible candidates for your software development service provider. This helps in determining the baseline skill set of what you are looking for. After this, an extensive research about each of the candidates strengths, turn around time, average, and reviews from past clients, would provide a guideline as to which outsource provider will best fit your project’s needs. 

Comparing the top three candidates in your list could also assist in negotiating the best deal that otherwise would not have been possible. 

2. Establish Payment Structures

Primarily, there are three payment structures that can be established with the outsourcing team, depending on budget, scope, time duration, and defined goals of the project.

  • Fixed rates – A fixed budget is agreed upon at the beginning of the project with well defined goals, time lines and scope.
  • Hourly rates –  An hourly rate is determined at the start of the project, usually with a shorter life cycle or that may require minor modifications. 
  • Dedicated – Usually employed by large corporations and projects that require a dedicated team of developers 

Once the best payment structure is settled, other fine details can then be worked out with the outsourcing team.

3. Documenting Scope of Work

Whenever a company collaborates with an external party for any project, there is always a room for miscommunication, which can send the project off course. Clearly defining the scope of work and then documenting it along the way is vital for any project. 

In preparing the list of criteria, you should be precise in defining the characteristics of the project, while designating the tasks, duties and responsibilities that are to be fulfilled by the outsourcing provider.

Proper communication channels need to be created at the start of the project so as to ensure steady flow of information and avoid delays and disruptions.

Since you are going to be dealing with humans, it is better to have some flexibility. Hence, realistic goals need to be established. It would be unreasonable to give a short time frame for completing a large complex software project.  

4. Create Milestones

To ensure the project is going the right direction, you should establish mini-goals for the total project life-cycle. This is often ignored by most of the companies who think they have done their part when handing over the requirements to the development team. 

Milestones help in keeping a track on projects as to how much has been completed and how much part is pending. In this way, if there are any issues, possibilities, improvements that need to be adjusted along the way can easily be identified and timely corrected. 

You should actively participate in the development process of your project, but try not to interfere too much as it would prolong the final delivery of the project due to miscommunication.

5. Ensure Data Security

Data is crucial to any business. Your job while outsourcing your software project is to get yourself acquainted about what security measures and protocols the outsourcing firm is following already and how they plan to handle your data.

It should be clearly stated in advance as to what can and cannot be done with your data once the outsourcing team is given its access. Usually a Non Disclosure Agreement (NDA) is signed between the parties involved to establish secure means of transferring and handling the data.

6. Exit Strategy

It might seem counterintuitive to have an exit plan ready at the start of the project, but it essentially is a realistic component of any outsourcing contract.  

The only constant thing is change in the world. What holds true or feasible today might not be so tomorrow. Therefore, it is better to have a wiggle room in your timeline and budget. However, when things appear not to be going in the anticipated direction, it is best to have an exit strategy ready. 

Both parties should plan around subjects such as early termination, modification in the scope of the project, and backups in case any unforeseen event occurs.


Entering an outsourcing partnership with a software development team is not a simple task, rather it is a process with which good match can be found for your project. Finding a perfect software developer could expand your business in unprecedented ways. 

By Anurag Rathod

Anurag Rathod is an Editor of, who is passionate for app-based startup solutions and on-demand business ideas. He believes in spreading tech trends. He is an avid reader and loves thinking out of the box to promote new technologies.