In-house vs. outsourcing developers: key considerations for your tech business
As young tech businesses rush to deliver the growth that could help them maximise their early potential, the question of whether to outsource developers becomes critical. We talk to an expert with experience on both sides of the in-house v outsourcing debate…
Industry-wide, the trend for outsourcing key business functions, typically IT and business processes, continues to grow. Some four out of five businesses expect to see an increase in the scope of their outsourcing by 2020, according to a recent report from the Global Sourcing Association.
Outsourcing tech and IT capability is an issue that many early-stage fast-growth tech businesses will have to address, as aggressive targets start to put pressure on scalability. Outsourcing has many obvious benefits – such as a rapid injection of resource, flexible headcount and technical support when and where you need it. But there are potential issues to address too, such as protecting IP, building a team culture and a lack of continuity and consistency.
How then do you balance the odds and decide whether outsourcing is right for you – and if so, what and when? To help us answer these questions, we spoke with Tim Palmer, CEO of strategic delivery consultancy Blue Hat Associates. A computer scientist and career technologist who began his career at Oracle, Tim has ample experience on both sides of the outsourcing fence, for example as CTO for adtech specialist The Exchange Lab (which sold to WPP in 2015), and as the head of his own consultancy delivering agile teams both onshore and nearshore to help companies deliver on their tech build challenges.
How do we define in-house and outsourced resource?
The first consideration to grasp here is that in-house and outsourcing are not like-for-like, says Tim. There’s a big difference between a tech business that deploys remote resources with which it communicates principally through electronic means, and the hiring of local consultants or contract staff to supplement your local team – a resource that could actually be classed as ‘in-house’ in lots of important ways. So for the purpose of this comparison between outsourcing versus in-house resource, we assume that third-party consultants are included in the ‘in-house’ category.
‘In-house developers sit next to you’ says Tim. ‘They are a part of your business and you need to actively manage them to get the best out of this more expensive resource pool. Outsourcing, on the other hand, is a different proposition. You trade the recruitment, management and retention issues of your own staff, and the ability to constantly supervise, but now have to give clear instructions to remote resources.’
How do we approach the question of resourcing?
The decision to outsource or develop in-house is a question that must be answered in the context of the founders’ goals, the needs of the company and its current stage of growth, says Tim. At its heart, the question is also about distinguishing between core capabilities and tech capabilities of a more subsidiary nature, though these priorities will naturally evolve with the business too.
‘Every company has to go through an evolution of technology,’ says Tim. ‘When you start, you are building the idea and simply testing that it works, so you need people around you who are specialists and add a particular flavour of technology to come in and work on whatever it might be,’ says Tim. ‘But once you’ve built that piece of technology you need somebody who can support it, make small improvements and keep it going. These are very different skills and require quite different talents.’
What areas can be outsourced?
‘As well as considering your stage in your product journey, you also need to identify what is unique and vital to you as a tech business,’ says Tim.
‘Some elements of your build will be completely fundamental to the business and, as a founder, you’ll need to keep these team members very close. This allows you to be aware of and have an input into each small step in their journey, as this can have long-term ramifications to the future of your company.
‘By contrast, for systems that are more commoditised you may want to think about outsourcing initially, but in making that decision also consider if you want to retain the option to bring this software back in-house at a future date.’
How does the role tech plays in the business impact on resourcing strategy?
Understanding the role of tech in your business is key to understanding what elements can be outsourced, says Tim. He categorises businesses into three broad types according to the relationship tech plays in their business strategy and offering.
‘The first category consists of businesses where technology is very much behind the scenes,’ he says. ‘These businesses need a marketing website, to generate invoices and maintain an archive of emails for example, but there’s no complex, unique functionality to build and manage that requires an expert. For these kinds of businesses, with the correct outsource management in place and good common technology, the business can benefit from an outsourcing relationship.’
The second category might be called tech-enabled businesses, he says. ‘These are businesses where IT and tech are absolutely critical. Businesses that are strong ecommerce players, such as an e-tailer like Not on the High Street, would fit into this category.’ Here the need for new tech and outsourcing is a strategically more complex issue that will evolve over time.
‘Tech-enabled businesses are using the Internet not just to communicate a message and do marketing but they're operating transactionally as well,’ says Tim. ‘In the first instance, they will want to outsource the build of their website, ensuring that it is engineered by experts who understand integration with social media, ensure it integrates neatly with advertising platforms, has some marketing collateral, does e-commerce transactions and bookings and that it will do the job adequately for the business.
‘But what they will quickly realise when they reach the growth stage is that they now need to offer something unique in the market. For example, their product might need to be more tailored and there will be another round of investments to build further technology. They then reach a critical juncture where they need to decide if they have enough money and knowledge of the business to go and hire an in-house team, or do that in a hybrid way – combine in-house and agile outsourced resource – or to outsource the whole program to another company to build it for them.
‘When we look at the way these companies are funded, they typically need to go back to investors every 12 to 18 months, so they need to build something that is sufficient in the short term to start fuelling their growth but that doesn’t restrict them in 18 months’ time when their business and the platforms on which they need to run it will inevitably be massively different. So the tech-enabled business will typically go through a series of outsourcing arrangements to grow its business.’
The final category of business is what Tim calls tech innovation companies, where effectively the technology is the company. Here, if a business’ value comes from the tech product itself, using an in-house development team gives founders a certain level of ownership long term.
‘Pureplay tech businesses are generally going to keep development in-house,’ he says. ‘The founder will typically be very technically competent and aware of what they want to do. They will probably build the MVP (minimum viable product) using their expertise and get it to a certain point of maturity with their own in-house skillset.’
Even in this category, however, Tim notes that there may be a balance to strike: velocity is key and founders may wish to consider outsourcing the commodities that surround the product, while focusing their expertise on the unique product features.
‘You can outsource work such as building a website or building the software that's going to extract data and put it into a database,’ he says. ‘But let's say you’ve got a machine-learning algorithm to do something very clever: you have to move or keep that in-house. You can outsource or bring in consultants to help you do it, but you ultimately want all of the IP to come back and sit with your in-house team to manage.’
Who will be your tech leader?
At any stage of growth, Tim highlights the importance of defining the technological landscape and infrastructure that you want to build, and then figuring out who best to own and lead that process for you. ‘Businesses must ask themselves: Is this commoditised IT that we can use off the shelf, or is it core to your business and your IP – meaning we need to hire someone to own that long term?’
‘This role may be filled by one of the founders who has got the technical skills, especially in a pureplay tech business. But if you don’t have that depth of capability, you may need to bring in a CTO, possibly on an interim basis, to support you and help you structure what needs to be built in-house, what can be pushed out of house overseas and how that can be supported.’
An interim CTO is there to advise on what decisions to make, who to hire and to eventually replace themselves, if necessary, in order to help founders reach their business plans. In Tim’s view, the interim CTO role is especially suited to the middle category of tech-enabled businesses: ‘There is an advantage to having somebody who sits between the business and technology, not to build the system but to help the founder’s plans.’
Does it matter to investors if resource is in-house or outsourced?
While it matters greatly to investors that you have someone in place who is technically very competent, says Tim, the question how resource is engaged is less important to investors so long as certain basic criteria are met.
‘The investors’ main concerns are likely to be: “What is the risk that this technology does not get delivered?”, “Who is the main person driving technology spend?”, and “Are they empowered and equipped to deliver on that remit?” As long as these questions are satisfactorily answered, it doesn't really matter about the employment status of those people for investors, certainly at the growth stage of the company.’
The other thing investors understandably really care about, he says, is making sure the IP is protected. ‘This is important at due diligence stage for all businesses, but even more so for the tech innovation companies: Because the IP of the business is the technology, investors will be looking to one of the co-founders (or if not them, then certainly the first employee or the next person to join) to be coming permanently on board to drive that.’
How does in-house vs. outsourcing impact company culture?
The case for outsourcing in a smart way that is relevant for your business is compelling. However, in some cases, outsourcing or bringing in contractors has the potential to raise concerns around loyalty, background knowledge and company culture, as integrated teams are thrown together to tackle problems.
‘If you’re wanting someone who is going to look at the broader picture, you don't really want to outsource that,’ says Tim. ‘But, with the right leadership and the right structure in place, it is possible for outsourced developers to become part of the team and of the culture as well, particularly on longer-term engagements.’
Strong effective leadership and management is critical here, he says. ‘The necessity is to have a person who is the figurehead of the culture. This could be the CTO, or the CEO, or anyone who can keep the team focussed on the vision and make the journey rewarding.’
Setting an engaging and attractive culture is vital if you are to hire the right people, whether temporary or permananent. ‘Culture is very important early on when you're looking to hire people, because you're looking to hire the best talent you can afford, but money is not necessarily the most important factor for them. People want to join a company which will treat them with respect to their growth and career path; they want to be listened to.
‘One of the interesting things about technology is that everybody's an expert in something. The key thing in building a culture is to put a team together who have complementary skills. You need an overlap of technological capabilities, of course, but also of personality types. You need extroverts and introverts: the person who sits up all night worrying about a problem and the person who can take a helicopter view. If you get a balance right to those teams then you’ll have a team who can effectively collaborate to solve problems and deliver results, and that extends to both in-house and outsourced employees.’
How can outsourced resource be managed effectively?
Across all three categories of tech business, outsourcing has the opportunity to support growth and provide businesses with a smart way to deliver the necessary functionality, or tech build. Here are Tim’s key takeaways to help your tech business get the most out of outsourcing...
1. Remember you are the knowledge owner
If outsourced suppliers get to a point of understanding the tech better than you do, you’re creating a risk for the business. ‘As a founder or tech leader I never want to lose control of what the scope of the outsourcing will be, because I know I have to be going in front of due diligence in a year or two years’ time with a company that might want to acquire us, and I need to have mastery of each moving part,’ says Tim. ‘If I was dependent on a vendor to come in with me, then they could have bought the vendor because the vendor knows more about it than I do.’
2. Retain ownership and responsibility
Most of the time, when you're working with an outsourced provider, you want to scope out exactly what you expect from them, says Tim. 'You delegate the technical delivery and the technical risks, and they have to understand all of those things and fix them for you, but you still retain ownership of the product and the problem – you haven't delegated your responsibility for these problems.
‘I want to get to a point where I can use the outsourced partner to help me solve a problem to move me forward faster, or de-risk something which I don’t have the skills for. But if I need someone to come in and actually fix the problem for me, I will define what it is, and what I need to be done.’
3. Clearly and succinctly define the job
‘I always make sure what I am outsourcing is clearly defined,’ says Tim. ‘Even if the job is easily understood by management, this may not be the case for the team delivering against the goals.
‘It may not be easy to do this at first, and often you have to invest initially to get the fundamentals right, providing the chassis on which all the projects will sit, such as the architecture and initial design. But once the main platform is in place, you’ve got the building blocks to then modularise and quantify all the other things you want to do.’
4. Make sure you’re outsourcing for the right reasons
‘If you’re using the outsourced person because you can't be bothered hiring or can't get the experience to hire people,’ warns Tim, ‘then you’re not going to get the right outsourced employees to match the passion of your in-house team --
and that could well leave you with a team that never really gels.’
5. Consider the tax and cost implications
The combination of staff resources, contractors, outsourcing and partnering with large businesses or SMEs can all have a bearing on the extent to which HMRC will be able to contribute to the development effort. ‘R&D Tax Credits, Government and EU Grants can all make substantial impact to the finance of a tech business, so make sure you consider these when making decsions about resourcing within the business.’
Tony Spillett | National Head of Technology and Media, BDO
Tony Spillett is Tax Partner and Head of BDO's UK Technology & Media team - 25 years advising high-growth tech businesses.