The “Hidden Benefits” Of Outsourcing

Any CEO or MD will tell you how important it is to monitor the state of your project pipeline. You need the ability to consider future requirements in order to adequately allocate your resources, however even the most rigorous of planners can be caught by surprise.

Here at Zircon we frequently witness companies that have always managed internally suddenly find themselves struggling under the strain of an increased workload, or unexpectedly presented with a problem that they do not have the capacity to solve. From our experiences we have noticed that when companies find themselves in these situations there are a number of potential solutions:

  1. Increase the internal team through the recruitment of permanent members of staff
  2. Recruit a number of independent contractors to solve the problem or manage the increase in demand
  3. Outsource responsibility of certain elements or projects to another company, either offshore or within the same country

Whilst researching into this topic the overwhelming consensus appeared to be that localised outsourcing was by far the least popular solution for a lot of companies. As you would expect from a software development company we have some views on this topic and would like to counter some of the arguments used against outsourcing.

First things first, let’s get the financial argument out of the way. If you go by the headline day rate alone, outsourcing will almost certainly give you cause for pause, but one should also stop to consider the potential ‘hidden’ costs such as;

  • The initial recruitment costs required to add members of staff to your team
  • The ongoing cost of permanent employee payroll and miscellaneous benefits i.e. sick pay and pension contributions
  • The management overheads
  • The possibility of reworking low quality code produced by offshore teams

When you take each of these points into account the cost differential begins to become less of a factor, but the frequently ignored additional benefits also remain.

Should you decide to head down the path of recruiting contractors you should be cautious of IR35, and the potential repercussions should you be found in breach of its terms. IR35 is an anti-avoidance tax legislation implemented to combat income tax and National Insurance Contributions avoidance by workers supplying their services to companies via an intermediary, but would otherwise be engaged as a permanent employee were the intermediary not used. Companies found in breach of this legislation are required to provide the employer contributions that would have arisen during a ‘contractors’ term of employment, and will be expected to continue doing so should the contractor turned employee remain with the company.

A further downside to recruiting independent contractors is the fact that their employment is only temporary. When a contractor leaves they take their knowledge with them, and if not documented correctly it is easy for knowledge to go missing. You are also faced with the fact that a contractor will not wait around until you require their services again, there is no guarantee that they will be available as and when you need them. Outsourcing to another company can essentially eliminate these risks. With ready access to a team of people, with the capacity to share knowledge and train other team members, should one engineer become unavailable there will already be another capable of filling this space.

It is not uncommon for companies to want to keep the development and improvement of their products internal. It gives them a feeling of security over the likes of intellectual property rights and other sensitive information. This is something a good outsourcing partner should understand and recognise that IPR remains with the client, and hand over such items as source code, documentation etc. to the client upon completion. This desire for control is the reason why, even though it can be a long-winded and expensive process, a lot of companies prefer to increase the size of their internal team over bringing in external resources.

Preference aside, there are occasions where such a solution simply isn’t practical. For example if increases in workflow are only going to be temporary or fluctuate regularly, adding more permanent members of staff could result in a build-up of unnecessary resources that do nothing more than drain a company’s capital. Offshoring, contracting and outsourcing can provide companies with the means to tailor the size of their workforce according to changes in demand, without the continuous drain on finances.

An additional benefit of outsourcing to another company is that you don’t limit yourself to the experiences and knowledge of just one person, you essentially get access to the expertise of every engineer by proxy. Just because a particular individual hasn’t been offered as a resource for your project doesn’t mean that they will not offer their advice or insights to those who are.

However, it isn’t all sunshine and rainbows, outsourcing does have its own flaws, with a particularly troublesome and unfortunately common problem being something as simple as communication. As soon as you introduce some form of remote working the ability to communicate becomes more complicated. Even though you avoid the added complication of differing time zones by outsourcing to a company in the same country as you, it isn’t possible to simply stroll into the room next door and ask how it’s going. From our experiences we recognise and understand how important communication is for our clients, which is why we make it one of our priorities. The era of internet and smartphones has assisted with enabling more points of communication, however companies must ensure that they are not left out of the loop and uncertain as to how a project is progressing until something inevitably goes wrong.

You also run the risk that, as outsourcing organisations will often take on more than one client at a time, the amount of focus being given to your requirements can wane. It is all too easy for teams to get distracted by the clients that are vociferous about the demands and time restraints of their project, leaving other clients up in the air with little to no progress being made. There are methods of reducing this risk, for instance Zircon employs best practice project management disciplines but at the end of the day communication and regular dialogue is key.

There is no hard and fast rule to tell you which of these potential solutions you should pick, as it depends heavily on each unique situation and how particular individuals feel about the different pros and cons of each solution. We advise that companies considering any of the solutions discussed in this article look further than the immediate reduction in cost and consider the potential additional benefits, which in the end could lead to longer-term savings.