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A Comparative Analysis of In-house and Outsourced Development in Software Industry



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International Journal of Computer Applications (0975 8887)
Volume 141 No.3, May 2016
A Comparative Analysis of In-house and Outsourced
Development in Software Industry
Syed Aitzaz Haider
Dept. of Software Engineering
University of Lahore
Lahore, Pakistan
Ghulam Samdani
Dept. Of Software Engineering
University of Lahore
Lahore, Pakistan
Mubashir Ali
Dept. of Computer Engineering
Bahria University
Islamabad, Pakistan
Muhammad Kamran
Dept. of Computer Engineering
College of EME, NUST
Islamabad, Pakistan
These days, many software companies handover their
software projects to outsourcing organizations. Outsourcing
refers to handing over some or complete business process
activities to some outside manufacturer. Many software
companies now have started feeling the need of outsource
development due to numerous factors that include high cost of
experienced in-house developers, tough project schedules,
lack of knowledge about domain and technology of certain
complex software systems. Outsourcing is causing
globalization, knowledge sharing, achieving quality and
minimizing production cost. Software project outsourcing is
common in many software companies, this makes it an active
and interesting research area. This paper investigates the
current state of the art in software project outsourcing. An
effort has been made to answer an important question about
outsourcing “Is software outsourcing a gain or loss? A
detailed comparison of in-house software development and
outsourced software development has been conducted to show
when and where outsourcing is useful for an organization and
where it is not.
Software Project Outsourcing, Offshore Software
Development, Global Software Development
During the industrial revolution from 1750-1900 Europe was
booming. It was dire need of outsourcing that pushed many
companies to hire third-parties for performing different
functions[1]. The topic of outsourcing has changed face
overtime. Offshore outsourcing became popular in the
1950’s[1]. From the last few decades outsourcing in software
industry has been a very hot topic of discussion. Outsourcing
has been studied by several researchers. The most prominent
work is done by Smith and Angela[1] in which they
comprehensively describe the need of outsourcing and its
various perspectives. Another important research about
outsourcing has been conducted by Marvin Taylor[2] in which
they elaborate the global trends of outsourcing and their
impacts. They have described how outsourcing has greatly
affected software and IT industry. The necessity of IT
Outsourcing has been illustrated by Bott [3] in which author
clearly describe how outsourcing is providing its benefits in
different industries especially in IT related projects.
Outsourcing driving innovation has been depicted by Gordon
and Mack [4].
Outsourcing has been supposed to minimize the cost of
production as well as complexities of tasks which are either
not feasible to be performed in-house or some time not
achievable through in-house activities due to lack of infra-
structure, required expertise or other technical aspects[5]. It
may also allow firms to concentrate on their core activities[6].
Today many business activities are mostly outsourced to
different specialized organizations in that domain. It allows
organizations to concentrate on their core and mitigate risk.
Outsourcing is mostly fruitful in those areas where face-to
face interaction is not needed[1]. On one hand where people
argue that outsourcing is a cause of across the borders
relationships and organizational benefits in terms of cost,
quality and goodwill; others negate the benefits of outsourcing
by saying that outsourcing is a cause of huge job loss, cultural
and national conflicts and damage to reputation[7].
Outsourcing impact is not only confined to organizations and
businesses that involve in this activity but government, public,
country and economy also enjoy its positive or negative
impacts. Due to this activity LDC’s are also getting fruitful
effects on their economy[8].
This paper provides a comprehensive study about different
motivational factors of outsourcing especially in software
industry. It elaborates the scenarios in which outsourcing is
more beneficial than in-house software development. In this
paper we have tried to present the various positive and
negative aspects of outsourcing in political, economic and
organizational aspects.
This paper has been organized in the following sections:
Section 1: Introduction
Section 2: Motivational factors of software outsourcing
Section 3: Advantages of software outsourcing
Section 4: Disadvantages of software outsourcing
Section 5: Comparative study of software outsourcing and in-
house software development.
While considering the need of outsourcing we generally
consider several key factors which are strategic, economic,
political and technological factors. Outsourcing is generally
preferred for more than one reason. Outsourcing in many
cases is done due to lack of expertise in some specific
software engineering process[8]. While in other cases
outsourcing is considered due to cost saving and technological
International Journal of Computer Applications (0975 8887)
Volume 141 No.3, May 2016
2.1 Cost factor
The most important factor that is considered is cost factor[10].
Sometimes it is very expensive in terms of cost to hire some
in-house expert especially if the project is to be completed in
very short time duration. In addition to this software cost of
development in some countries is too high that software
organizations feel it better to transfer their software project to
some external offshore software company that accomplish this
task in relatively less cost[11].
2.2 Core expertise/ Specialty
In many cases when a software company gets such type of
software in which it doesn’t have enough expertise then
performing this process in-house will lead to goodwill and
quality compromise risk[12].The complete project failure can
also occur if the project is completed in-house in spite of
having lack of expertise in the relevant domain. In such cases
companies prefer to hand over such type of projects to some
outside software company which have enough skill and
expertise in that particular sort of software project.
2.3 Global Access Factor
Software companies desire to penetrate into global market to
widespread their business. This factor also motivates software
companies to outsource some of their projects to offshore
software companies in order to access global markets[13][2].
In this era of competition software companies tend to
widespread their goodwill into global market by penetrating
into different geographical markets and regions.
2.4 Success Factor
Outsourcing increases the software success ratio because of
deployment of highly expert team on project which otherwise
was not available in home organization.
2.5 Quality factor
When a software company doesn’t have expertise in some
project then it will outsource this project to some software
company which has high expertise in that particular sort of
project[14][9]. This will lead towards quality software project.
2.6 Goodwill factor
Increase in project success ratio will ultimately lead toward
more good will in the software market thus increasing
company revenue by getting more projects
2.7 Time Factor
Software companies consider outsourcing extremely
beneficial when projects are to be completed in very short
duration. Time is an important factor to be considered in any
project. When it is not sure whether company will meet the
required objective in specified time duration they generally
outsource the software project to external expert software
2.8 Speed factor
This is another factor where software outsourcing is
considered vital in software industry. Due to tight and busy
schedule of software organizations most of the software
projects exceed their deadlines. In this case software
outsourcing provides a solution for the organizations to
complete their software projects within due time[16].
Fig 1: Motivational Factors of software outsourcing[17]
International Journal of Computer Applications (0975 8887)
Volume 141 No.3, May 2016
This section explains main benefits associated with software
3.1 Services from native born employees
Outsourcing allows firms to penetrate in foreign markets.
Getting the services from native-born employees can assist
firms to adjust to the customs and traditions of the foreign
market [14].
3.2 Around the clock working
Outsourcing allows firms to work 24 hours a day when home
and outsource organizations are in different geographical
regions or continents. If there is a lot of time difference then
outsource organization and home organizations will have to
work more than just working hours and in some cases they
will work 24 hours a day. In this way they will be able to
complete the project quickly[14].
3.3 Less development cost
Software projects are mostly outsourced when cost of in-
house development is more than other regions due to higher
wage rates and salaries. In such situations home organization
will decide to outsource the software project to some
organization in other regions where cost of production or
development is less.
3.4 Beneficial for both organizations
Software outsourcings is highly beneficial for both home and
outsource organizations. Home organization gets expertise of
external highly experienced workers which will yield a better
quality software. Also home organization reduces the cost of
software project as well as it is able to shift the risk. On the
other hand outsource organizations gets the business and earns
revenue which will ultimately increase business of the firm.
3.5 Diversified Projects
Outsourcing is a cause of diversity in software projects for
many software organizations. Any organization which has
expertise in some particular projects cannot work on other sort
of software project with same level of expertise. Such
organization definitely does not want to lose the projects in
which it does not have expertise because in this way they will
lose market share. Such organizations get diverse sort of
projects and handover these projects to some other
organization which has specialty in that sort of projects. In
this way home organization can capture the larger share of
market by getting diverse projects.
3.6 Capturing larger market share
If any organization works only with some specific projects
and lose the other sort of projects then it will definitely lose
much of the market share. To increase its market share
organizations prefer to work in many different sort of projects.
Home organization will work in-house with only those
projects in which it has enough expertise, infra-structure and
resources and outsource the rest of the projects to some
specialist outsourcing organizations.
3.7 Availability of talent pool
Outsourcing allows forms to get services from best talent pool
all around the globe hence producing high quality projects
with less effort and time[6][13].
4.1 Geographical and lingual barriers
When home organization and outsourcing organization are in
different geographical regions then there may be lingual and
communication barriers which may cause misinterpretation of
some business processes specially requirement
understanding[18]. This will ultimately cause poor software
4.2 Goodwill at stake
If the outsourcing organization does not meet the required
standard of the project or does not work properly then it can
be a great threat to the home organization’s goodwill. In many
cases it has been observed that home organizations in such
cases suffer a lot by losing valuable customers.
4.3 Privacy / confidentiality risk
When an organization outsources any project to outsource
organization then confidentiality and privacy of the
organizational data and customer’s privacy is also at stake
because a lot of confidential data has to be provided to the
external organization[19]. Sometimes due to secrecy, security
or to minimize risk the things are not provided in black &
white form so due to this the result never meet up to the
maximum. This may cause loss or damage the reputation of
the parent organization.
4.4 Loss of control
Giving away the projects to someone else outside the
organizations means losing control over the project. When
project is handed over to outsourcing organization the controls
ultimately shifts to the hands of the outsider organizations
which means home organization cannot manage and control
the things or business processes according to their own or
customer’s wish[19][18].
4.5 Losing valuable customers
When outsourced organization is failed to deliver the expected
quality or in-time delivery of the project it will hurt the trust
and reputation of the parent organization which will be
ultimately the cause of loss of valuable customers.
4.6 Maintenance Issues
In case of any maintenance or update required by the
customer, the home organization has to get the services from
the outsourcing organization again. If the outsourcing
organization does not have enough time or not willing to
provide the required service due to some financial or
contractual matters the home organization will suffer a lot.
In this section comparative study of in-house software
development and outsource software development has been
5.1 Feature Comparison
Table 1 throws light on the different features and aspects of
both in-house and outsource software development. Both in-
house and outsource software projects has superiority over
each other in different aspects. In some aspects in-house
software project development is preferable while in others
aspects outsourcing has clear edge over in-house
International Journal of Computer Applications (0975 8887)
Volume 141 No.3, May 2016
Table 1. Feature comparison of In-house & outsource
software projects
Limited and defined.
resources because of
specialty in such
Limited range of
technology with
respect to specific
Have more technology
and tools for the project
because company has
specialized in that sort
of projects.
More cost to hire
domain and
technology experts.
Less cost because of
availability of experts
and geographical cost
Narrow Range.
Wider range.
Slow and gradual.
Fast and progressive.
Less Quality
Quality variation
Rigid & less flexible
because of local
control and strict
More flexible because
of having more
expertise in the current
Less legal
compliances because
of domestic market
and local laws.
More legal compliances
because of geographical
variations in laws and
5.2 Risk Comparison
Table 2 explains different risks factors associated with both
in-house and outsource software development.
Table 2. Risk factors comparison of In-house & outsource
software projects
Risk Factors
Goodwill in hand.
Goodwill is at stake
because if the
organization does not
perform up to mark.
Change is easy to
Change is difficult to
is manageable
due to local
Communication is
less manageable due
to less control and
language differences.
Management is
centralized and
Management control
and efficiency is less
as compared to in
house development.
More Business
Process control.
Less Business
Process control.
Privacy of the
organization is in
safe hands.
Privacy of the
organization is at
More Security of
confidential data.
Less Security of
confidential data.
5.3 In-House software projects challenges
addressed by Outsourcing
In-house challenges
Hidden and unpredictable
Bundle of unexpected costs
have to bear such as
purchasing new hardware for
specific project,
maintenance, management
and up gradation costs[11].
Staffing and Training
In case of specialized and
complex projects home
organization doesn’t have
enough expertise and
workers available so have to
conduct project based hiring
and training[22].
Maintenance overhead
Maintenance of projects is
highly complex task and
generally required a lot of
times and cost to be done in
house. Again have to hire
experts for the maintenance.
Lack of up-to-date
Technology and Tools
In case of specialized and
complex projects generally
home organizations don’t
have enough technology and
Tools available[23].
Capital Expense
May occur due to purchase
of new hardware and
Retention and Training
Expert workers turnover rate
is generally high so have to
hire new employees and train
5.4 Limitations of outsourcing
When there is huge cultural and lingual difference between
home and outsourcing organizations communication and
working style may vary a lot.
Foreigners cannot become locals so they cannot be treated as
organizational employees can be treated and motivated.
Motivation factor of workers is often absent in outsourcing
unlike in-house software projects where every individual
employee works for promotion and reward by giving his best
International Journal of Computer Applications (0975 8887)
Volume 141 No.3, May 2016
Both in-house and outsourcing practices have been in use all
over the world since last few decades with all their
advantages, disadvantages and risks associated with them.
The environments where projects are highly complex, cost is
too high to build them, technology is not sufficient, expertise
are not enough, Outsourcing plays a vital role to meet the
expectations. It also plays a key role to complete the task in
time, due to this organizations can save their production cost
and they can focus on their core. It is a good tool to transfer
the risk. While on other hand it also has some risks associated
with it like data privacy issue, goodwill compromise risk, loss
of potential employees and loss of potential customers. In
future we would like to explore ways to minimize the risks
associated with software outsourcing.
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[3] Protiviti, Apics 2004. “Managing the Risks of
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[5] Tibor Kremic, Oya Icmeli Tukel and Walter O. Rom
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[8] Shahnam Taheri, August 2013. “Advantages and
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[9] Rob. Aalders, 2002 “IT OUTSOURCING : Making it
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[11] Dogerlioglu 2012. "Outsourcing vs inhouse: A modular
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[13] Satwik Seshasai, Amar Gupta ,2004 “Global Outsourcing
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[14] New York state department of labor 2010."The offshore
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Global software development has gained a drastic growth from the last two decades due to the revolution in information and communication technologies (ICTs) and the world has become a global village. Offshore software development outsourcing (OSDO) is an important paradigm of global software engineering for the development of better and cheaper software's at low-wages countries. The objective is to dig out various communication and coordination challenges faced by vendors in OSDO relationship. We have performed systematic literature review (SLR) for the identification of communication and coordination challenges faced by vendors in OSDO relationship. We have identified a list of 18 challenges faced by vendors in managing communication and coordination activities in OSDO relationship. Amongst the identified list, the most frequently cited challenges are'geographical dispersion', 'cultural differences', 'language differences' and 'lack of technological cohesion'. 1.0 INTRODUCTION Global software development (GSD) has become a fast growing business for developing high quality software through globally distributed teams. GSD has many paradigms like outsourcing, outsourcing partnership, distributed developments through subsidiaries etc. Outsourcing is a contract-based relationship and is a fast growing paradigm of global software engineering (GSE) [1]. Software outsourcing can be defined as a contractual relationship between vendor and client organisations in which one or more vendors can get contracts of all or part of the clients' software development activities, and the vendors provide agreed services in return for payment [2]. From the last few years many client organisations at US, UK and Japan are involved in outsourcing of their software development projects to offshore countries [3]. India, Ireland, China and Russia are the most of common offshore destinations for offshore software development outsourcing (OSDO) [4]. OSDO business offers a variety of opportunities to client organisations like, reducing their operating cost and receiving high quality software products [5]. Another major motivator for OSDO is access to the latest technology, available at vendor organisations [6]. As OSDO have many benefits but it also encompasses several challenges like findings and selection of the appropriate vendor, requirements engineering, software development process, architectural design, configuration management, software component integration and culture, training, communication and collaboration, planning, coordination and risk of control [7]. The lack of communication among the stakeholders is the primary cause of failures in many of the GSD projects [8]. As in GSD the geographical distance exists which creates further challenges such as complex communication and coordination process, differences in culture, different languages, time zone differences, knowledge management difficulties and collaboration difficulties [9]. Our previous research identified a number of critical barriers/challenges faced by vendor organisations in OSDO relationship [10]. Amongst the identified challenges, communication and coordination was identified as a critical challenge. The research presented in this paper elaborates the issues relating to communication and coordination process in OSDO. Our aim is to identify communication and coordination challenges and to suggest solutions for addressing these issues. Our ultimate goal is to develop Communication and Coordination Challenges Mitigation Model (CCCMM) to assist OSDO vendor organisations to identify and address the communication and coordination challenges in OSDO relationship. We have formulated the following research question (RQ), in the first phase of our research, in order to understand communication and coordination challenges in OSDO relationships from vendors' perspective. RQ: What communication and coordination challenges, as identified in the literature, are faced by vendors in offshore software development outsourcing relationship? This paper is structured as follows. The background is described in section 2. The research methodology is described in section 3. The findings from the systematic literature review are presented and analysed in section 4. The limitations are described in section 5. The conclusion and future work are described in section 6.
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Purpose The purpose of this study is twofold. The first is to provide a structured review of the vast amount of outsourcing literature that has accumulated in the past two decades using a decision support framework. The second purpose is to statistically analyze the contents of the studies to identify commonalities as well as gaps, in order to suggest directions for future research. Design/methodology/approach The contents of more than 200 publications are analyzed using a variety of approaches. A decision support framework is used to first classify whether the studies address outsourcing benefits, risks, motivations or factors. Next, each classification is further described by the type of benefits, risks, etc. Additional relevant contents such as type of organization, and the location of the outsourcing practice are also considered. Multivariate analyses consisting of cross tabulations, chi‐square testing and cluster analysis are used for categorizing the studies with the aim of identifying relationships among the studies which are not apparent when they are considered individually. Findings A number of trends and relationships are identified. For example, most studies focus on US for‐profit organizations and are typically theoretical, discussing benefits, risks and motivators. On the other hand, the research on outsourcing practices of non‐profit organizations, where objectives for outsourcing are typically politically driven, is found to be scarce. Furthermore, the results of the cluster analysis indicate that the studies can be grouped into six clusters where the five small clusters are characterized by strong relationships with a few variables while the large cluster is characterized by variables that are not addressed in the studies. Practical implications Outsourcing has become commonplace in today's businesses. In addition to outsourcing in profit seeking organizations, there is considerable outsourcing effort in governmental and non‐profit organizations also. It is not easy for managers who are exploring outsourcing opportunities for the very first time and academicians who want to build upon existing studies to search the literature to find what they are looking for. This study addresses this difficulty by providing different classifications of the literature based on a variety of research criteria. Originality/value This study is a first attempt to organize the outsourcing literature using statistical as well as decision support tools. Using cluster analysis and discriminant analysis to explore the relationships among the contents of the studies is a new approach.
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Outsourcing, as time has passed, has changed its formats and patterns from simple specialization to Business Process Outsourcing or Application Service Providers. As the outsourcing industry grows, it becomes more complex than before and more cases of failures coming into existence. This paper intends to discover the reasons for these failures and the steps that need to be taken to make the outsourcing process a success. Also, different issues of outsourcing and the future trends in outsourcing are the major focuses of this paper.
Conference Paper
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More firms outsource information technology (IT) security activities each year, as they determine that they can achieve cost savings or a higher level of security at the same cost. However, despite the estimated benefits, many firms still fail to see a clear positive net benefit from their (private) perspective, given the risks and costs involved. This paper investigates the positive externalities associated with IT security outsourcing. My research suggests that, when one organization decides to outsource its security, both direct and indirect benefits can accrue to other organizations and Internet users. In this paper I analyze how a variety of decision characteristics affect whether and to what level such positive externalities will result. I also discuss implications for public policy and for firm-level decision making.
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Purpose Outsourcing is currently going through a stage of unstoppable growth. The purpose of this paper is to make a proposal about the main reasons, which may lead firms to adopt outsourcing in information systems (IS) services. It will equally analyse the potential risks that IS clients are likely to face. An additional objective is to assess these reasons and risks in the case of large Spanish firms, while simultaneously examining their evolution over time. This study of outsourcing reasons and risks has been carried out from the client's perspective. Design/methodology/approach In order to achieve these aims, a questionnaire was administered to the IS managers of the largest Spanish firms. Findings Outsourcing gives the organisations the opportunity to have better IS services and the possibility to achieve technological improvements and, although cost savings in staff and technology are generally seen as very important, they do not emerge as priority reasons for outsourcing in the present study. Regarding risks, they are mainly associated with providers, with great concern being expressed about the lack of qualification among their providers' staff, the potential lack of compliance with contracts, and the inability to adapt to the new technologies. Originality/value An important contribution made by this paper is not only the specification of those reasons and risks but also the fact that they are considered important by the firms interviewed.
Although there are forecasts of overall information technology (IT) outsourcing growth, there is no published research on which particular functions are being outsourced now or in the near future. Additionally, there is no literature on how outsourcing growth and how it may be related to department and/or firm size. The authors survey 181 upper level IT professionals across the United States to assess what they are outsourcing now and what they will likely outsource over the next three years. The results show that the areas of applications development, applications maintenance, personal computer (PC) maintenance, and systems maintenance will experience tremendous growth, while data center operations, systems development and telecommunications/LAN will experience very healthy growth. PC acquisition and project management will experience a lesser expansion. This growth will be led by what are now large IT departments. These results have implications for IT professionals and firms across the US and around the world.
The article presents information on managing cross-cultural issues in global software outsourcing. IT outsourcing continues to be booming business. the reasons why companies choose to outsource have been well-documented, including reduced cost, improved performance and access to wider labor markets. One aspect of IT outsourcing is the outsourcing of software production. An important trend that started in the 1990s and continues to increase today is to outsource software production globally. Much of the software development takes place at offshore locations, where cost are low and labor is often plentiful. Software suppliers normally maintain small bridgehead teams in the client countries for sales and customer liaison purpose. Outsourcers in turn often locate executives in the supplier countries to, for example, oversee large projects. All of this makes good economics sense for both sides of cross-border outsourcing relationship, but it raises the question of how best to manage the process
As a growing number of firms outsource more of their professional services across geographic and temporal boundaries, one is faced with a corresponding need to examine the long-term ramifications on business and society. Some persons are convinced that cost considerations should reign as the predominant decision-making factor; others argue that outsourcing means permanent job loss; and still others believe outsourcing makes U.S. goods and services more competitive in the global marketplace. We assert that if outsourcing options need to be analyzed in detail with critical objectivity in order to derive benefits for the concerned constituencies.
We study the determinants of the location of subcontracted activity in a general equilibrium model of outsourcing and trade. We model outsourcing as an activity that requires search for a partner and relationship-specific investments that are governed by incomplete contracts. The extent of international outsourcing depends inter alia on the thickness of the domestic and foreign market for input suppliers, the relative cost of searching in each market, the relative cost of customizing inputs and the nature of the contracting environment in each country.
We study the determinants of the location of subcontracted activity in a general equilibrium model of outsourcing and trade. We model outsourcing as an activity that requires search for a partner and relationship-specific investments that are governed by incomplete contracts. The extent of international outsourcing depends "inter alia" on the thickness of the domestic and foreign market for input suppliers, the relative cost of searching in each market, the relative cost of customizing inputs and the nature of the contracting environment in each country. Copyright The Review of Economic Studies Limited, 2005.