When it comes to software product development in the modern age, most companies will settle for one of two primary models, opting for either a captive approach or outsourcing the work to a third-party provider. There are a number of different factors that must be considered in order for a business to determine which option is best for them. Some variables that must be considered when determining whether to outsource software development or use captive operations include customer needs, associated risks and relative costs.

Each option has its own benefits and setbacks, so understanding each will be key to ensuring that the right option is chosen for your business.

Third-Party Outsourcing

Third-party outsourcing is reflective of the classic client-vendor relationship, which is strictly governed by contractual obligations, in addition to service level agreements. Whenever a company chooses to outsource to a software product development company, some form of strategic and tactical reasoning, such as short-term cost-efficiency or staffing flexibility, usually motivates the decision. For instance, if your company has current expertise to develop your software, but your current staffing situation doesn’t allow for a major overhaul, porting to new platform (mobile version etc.) or increasing speed to achieve newer releases, then third-party outsourcing will likely be a better option.

The most common form of outsourcing used when setting up a software development project is generally project-based outsourcing. This however changes a lot when it comes to outsourcing software product development. One must look at outsourcing software product development activities to be a core strategic move and form an extension of their own product development team in longer run. This type of outsourcing can be carried out on site or off site, depending on the specific needs associated with the product.

Captive Operations

Where outsourcing often provides a cost-effective method for producing necessary software programs, it was earlier rarely considered when certain core functions and critical activities were involved. Businesses have been motivated to create their own captive operations in low cost countries to take advantage of cost without compromising on IP security and other critical factors, as they believe to controlling these operations directly.

This has worked well for many vendors but with time, the hassles and issues faced like local red tape, difficulty of doing business in remote countries, business costs, taxes, rising costs in developing countries have all added up and many times overshadowed the captive advantages for many companies, forcing them to shut down their captives and going the third party route.

With the evolution of cloud and reliable project management and team collaboration tools, companies today can take advantage of using the third party outsourced software product development vendors without really compromising and losing control over their core software development and security requirements.

While there is no cookie cutter approach to determining which development process will be best for you, the general rule would call for you to start outsourcing with non-critical and cost sensitive smaller chunks of product development and slowly look at outsourcing vendor(s) more as your own extension and as your partners for core product development activities & support. While captive operations provide the control that is needed for critical projects, it may turn out to be very expensive approach. One can even look at options of matured models by niche outsourcing product development companies that may help you build, operate and then transfer the software development operations to your own captive if needed with time.