April 26, 2022

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Why are start-ups increasingly turning to outsourcing? 

The answer may depend on funding stages

In a recent Forbes discussion, project-based staffing and outsourcing were named by tech leaders as two of the top six trends to watch for start-ups in 2022. With the skills gap and talent shortage in tech positions at an all-time high, outsourcing offers access to niche expertise to fill variable capacity when it’s needed. This can also be provided at a reduced cost by taking advantage of the lower price of labor abroad.

In our latest report, The 2022 State of Tech Staffing survey, Commit asked 200 senior tech leaders about their experiences managing and staffing engineering teams, and uncovered a focus on outsourcing as a key strategy for success. Through our research, we highlighted some key differences between start-ups at Seed funding stage, and those who have moved on in maturity to Round A or B funding stages.

The rise in remote work as a strategy

Employees are increasingly demanding more flexible and hybrid work opportunities, and this suits employers as well. Businesses validated remote working as a strategy during COVID-19, and now firmly see the benefits of being able to hire anywhere to get the best fit for the role. In fact, 99% of the organizations we surveyed see benefits in remote working.

Biggest Benefits of Remote Teams

The main benefit is increased productivity. 75% of businesses see greater productivity from their employees when they are working remotely, with just 6% seeing a drop in productivity levels. Other benefits include cost savings, collaboration, and better employee health and wellbeing

Impact of Remote Teams on Productivity

The growth in remote work has led to increased outsourcing

With the validation of remote work, outsourcing is becoming increasingly popular as a strategy – to open new talent pools, scale quickly with readily available talent from outside of the company, and reduce costs and overheads on hiring internally. Between 2022 and 2023, our respondents project a 70% increase in the amount of software development outsourcing leveraged in their organizations.

Percentage of Software Development Outsourcing, 2021-2023

When and why do start ups of different stages of maturity turn to the outsourcing model? 

For those start-ups who have received their Seed funding but are still at the earliest stages of growth, the data shows that outsourcing is mainly a strategy for reducing risk. Hiring in-house is a leap of faith, and if you hire too fast, it’s much more difficult to roll back those costs. In addition, at this stage of maturity, start-ups may not know exactly what skills and talent they need, and even a simple task like writing an accurate job description can be complicated as needs are evolving all the time.

Outsourcing allows early-stage start-ups to test the waters with different roles, hire for a specific task, or use an accordion model to scale up and down as necessary to meet current capacity.

Top Benefits of Outsourcing Software Development

As organizations grow, the focus shifts. For those at Round A, there is a fairly equal split in terms of the benefits that start-ups see of an outsourcing strategy. While scale is the number one benefit on the list, this is quickly followed by time savings, increased productivity, and cost savings. Start-ups are developing their strategy, working out what they need – and seeing wide and varied benefits of the outsourcing model.

However, by Round B, when start-ups are more established, engaged in commerce and contracts and perhaps even eyeing that unicorn status or IPO, the main benefits are clearly time savings and scale – called out by 46% and 45% respectively. The pressure is amping up for these more mature businesses, and it’s no longer about risk, which is now close to the bottom of the list of benefits; it’s about fast growth to keep up with demand.

Risk vs scale: What tips the balance for Round A and B start-ups?

This data also explains why start-ups choose to leverage outsourcing at the stages they do. We see that 25% of start-ups at the Seed stage are outsourcing for software development roles, but this takes a huge leap as they move into Round A and B. While reducing risk is an important goal for the internal business, achieving scale and productivity has a direct impact on customer experience and success. 

Percentage of Software Development Outsourced in 2021 (Weighted Average)

Companies who want to leverage the benefits of outsourcing as they grow should look to onboard flexible talent management solutions. For start-ups at early stages, an outsourcing partner who allows easy switching and replacement of talent without financial risk can meet the need for risk reduction head on. As start-ups evolve, your partner should offer the quick and easy ability to scale teams up and down to meet varying needs for capacity and support productivity and growth.

Ready to talk about outsourcing for your business? Schedule a call to discuss Commit’s Cloud of People solution. 

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