When does outsource product development make sense?

Outsource product development has caught the imagination of the entire business world. Sometimes, an enterprise opts for outsourced product development to manage costs, boost bottom line and save time for core activities. Other times, some strategic purposes such as dispense with some centers located at critical geographical regions have bearing on the option for outsource product development. There are several reasons can be cited for outsourcing option. But the moot question is -When does outsourcing make sense?

Outsourcing product development makes the most sense when:

• There is a need for expertise the company doesn’t have or need full time involvement.
• There is a need for resources the company currently does not have to complete all of the required work.
• It incurs heavily to keep up internal teams to do some or all of the development projects.
• There is a desire to incorporate standard practices or fresh approach in the product development processes.
• The capabilities to find, evaluate, and hire the outsourcing firm.
• Methods, protocols, and resources for communicating and managing the outsourcing firm.
• Tools, resources, and plans for gaining, storing, and using knowledge transfer.

What are the reasons to outsource product development?

Acquiring Expertise

One of the most plausible and successful reasons to outsource product development is to acquire expertise not currently available within the company. This lack of expertise could be because of a specific, non-core activity within the company, or it could be due to sudden rise in demand that exceeds the company’s existing capability.

In both situations, outsourcing product development is an excellent way to plug the need for expertise. However, a critical factor for successful implementation of outsourced product development is to ensure protection of all proprietary information, which should be arranged at the earliest or just before the onset of the project with some sort of contract.

Building Additional Resources

One very obvious reason to outsource is to supplement the number of development teams available to complete projects. Actually, in most of the cases firms prefer to staff below their total development capabilities in order to lower costs and risk, and with outsourcing they escape the possible burden of repetitive layoffs and hiring sprees.

This approach to outsourcing, or resource expansion, works well when the company outsourcing the project understands the capabilities required to effectively outsource a development project. These capabilities include:

• Identifying the best projects to outsource
• Managing the outsourcing relationship
• Identifying the project deliverables
• Auditing and smoothly integrating the project deliverables into existing systems

Although expansion or augmentation of resources is a common reason for outsourcing, it sometimes acts as a compelling reason for firms to miss out this opportunity. Ineffective cost benefit analysis and an inability to measure internal development costs often leads to conclude that the project can be done internally for less. Inevitably, the internal teams get pressurized and over burdened that lead to delayed and ineffectual product development. Development teams focusing on a single project produce the best results because they avoid the overhead and mistakes that result from multi-tasking across several projects.

Minimizing Development Costs

One very pertinent reason to outsourcing is to minimize costs involved in the development of products. Outsourcing seems to be a better and cost-effective measure, if you take into consideration all costs involved in maintaining the necessary capabilities within your company, which include:

• Employee costs such as salary, taxes, benefits, etc.
• Overhead expenditure on office space, desks, computer, training, software and hardware tools, etc.
• Supporting costs on information systems, management, human resources, payroll, etc.
• Risk costs such as downsizing costs including severance pay, legal support, etc.

In addition, certain irritating questions keep recurring such as:

• How do we build and maintain a high quality development team within our corporate culture?
• What traits and skills are important? Are those traits and skills available in our area of geography and expertise? How long will it take? What will it cost?
• How many teams will we need today and should we try to staff every project internally?

After having done cost benefit analysis on all these posed questions, most firms come to the conclusion that outsourced product development teams cost less than maintaining comparable internal product development teams.

In addition, organizations having internal product development resources that choose to outsource product development projects can have the following benefits of outsourcing:

• Gaining new perspective & process
• Acquiring quality system reviews, and
• Gaining industry standard practices

Most would agree that firms that don’t usually outsource product development should periodically do so to know how they could improve the results of their internal development teams. To glean the maximum benefit, the firm outsourcing the development should have systems in place to imbibe within the lessons-learned and to integrate them into its systems where appropriate.

Bottom Line

Thus, it certainly makes business sense to outsource either complete or a part of product development process, which helps organizations build near-term capability, meet increased resource needs, reduce costs, and bring a new development project perspective.