Updated: July 30, 2025
Contents
- What is in-house software development?
- Pros of in-house development
- Cons of in-house development
- What is software outsourcing?
- Pros of outsourced development
- Cons of outsourced development
- In-house vs. outsource: highs and lows of each sourcing model in a nutshell
- Not ‘either-or’: hybrid approach to software development
- FAQ
Key highlights
- Having the right talent at the right time at a reasonable cost is usually a pipe dream in workforce management, driving the ongoing challenge of in-house vs. outsource decisions.
- In-house development provides complete control over your project, but comes at a high cost and often involves staffing challenges.
- Outsourcing wins at cost, speed to market, expertise diversity, and team scalability, though its benefits can be offset by potentially reduced control and higher exposure to security risks.
- There’s a third option allowing companies to get the best of both worlds and meet their business needs while minimizing the trade-offs.
Knowing the pros and cons of in-house software development and outsourcing empowers businesses to play their sourcing strategy right. Pick wrong, and you burn time, budget, or, more likely, both. Pick right, and you gain control, speed, and focus exactly where it matters.
Neither in-house software development nor outsourcing software projects is foolproof. Your chances of thriving hinge on a grounded understanding of your capabilities and experience as well as choosing the model that resonates with your business goals and levels out your limitations. This guide will help you match your business needs with the best-fit sourcing approach.
What is in-house software development?
In-house development, or insourcing, is the practice of relying only on internal teams to analyze, architect, design, test, and maintain software. Companies that adopt this approach take full responsibility for finding the relevant candidates, interviewing them, onboarding new hires, and providing them with the necessary tools and technology to support their work.
Pros of in-house development
In-house development offers a range of strategic advantages that can significantly impact product quality, team alignment, and long-term growth.
Complete control over your development team members and the entire project
Direct communication and control are vital if you develop specialized, complex software solutions. Besides predictable quality benchmarks and a fully transparent development process, reliance on the in-house squad allows you to pivot or adjust priorities instantly.
With no external dependencies, you’re free to move without waiting for third-party approvals. Realigning sprint goals and reshuffling tasks in the backlog to roll out an in-demand feature faster and respond to market shifts in near real-time can be critical for startups chasing product-market fit. It’s also increasingly important for SaaS companies with mature products facing pressure in an AI-heavy landscape, as they need to launch AI-powered versions of existing tools to stay relevant and secure a share of their clients’ AI budgets.
Security and intellectual property protection
Historically, an internal team provided a higher level of security. This model came with fewer external exposure points, since sensitive data stayed within the company’s internal network and physical perimeter.
However, with remote work arrangements, this benefit is no longer set in stone. Maintaining overall security and protecting intellectual property now depend more on the measures taken to safeguard it, rather than only on the sourcing model you choose. And when it comes to establishing robust security measures and building defense mechanisms as well as facing the fallout if something goes wrong, the responsibility is yours and yours alone.
Knowledge capture
With an internal team, you may feel safer regarding knowledge capture. Even if you didn’t prepare all-encompassing project documentation from the outset for the sake of a speedy start, the team is still with you, and members can help fill in the gaps whenever they pop up. But this arrangement introduces the problem of overdependency on the in-house knowledge holders. If they quit the company, you’re left empty-handed.
My 15+ years of working with both in-house and dedicated teams reveal that the key to stable and lasting knowledge retention is a well-oiled system for managing and centralizing information, featuring organized storage for knowledge assets, metadata and tags to simplify search and retrieval, version control, archiving of outdated content, etc.
And this principle applies to both sourcing approaches. If you prioritize knowledge capture and sufficient project documentation from the start, you’ll always have vision and scope, competitor analysis, target audience, architecture overview, and UX/UI concepts at your fingertips.
— Konstantin Nikitin, Lead Project Manager & Delivery Manager, *instinctools
Exclusive focus on your project
With the in-house team, you have experts operating within a single working context, and this setup has its benefits. For instance, having a business analyst who knows your core business functions like the back of their hand and a software architect who understands your system inside out greatly facilitates new feature development.
On the contrary, for an external team, your project is one of many. However, with the right collaboration model, you can get an in-house-like experience. For example, a dedicated team model gives you a group of professionals who focus solely on your project, offering the same level of commitment and continuity as an internal team.
Cons of in-house development
Although insourcing has strong advantages, there’s also a fly – or rather, a few – in the ointment you should take into account.
High labor costs
Keeping an internal development team gets expensive. As an employer, you have to cover sick leaves, vacations, health insurance, and perks like online course subscriptions or gym memberships. Plus, you need to invest in ongoing training for your team. And don’t forget about recruitment and replacement costs. Let’s do the math.
When filling tech positions, recruitment costs (job postings, agency fees, and the time HR spends on interviews) can amount to 30–50% of the expert’s annual salary. For example, for a software engineer earning $100,000, roughly $40,000 is spent to fill the position. Not to mention that new hires often aren’t fully productive for the first 3–6 months.
To achieve a positive ROI, companies typically need specialists to stay at least 2–3 years. However, the reality of the job market is that up to 65% of software developers don’t stay put for more than two years, with the whole 18% of new hires leaving during their probationary period.
Also, keep in mind the cost of equipment. While the bring-your-own-device (BYOD) approach gained traction during the mass compulsory adoption of remote work in 2020, and now 63% of US enterprises allow their staff to access corporate resources via personal devices, companies are still expected to provide their in-house employees with hardware and licensed software. It adds to the operational expenses of the in-house resources. Moreover, if you support both remote and on-site work options, count in the cost of renting the office space.
Staffing challenges
The cost of recruiting specialists in-house isn’t the only dealbreaker with this insourcing. The recruitment process is also time-consuming and labor-intensive. In-house hiring may take weeks or even months to spot and enlist necessary experts. It makes scaling the team up or expanding expertise areas on short notice practically impossible.
The average time to fill depends a lot on the role. For example, if you get lucky, you may find a valid project manager candidate, move through interviews, and get a ‘yes’ to your offer in 20 to 30 days. But for tech positions, especially hot-commodity roles like AI engineers, it can easily stretch up to 90 days.
— Yanina Sushkova, Head of Recruitment, *instinctools
It also makes it harder to keep up with the technology trends, even major ones, such as company-wide and function-specific adoption of artificial intelligence. For example, FAQ-like chatbots trained on the company’s data are known to be one of the low-barrier gen AI use cases, but you’ll need AI engineers to implement them. There’re two ways to get them on board:
- If your budget can stretch for another in-house team member, hire an AI engineer
- If you have data specialists willing to transition to an AI engineer role, invest in their retraining
As you can see, each option is neither quick nor easy.
Moreover, don’t forget about the risk of in-house employees resorting to quiet quitting if they grow unsatisfied with you as an employer. McKinsey’s report highlights that while 20% of staff members are vocal about job dissatisfaction, only 7% also express plans to leave the current company. The remaining 13% can gradually slip into underperforming. Outsourcing takes quiet quitting off your radar. With clear SLAs and contractual oversight, vendor teams quickly replace disengaged members to keep delivering on their promises.
What is software outsourcing?
Outsourcing software development involves partnering with external vendors who add the necessary expertise to your project and cover some phases of the SDLC or the entire development process. Outsourcing comes in different forms regarding the hiring distance (onshoring, nearshoring, and offshoring) and the cooperation scope (IT staff augmentation, a dedicated team, and the whole development center).
Pros of outsourced development
Where an in-house squad hits a wall, an outsourced development team opens a side door to deliver on time and on budget.
Cost-effectiveness
You only pay for the work done. All the extra costs related to the outsourced team are on the vendor’s side. Of course, these costs are reflected to a certain extent in the hourly rates.
However, if your company is based in pricey regions, such as the US, Australia, the Nordic countries, or Western Europe, you can still benefit from a global talent pool in more budget-friendly locations such as Central and Eastern Europe. For instance, tech giants of the IT industry like McKinsey and Deloitte set up their R&D centers in Poland for a reason. The country is known for its high-quality and affordable IT workforce.
Faster time to market
When time to market is a priority, outsourcing software projects becomes your silver bullet. It enables you to initiate the project within several days.
Working with an experienced outsourcing company also has well-defined timeline agreements for all development stages, with penalties for downtime on the vendor’s side. This means your contractor is motivated to quickly address any issues that arise.
Of course, not all outsourcing experiences are created equal. It’s essential to stay away from providers who offer lip service rather than solid software development. An unreliable tech partner can deliver a solution that doesn’t match the original idea and your expectations, or, which is worse, misreads user needs.
One of our clients – a European venture capital company – reached out to *instinctools after a frustrating experience with an incompetent outsourcing provider. They had a developers-only team, which led to blurred project vision and a deep chasm between expectations and reality. Instead of a top-of-the-line digital fundraising platform they envisioned, they got an Excel-like spreadsheet. We got the project back on track.
— Konstantin Nikitin, Lead Project Manager & Delivery Manager, *instinctools
Diverse expertise on tap
A strong competitive advantage of outsourced teams is their broad range of expertise without long-term commitments.
Say, you should undergo software modernization and need experts well-versed in both legacy systems and modern technologies. If your internal team doesn’t have the right specialists to ensure a smooth transition, hiring full-time in-house developers with specialized skills for just a few months isn’t cost-effective. That’s where outsourcing really shines.
Unlimited team scalability and flexibility
The core strength of outsourcing software development lies in its unmatched scalability and flexibility. You can start with a single developer and then expand to a few dozen of them, or set up a ‘nuclear’ team with a business analyst, software architect, and several engineers, integrating other subject matter experts later on. And when those roles are no longer needed, scaling down is just as smooth and swift, if you cooperate with a reputable outsourcing partner.
Cons of outsourced development
The benefits of outsourcing may be tempting. But to make a well-informed decision when comparing outsourcing vs. in-house, it’s important to weigh the potential drawbacks too.
Less control over the team (but not necessarily)
Borrowed talents may split focus between clients, and your project’s priorities can fade into the background. Still, that’s not always the case. In fact, with the right setup, the decision to outsource development can turn this risk into a strategic advantage.
With insourcing, the responsibility for managing the team (coordinating tasks, resolving blockers, maintaining motivation) falls on your shoulders. Meanwhile, with the right outsourcing partner, less direct control can translate into less day-to-day management stress. Because in the case of outsourcing, you can calibrate the level of control:
- IT staff augmentation is for those who want to lead the project just as they would with their in-house team.
- A dedicated team and an offshore development center take full ownership of delivery, providing updates and reports at agreed-upon intervals.
Well-orchestrated knowledge management is another area extended teams usually excel at. Working for various companies for years, if not decades, they hone their mechanisms for knowledge acquisition, creation, refinement, storage, transfer, sharing, and utilization. As a result of their solid documentation practices, you get well-structured, comprehensive project records.
Higher infrastructure and data security risks (only with a shady outsourcing provider)
Security concerns are another hot-button issue. Insourcing feels safer because it keeps everything behind your firewall. But if we look at companies like Amazon and PayPal, which rely strictly on in-house software development, and giants like Google and Slack, which leverage outsourcing, they all suffer from data leakages nearly every year.
What’s certain is that outsourcing extends your security boundary beyond your organization into the vendor’s environment. Does it always mean security trade-offs? Not really.
Your project is safe if the outsourcing provider follows key security best practices, such as enforcing strict authorization for access to production data, obfuscating sensitive information, adhering to secure coding standards like the OWASP Top 10, providing employees with individually assigned corporate VPN access, and maintaining strong firewall protection to shield internal systems.
Moreover, sometimes an outsourcing partner, that operates in a budget-friendly location, can offer security infrastructure that may be too costly or impractical to implement in-house, say, an ODC with a closed physical perimeter with a security frame and an on-site guard, a no-phones policy, limited access to the internet, and mandatory audio and video surveillance within the office space.
In-house vs. outsource: highs and lows of each sourcing model in a nutshell
This brief table outlines the strengths and weaknesses of in-house and outsourced development, making it easier for you to analyze each option.
| Parameter | In-house team | Outsourcing team |
| Cost | High | Low (when outsource development team to low-cost locations) |
| Scalability | Low | High |
| Time to set up a team | Months | Days |
| Time to market | Slow (if you lack project team members and need to hire them) | Fast |
| Level of control over a team and development processes | High | Lower, but with a decent provider, you can have nearly the same level of control |
| Expertise diversity | Limited to your core activities | High |
| Communication with a team | Direct | Depends on a collaboration model |
| Cooperation duration | From 2+ years (to make the cooperation cost-worthy) | Any time period |
| Security and IP safety | Depends on the data security measures in place, not the sourcing model | |
Not ‘either-or’: hybrid approach to software development
Current Fortune 500 statistics show that most of these companies choose outsourcing and in-house software development rather than in-house versus outsourcing. Indeed, businesses don’t have to clash two sourcing models. A hybrid approach often works best, enabling you to strike a balance between the upsides and downsides of both options.
With the right partner, your sourcing strategy can steer, not stall
FAQ
When facing the in-house vs. outsourcing software development dilemma, keep in mind that in-house makes sense for a complex and long-term (3+ years) development process, while software outsourcing is the right choice if you have budget or time constraints, one-off or experimental projects, need frequent team recalibration, and when the demand for specialized expertise is short-lived (< 6 months).
Sure! In fact, strengthening your in-house resources with guest experts or a whole external team is the way 90% of Fortune 500 companies approach software development. Hybrid development is a go-to option when you need to offload your backlog quickly, handle an unexpected workload spike, or want to test a raw hypothesis without sacrificing first-priority tasks.
An outsourced software development team is a more budget-friendly option than hiring, onboarding, and equipping in-house specialists with hardware, not to mention covering healthcare costs or company perks. To be totally honest, though, since outsourcing vendors absorb those overhead costs, a portion of that is reflected in their hourly rates. To make the most of this sourcing approach, look for low-cost locations, such as Central or Eastern Europe, Central and South Asia – Poland, Kazakhstan, and India are good starting points.
