Custom Software Development Outsourcing: What You Should Know

Slack, the widely used communications platform, outsourced the development of its mobile applications to a Canadian firm with the objective of leveraging the excellent and cheap expertise available outside and also focusing more on its core competencies. Its success was almost a no-brainer, and not many doubted it. It was a massive success, as the outcome guaranteed rapid development. Increased focus on its core competencies allowed Slack to focus on its core platform, and evidently, the app received positive responses for its design and functionality, contributing to Slack's rapid growth and popularity.

In today's business environment, where digitization and IOT have transformed every operation, businesses of all sizes are trying to create differentiation and are increasingly turning to custom software development outsourcing. So why outsource? Well, it allows companies to leverage specialized skills available outside at reduced costs and also lets them focus on their core competencies. But there is a common saying that every coin has two sides, and there are a few pitfalls that must be navigated carefully.

Benefits of Outsourcing Custom Software Development: The Alibaba Case

Alibaba Group is one of the world's largest e-commerce platforms. Founded by Jack Ma in 1999, it has a market capitalization exceeding $400 billion as of 2021. Although, behind this success, outsourcing custom software development played a major role.

In the early days, Alibaba faced numerous challenges and lacked resources. They needed to quickly develop a robust e-commerce platform. China's internet infrastructure was still in its infancy. The potential of e-commerce was huge, and developing the platform needed expertise. To overcome this, Alibaba made a strategic decision to outsource several critical aspects of its software to a team of developers in the US, where the tech industry was way more advanced. The results proved to be a grand success in the following parameters:

Cost Efficiency

Outsourcing allowed Alibaba to manage its limited budget effectively. Alibaba lacked the funds to hire and train an in-house development team in China, where skilled developers were scarce and costly. Outsourcing to a team of developers in the US not only provided them with high-quality expertise but also at a much lower cost. The extra funds were then utilized in other key areas such as logistics, marketing, and customer service, which later emerged as major selling points for the Alibaba Group.

Specialised Expertise

China's tech industry was in its initial stages. Tech experts and skilled developers were scarce, and their credibility was also low. The team in the US had extensive experience in building scalable and robust web applications. The US developers helped design and implement Alibaba's initial platform, ensuring it was user-friendly, secure, and capable of handling large volumes of transactions. This technical proficiency was pivotal in establishing Alibaba's credibility and reliability in the market.

Scalability and flexibility

As Alibaba's user base expanded, the company needed to continuously update and enhance its platform. Outsourcing enabled Alibaba to scale its development efforts quickly without unwanted delays.

Flexibility was another key factor, as operations needed to be carried out smoothly during peak periods such as the annual Single's Day shopping festival, which had become the world's largest online shopping event. The ability to scale development resources ensured that Alibaba could handle massive spikes in traffic and transactions without operational inefficiencies.

Focus on Core Competencies

Alibaba's core team devoted its time to focusing on their primary competencies: business strategy, market expansion, and customer acquisition. Jack Ma and his team concentrated on understanding the Chinese market, the tastes and preferences of various demographics and areas, building a strong brand, and establishing strategic partnerships.

Alibaba's success crossed all competitors to become the leading e-commerce platform in China.

Faster time to market

The team in the US already had the infrastructure and technical know-how required to meet Alibaba's software demands. The time to create it was very short, enabling Alibaba to enter the market very quickly.

This save in time was crucial, as it helped them capture the market and establish a strong presence in the industry. The rapid development and continuous improvement helped them stay above the competition.

Alibaba's success is a testimony to the varied benefits of outsourcing custom software development.

The Flip Side: Target’s Canadian Expansion and IT Outsourcing Disaster

Target Corporation, the American retail giant, provides a cautionary tale of how outsourcing custom software development can lead to a significant failure, highlighting issues such as lack of clear communication, inadequate planning, choosing the wrong partner and lack of control and oversight.

In 2011, Target announced its plans to expand into Canada by opening 124 stores and establishing a distribution network across the country. To support this ambitious expansion, Target decided to outsource significant portions of its IT infrastructure, including its custom software development, to various external vendors. The project aimed to integrate complex systems for supply chain management, inventory control, and point-of-sale operations.

Although this unfortunately turned out to be a big failure.

Lack of clear communication

According to reports, there were frequent misunderstandings and misalignments regarding project requirements and expectations. Target’s Canadian venture was plagued by a lack of clear communication between Target’s management and its outsourced IT vendors. The project involved multiple stakeholders across different geographic locations, which complicated the flow of information.

For instance, Target’s inventory management system, which was supposed to be customized for the Canadian market, was riddled with inaccuracies. Shelves in Canadian stores were often empty due to incorrect inventory data, while the back rooms were overstocked with unsellable items.

Inadequate planning and documentation

Target rushed the expansion process. Opening 100 stores in 2 years was a very aggressive timeline. It didn't leave much space for planning and proper documentation of system requirements and processes.

The inadequacies were evident in the flawed implementation of the inventory and supply chain management systems. The crunch time led to software not being properly tested before use, and critical aspects of integration were overlooked.

Choosing the Wrong Partner.

Target’s choice of outsourcing partners contributed to its downfall. Choosing multiple vendors for different aspects of its IT infrastructure was a bad idea, as these vendors lacked the necessary expertise or alignment with Target’s strategic goals. The selected partners did not have a proven track record of handling projects of this scale and complexity, especially within the tight deadlines imposed by Target.

Moreover, Target did not invest enough time in vetting these partners or establishing strong working relationships. The misalignment in capabilities and expectations between Target and its vendors resulted in poor-quality deliverables and missed deadlines. For instance, many software components delivered by the outsourcing partners were not compatible with Target’s existing systems, leading to further delays and rework.

Lack of control and oversight

Target’s lack of control and oversight over its outsourced IT project was perhaps the most critical failure. Target entrusted its vendors with significant responsibilities without establishing robust governance structures or oversight mechanisms. There was no centralized control to monitor the project’s progress, quality, or compliance with requirements.

For instance, when the inventory system failures became apparent, there were no contingency plans in place, and the management could not act swiftly to rectify the problems. The lack of oversight became evident when issues started to surface. This led to a cascading effect of failures, ultimately resulting in a disastrous launch.

Looking at the two famous cases, it is evident that outsourcing custom software development is a strategic decision. A lot of planning and clarity are needed to execute it to perfection. Although it has immense benefits, it may come to plague you if not implemented in the desired manner.

A proper study of your business idea, your ambition with it, and the available resources play an important role in making such a decision.

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