This is Part 3 of a blog series that details the challenges of outsourcing software development.

Software development is always on the cutting edge of technological advances. It’s the foundation that allows us to design tools that make our lives easier and stay ahead of the game. But designing software is far from easy. And honestly, sometimes it requires outside help.

Even though the number of outsourcing providers has skyrocketed in the past few years, the overall quality of work and level of customer satisfaction hasn’t. We want to change that. With over 15 years of cumulative experience in software development, our founding team has experience both from the perspective of an agency as well as a client.

We’ve received vague requirements (and given vague requirements).

We’ve dealt with picky customers (and been a picky customer).

We’ve complained about bugs to suppliers (and been the ones fixing bugs).

To put it simply: we’ve been on both sides of the fence. This has given us a unique perspective to understand the drivers and motivations behind clients and agencies when it comes to outsourcing.

Part 3: No Skin in the Game

One of the main sources of mistrust in outsourcing is the fact that external teams appear to have less skin in the game when building a tech product. Or at least they are perceived that way.

A team of full-time developers has more to lose if things don't go well. If the product fails, they may be yelled at, lose their jobs, or the whole company might do down.

These are dire consequences. As a developer you might not only lose your job. But your colleagues and friends at work might lose their jobs too. You don’t only lose as an individual but as a tribe.

On the other hand, external developers (and agencies) seem to have slightly different incentives. If things don’t go as well in a given project. They will simply move the developers to another project in their portfolio, or simply put them on the bench until the next project comes.

Their developers might get a slap in the wrists, but they will definitely not lose their jobs on the spot. To the agency these developers are a valuable resource, that while it didn't work out for your needs. They can certainly be utilized for other projects.

Also, if your project does not perform, the agency itself will not go down with you (in most cases). They are probably well diversified and they might have anywhere between 3 to 300 other clients like you.

HINT: The more clients an agency has, the less “skin in the game” they have toward each client project, as a loss of any one particular client will have a very small impact on the overall business.

Equity = Aligment

If you wanted to make your full-time developers even more invested with your goals as a company, you could give them shares as part of their overall compensation. That way the wins and losses are felt directly.

However, you could do that with agencies too. At Softup, we receive offers to work for equity quite frequently. But there a few things that you need to keep in mind when offering equity to an agency:

  1. Every founder has their own way of valuing their companies’ worth. Sometimes an agency will agree with that valuation and sometimes not. And sometimes you decide not to work together, not because you are not a great fit, but because you didn’t agree on how much the equity is worth…. which is a shame.
  2. Offering equity only compensation, won’t work for most agencies. If they would work on an equity basis ONLY, for all of their clients, they would be out of business and illiquid in a matter of months. So this is not scalable.

But there are ways how you can make an development agency  have skin in the game, and make sure that they take both the rewards and the risks of building software products:

  1. You could agree on a part-equity, part-cash payments. Based on agreed milestones, the agency works to earn enough cash to cover basic overhead expenses and their “profit” would materialize only in equity form in your company. It is a very popular approach among agencies, but is something we offer at Softup. Contact us to learn more.
  2. You could use a risk-free development approach, where you only pay for a given sprint, if you are satisfied. If not, we give you the code base, for that sprint, for free.

The risk-free model is really the closest thing to making an outside agency have skin in the game. Think about it, if our customers would not be satisfied, they would not pay for the sprints. If they wouldn’t pay for any of the sprints, we would be out of business very fast.

We are forced to deliver, in order to be in business.

When we used to work on the vendor side, when we were the client. We found ourselves, in a position where, depending on the contract, we were often obliged to pay invoices even when you are unhappy, frustrated and disappointed with the work from the agency. So we decided to change that.

In classical outsourcing you are paying not just for the work, but for the mistakes also. A classical no-skin-in the game scenario.

At Softup we believe that if we get the rewards, we must also get some of the risks.

Contact us if you want to learn more about this approach.