What Is Offshoring of Software Development?

Offshoring of software development means hiring engineers in another country to build your product. The work that a software developer would do in the US gets done by a developer in the Philippines, India, Poland, or somewhere else where salaries are lower. The output is the same code. The difference is who’s writing it, where, and at what cost.

That’s the entire definition. Anything else you’ve read about offshoring being “a strategic relocation of business processes to optimize global resources” is the McKinsey-deck version of the same idea.

I’ve been doing this since 2018, when I started Full Scale. Before that, as a four-time founder and CTO, I tried every version of offshoring there is. Most of them failed. The version that works is not the version that gets sold to most companies, and that’s what this article is about: what offshoring of software development actually is, where it came from, why the standard version is broken, and what the working version looks like.

The short definition

Offshoring is the practice of moving work to another country. When that work is software development, you’re paying engineers outside your country to write the code your business depends on. They might be employees of your company through a foreign subsidiary, or contractors of an offshore agency, or staff augmentation hires placed by a firm like ours. The arrangement varies, the core mechanic doesn’t: code that used to come from local engineers now comes from offshore ones, and you pay less for it.

The most common confusion is between offshoring and outsourcing. They overlap, but they aren’t the same. Outsourcing means hiring an outside company to do work for you. You can outsource locally (a US firm hires a US contracting agency) or outsource offshore (a US firm hires a firm in India). Offshoring just means the work happens in another country, whether through an outside firm or your own offshore subsidiary. The difference between outsourcing and offshoring trips up almost every buyer the first time they shop for offshore developers.

The reason companies do it is the wage gap. A senior software engineer in the US costs around $180,000 a year fully loaded. The same engineer in the Philippines runs a fraction of that, even after factoring in benefits, equipment, office space, and management overhead. That gap is what’s driven every wave of offshoring for the last 60 years.

A short history so the rest makes sense

Offshoring didn’t start with software. It started with factories.

In the 1960s, US manufacturers started moving production to Mexico under the maquiladora program. A maquiladora is a Mexican plant that imports raw materials, builds something, and exports it back to the US. The math was simple for both sides: Mexico got jobs and tax revenue, American companies got labor at a lower cost. Employment in maquiladoras grew from roughly 200,000 in the 1980s to over a million by the late 1990s.

The model worked because manufacturing is highly structured. A worker follows a process, a supervisor checks the output, and quality control happens at the end of the assembly line. The worker doesn’t need to talk to the CEO or understand the strategy, they just attach part A to part B the same way every time.

Through the 1980s and 1990s, more countries got pulled in: India, China, the Philippines, Eastern Europe. The math kept working as long as the work was repetitive and the communication needs were low.

Then the internet showed up. In the 1990s, telecom got cheap enough that you could send work across the world digitally. Dell and IBM moved call centers offshore. Companies started moving back-office accounting, data entry, and basic IT support. The assumption was simple: if it worked for factories, it’ll work for software.

It didn’t. But by the time anyone admitted that, the model had calcified into an entire industry of offshore agencies running software projects the way Mexican plants built radios.

Why the factory model breaks for software development

Software development isn’t manufacturing. Most of the failure modes of traditional offshoring trace back to people forgetting this.

Manufacturing rewards repetition, software rewards thinking. A factory floor wants twenty workers doing the same task at slightly different stations. A development team wants two engineers arguing about whether the database should be relational or document-oriented. The two shapes look the same from a distance, both are offices full of people producing something, but underneath, the work is completely different.

When an offshore agency runs a software project like a factory, three predictable things go wrong.

The most obvious problem is the project manager middleman. The agency puts a PM between you and the developers. The PM’s job is to “translate” your requirements to the engineers. The PM becomes the bottleneck. Every question goes through them, every clarification adds a day, and by the time a feature ships, the answer to “what did the customer actually want” has been through five rewrites.

The deeper problem is the missing context. The developers never get exposure to the customer, the market, or the product strategy. They get a Jira ticket and a deadline. So they build the thing literally, including the parts that are obviously wrong, because nobody told them they could question the spec. You can’t write good software when you don’t know what it’s for.

And then there’s turnover. The average offshore agency sees 68% annual developer churn, which means three out of four engineers on your project this quarter won’t be there next year. Whatever institutional knowledge they built up walks out the door with them, and the next set of engineers has to learn your codebase from scratch.

This is why Deloitte’s 2024 Global Outsourcing Survey found 59% of companies report dissatisfaction with offshore outcomes, and Gartner found 67% need significant rework after offshore projects ship. The frustration isn’t with the idea of offshoring, it’s with the factory version of it.

What modern software offshoring actually looks like

The version that works treats offshore engineers as part of your team, not as external contractors managed through middlemen.

In practice, this is what staff augmentation looks like. You hire engineers in the Philippines (or wherever else) who report into your existing engineering org. They attend your standups, they get added to your Slack and your GitHub, and they work in a timezone that overlaps yours so they can talk to your senior engineers in real time. The agency that placed them stays out of the day-to-day. There’s no PM “translating” anything because there’s nothing to translate. Your engineers and their engineers are the same engineers.

The retention math changes too. When developers are part of a real team instead of being cycled through an agency, they stay. Our retention rate at Full Scale runs above 93%, against an industry norm closer to 32% (the inverse of that 68% turnover figure). That difference compounds. After two years, an embedded offshore engineer knows your codebase as well as anyone you’ve ever hired. By year five, they’re often the most senior person in the room.

This is the model that won. It’s also the model that almost nobody calling themselves an offshore software development company actually runs. Most are still doing the agency project-management dance. The full offshoring playbook walks through how to evaluate that and what to ask in the first sales call to figure out which version you’re being sold.

When offshoring of software development makes sense

Offshoring of software development is a good fit if you’re hitting one of these situations:

• You can’t hire fast enough in the US. The local talent market is tight, the salaries you need to pay are higher than your budget supports, and engineering work is piling up faster than you can clear it.
• You have specialized needs that are hard to find locally. Some stacks (Ruby on Rails, Elixir, Vue.js, niche QA tooling) are easier to staff offshore than in your hometown.
• You’re funding growth without funding US headcount yet. Early-stage teams often need to keep burn low while still shipping, and offshore engineers can extend runway without slowing development.
• You want development to keep moving around the clock. With engineers across time zones, code can move continuously instead of stopping when one office closes.

It’s a bad fit if your work depends on tight regulatory constraints where engineering itself has to happen inside a specific jurisdiction (some defense and certain healthcare contracts), or if your team culture is built around 100% in-person collaboration and you don’t want any remote engineers in the mix at all.

Most software companies fall in the first bucket. The conversation isn’t whether to offshore, it’s how to offshore well.

How to evaluate an offshore software development partner

The first thing to ask any offshore firm you’re considering: who manages the developers day to day? If the answer is “our project manager,” walk away. You’re being sold the factory model. The right answer is something close to “your engineering manager does, we just placed them,” because that’s the difference between an agency and a staff augmentation partner.

The second question is retention. Industry norm is around 32% (68% turnover). Anything below 50% is a red flag. Anything above 80% means you’re talking to a firm that actually treats developers as employees, not project lines.

The third question is contracts and IP. If you’re hiring through a firm whose subsidiary in another country employs the developer, your IP path needs to be airtight. Firms that contract through US entities, as we do at Full Scale, keep the legal layer simple. Firms that route everything through foreign subsidiaries can get complicated fast if there’s ever a dispute.

The last question, which most people forget to ask: can you talk to an actual developer before you sign? Not a sales engineer, not a PM, but an engineer who’d be on your project. If the firm won’t let you, you’re being sold a black box. If they will, you can usually tell within ten minutes whether the engineer is going to be a useful team member or a body in a chair.

How Full Scale handles it

We started Full Scale in 2018 because I’d been through the factory version of offshoring as a founder and didn’t want to keep losing money to it. We hire developers in the Philippines and place them directly into our clients’ engineering teams. There’s no PM layer. The developers report up through the client’s engineering manager. We handle recruiting, vetting, equipment, office space, payroll, HR, and the legal layer, while the client handles the engineering work.

The result is that our clients hire a developer in roughly seven days instead of three months, pay about 60% less than US fully-loaded cost, and keep that developer for years instead of quarters. We’ve done this for over 200 companies, including AMC Theatres, since 2018.

If you want to see how this works for your team, the next step is a discovery call. We’ll walk through your engineering needs, the stack, and what an embedded offshore engineer would look like inside your existing team.

Frequently asked questions

What is the difference between offshoring and outsourcing?

Offshoring means the work happens in another country. Outsourcing means hiring an outside company to do the work, regardless of location. They overlap when the outside company you hire happens to be in another country. They don’t overlap when you offshore through your own subsidiary, or when you outsource to a local firm. Our full outsourcing vs. offshoring breakdown covers the variations in detail.

When did offshoring of software development start?

Software offshoring took off in the 1990s, after the internet made it possible to send work and data across the world digitally. Before then, offshoring meant manufacturing. After then, it expanded to include IT support, call centers, accounting, and eventually full software development teams.

Why does traditional offshoring of software development fail so often?

Because most offshore agencies still run software projects the way manufacturing plants ran factory lines. The model assumes work can be standardized and managed through middlemen, which works for assembly lines but not for code. The result is delayed projects, high turnover, and rework rates that often exceed 60%.

What is staff augmentation, and how is it different from traditional offshoring?

Staff augmentation means hiring offshore developers as embedded members of your existing engineering team, rather than handing a project to an outside agency. The developers attend your standups, use your tools, report to your engineering manager, and stay for the long term. There’s no PM layer. Most failures of traditional offshoring disappear when you switch to this model.

Is offshoring of software development cheaper than hiring locally?

Yes, by a lot. The all-in cost of a senior offshore engineer in the Philippines (salary, benefits, equipment, office space, management overhead, agency fee) runs about a third of the equivalent US cost. The math gets even better if you’re competing for talent in expensive markets like San Francisco or New York.

What kind of work is best suited to offshore software development?

Anything where the developer can work as a true team member with enough context to make decisions. Long-running product engineering, backend systems, mobile apps, QA automation, and frontend builds all work well. Short, isolated, throwaway projects don’t work as well because they don’t reward the relationship-building that makes the model successful.

How fast can you hire an offshore software developer?

Through a real staff augmentation partner, around seven days from first call to first commit. Through a traditional offshore agency that’s building a project team, two to three months. The speed difference comes from the fact that staff augmentation firms keep a vetted bench of engineers ready to place, while project agencies have to assemble a team for each engagement.