A Guide to Vendor Evaluation and Scoring in Software Outsourcing

If your organization has decided to build custom software to improve customer experiences, optimize internal processes, and increase revenue, sooner or later, you'll face the tough question of how to choose a software development company most effectively.

As the global trend for outsourcing software development is here to stay, there are thousands of IT companies boasting of their "full stack" skill set or highlighting their "unprecedented" pricing options. But how can you be ensured that they are the best fit for your future project? Here is where vendor evaluation management comes in.

This page is devoted to how to evaluate IT vendors to make an optimal choice. We'll cover the entire process, from the must-use software vendor evaluation criteria to the steps, and even provide a downloadable scoring template.

Why Is Software Vendor Evaluation Important in Outsourcing?

Building custom software or an application is a significant investment. Implementing the wrong technology or even deploying good software the wrong way may result in substantial business losses and lead to fewer chances of success on the market. It can even break the workflow of various teams or the processes of the entire organization.

So vendor evaluation becomes crucial. Whether you are a Fortune 500 company or a group of 5 enthusiasts seeking to scale the team when making a startup, the software vendor evaluation process should consider all possible risks and pitfalls. After all, your main priority is to make a long-term ROI.

Why Outsourcing Vendor Evaluation Is Important

Those entrepreneurs who value their time and resources shouldn't choose their software development partners blindly. The major purpose of vendor evaluation in the field of IT outsourcing is to achieve mutual gains from a fruitful collaboration. Since a lot is at stake, this crucial decision can't simply be a shot in the dark.

Here are the main reasons why vendor assessment should be a top priority for your organization:

• Risk mitigation. The vendor evaluation process helps you identify vulnerabilities before starting the project. So you can take the necessary steps to mitigate them or choose an alternative software development partner. You can easily verify information, such as their qualifications and certifications, track performance, and even look into the supplier's financials to decide whether you are ready to go forward with them or opt for the services of someone else. 
  

• Cost reduction. The difference in overall costs is among the defining software evaluation criteria when comparing in-house vs outsourcing software development. But avoiding financial issues around the vendors' poor service and delivery as well as early detection of "hidden costs" may save you a lot of money. Additionally, having strong relationships with your suppliers can help you negotiate better rates and access discounts for your future projects.
  

• Quality growth. Choosing a software vendor who has a deep understanding of your industry or domain and extensive expertise in specific technologies you are working with helps you get a more productive service or high-quality product on the way out. This way, IT vendor evaluation is your path to finding a partner that'll be a perfect match.
  

• Relationship strengthening and establishing a good reputation. Well-established relations with a software provider foster communication, collaboration, and loyalty, strengthening your brand and creating a friendly working environment. In the long run, it will affect the company's reputation and promote fruitful cooperation. 
  

But are there ways how to minimize risks and choose the right software development company? This article will navigate you through the key software vendor selection criteria in outsourcing. Also, we share an easy-to-fill-out evaluation spreadsheet where you can rate vendors and make decisions based on the scoring algorithm.

Start with Understanding Your Project

Before beginning the outsourcing vendor selection process, your business should turn its attention to your future projects. You have to go through the project discovery phase to define the type of the project and basic requirements, outline possible deadlines, and decide on an optimal software development process model.

To understand your project better, take the following steps:

• Define the project type: did you decide to build an MVP or simple project with minimum features to implement or a complex solution with flexible requirements?
  

• Evaluate the project scope: you need to decide on the goal of your future product, define the questions you need to discuss with the prospective vendor, consider the staff and equipment it needs for successful app development, and others.
  

• Estimate the project budget: budgets for small projects with detailed requirements are easy to calculate, while the budgets for large ones with changing requirements can be reevaluated several times throughout the project. You must aim to make accurate software project estimations and invest time in this vital step.
  

• Establish deadlines: you have to define the deadlines that can't be postponed or moved and are extremely important for the project's success.
  

• Choose a software development process model: there is a wide range of software development models in IT, including waterfall, Incremental, Agile, RAD, and many others. Each of them defines the working style of a project team and the activities undertaken during the development process.
  

As you see, the vendor evaluation criteria in software engineering strongly depend on the project's scope, requirements flexibility, and type of system to be developed. So, what are these criteria?

Top 8 Vendor Evaluation Criteria

Once a business has evaluated its project, it's time to find an outsourcing vendor. There are numerous IT outsourcing models and options. But based on our experience talking with customers about why they chose (or didn't choose) Upsilon, we want to highlight key IT vendor selection criteria and share a few recommendations that will help you range the vendors properly and opt for the best one.

Expertise and Qualifications

There's nothing more important when selecting your software outsourcing partner than evaluating its expertise and qualifications. By specifying the tech stack and skill set requirements, you can significantly cut the number of potential vendors at the very first step.

What do we recommend? Determine the top 3 technical skills your software requires and set them as top priorities in your vendor evaluation criteria. Focus on the technical expertise that has the greatest positive impact on user experience and the overall quality of your future software. No two projects are the same, but if the vendor's team covered projects similar to yours, that's a good indicator that they clearly understand what it takes to deliver your project successfully, as well.

Helpful tip: insist on specialists, not generalists! We advise you to avoid picking someone who claims to be an expert in all imaginable tech fields. They may turn out to be masters of nothing. While conducting your software vendor analysis, place outsourcing providers who specialize in your technical requirements at the top of your shortlist for consideration. 

Industry Experience

Everything said about the tech knowledge is also valid for evaluating a vendor's industry experience. Software service providers who have spent years in a specific business vertical will have built up subject-matter expertise that is invaluable to you. So, this is also an integral IT vendor selection criteria to keep an eye on.

That's not to say that a vendor can't learn about your industry. But it does mean it will take a lot longer for them to get up to speed. If you want to enforce your startup team structure and ramp up your efforts quickly, it makes sense to look for a vendor who already knows your domain and can hit the ground running.

Helpful tip: here's what we recommend to analyze during the research phase to assess a vendor's tech competence and industry experience:

• company background;
• past and current clients;
• projects and case studies on their website;
• CVs of their specialists with certifications and acknowledgments attached;
• publication of articles and interviews related to the technology or industry;
• awards and recognition related to the technology or industry;
• attendance at thematic events.

Team Size

Before approaching a technology partner, you should define the approximate scope of your project. This IT outsourcing vendor selection criteria will predetermine the hiring path and even company size to consider browsing.

If your project is estimated to take under 500 hours to complete, it's better to hire freelancers. You can find individual contractors on freelance web developer sites like Upwork.

If your project is much more complicated, you can choose from three types of software outsourcing companies: small, medium, and large. The size and web development team structure will vary from project to project.

Small Outsourcing Software Companies (Fewer than 100 Specialists)

Medium Outsourcing Software Companies (100 - 500 Specialists)

Large Outsourcing Software Companies (500+ Specialists)

One of the critical aspects affected by the vendor's size is its ability to scale the development team up or down. Medium and large-size vendors have more internal resources and a bigger external pool of candidates. So they can easily extend the development team to handle the increasing workload and rotate people to a different project if you need to ramp down. 

Helpful tip:  unless your outsourcing engagement uses a team of developers greater than 5% of the total number of vendor's employees, then you're not likely to get the attention you need to be successful. We call this guideline "a golden rule of 5%". Ensure your engagement represents at least 5% and no more than 20% of your outsourcing company's business base. 

Pricing and Engagement Models

Start by analyzing the vendor's average hourly rates (by seniority and job specialization). Compare it to the average in the region. Then, provide the vendor with the scope of your future project and ask them to configure a "virtual" team of specialists with the required qualifications needed to deliver it. Ask about discounts and special offerings.

You should clearly understand the scope of your project and your final goal. In fact, the budget of the project is determined by the engagement model you choose (fixed price, time & material, dedicated development team). Choose the engagement model that suits you best, then calculate the estimates and add them to your vendor evaluation matrix.

Helpful tip: the first question most companies ask vendors is "How much will it cost?". But keep in mind that any figure by itself, without context, means little. Unfortunately, in competitive negotiations, it's a widespread practice to underestimate to win the project. But that will almost certainly cost you more time and money in the long run.

When you're provided with a quote that lists a low price and a short timeline, it looks too good to be true. We're not saying inexpensive is always bad, there are many factors to consider. But when you're looking only at pricing, remember that there are pitfalls somewhere near.

Besides the cost, pay careful attention to what else is in the estimate. A good vendor will include details about project functionality, the timeline, development milestones, and more, along with advice specific to your case.

Does the estimate include information about the approach, potential technology choice, phases, deliverables, milestones, risk management facts, assumptions, and constraints? All this information will help you see the bigger picture and make an informed decision. And when an estimate includes little more than the final cost, that's a sign not to take that offering seriously.

References and Recommendations

Nothing talks better about how well a vendor treats its clients than the clients themselves. Nowadays, it is a common practice to request references, and companies are usually open to giving feedback, of course, without revealing project details placed under an NDA.

Ask a potential technology partner to provide contacts of product owners, project managers, or C-suite executives representing their current and past clients. Their feedback might reveal genuine insights about the vendor's service quality, work processes, communication style, and even nuances like how well they may fit in your startup culture.

Helpful tip: while choosing a software development firm, visit popular review platforms such as Clutch, GoodFirms, The Manifest, and others to get real customer feedback about different vendors. By combining various filters such as service focus, technology, location, and price, you can easily select vendors that match your needs.

After applying filters, the platform displays a list of vendor profile briefs with a vendor evaluation summary, including their rating, average hourly rate, team size, featured testimonials, and more. With one click, you can either explore the full vendor profile or visit their website.

We highly recommend exploring the vendor profiles comprehensively. Don't get hung up on ratings only! Read the full reviews and put your focus on those that contain negative assessments. They may give you a lot of insights for further reflection.

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Communication

As English is the de facto language of communication in the tech world, it goes without saying that a software development company should have a conversational English proficiency level. While the intermediate level can be acceptable for junior and middle specialists, senior team members must clearly and immediately understand all client requirements, claims, and suggestions. So they have to be fluent in English.

Another key aspect is communication frequency and transparency, which is extremely important from the beginning and throughout your outsourcing relationship. Expect to use weekly video conference calls, regular emails, and instant messages every day. Frequent status reports will help ensure that your engineers are working on the most critical tasks. 

Helpful tip: if the development team practices the Scrum methodology, ask the vendor about its most crucial parts: retrospective and sprint demo. What format of the sprint demo do they consider to be the best? What questions do they usually discuss during retrospective meetings? What indicators do they use to measure the success of the sprint? Answers to these questions will give you insights into vendor's agility and their skills in managing development processes, which are valuable elements of vendor assessment.

Location and Time Zone

A convenient geographical location is a vital criterion every business should consider while looking for a technology partner. Short flight distance, small time difference, and visa-free travel can significantly cut management and administrative costs (if you're considering in-person meet-ups at least partially).

There are several popular outsourcing locations across the world (including South/Latin America, South East Asia, India), but engineers from Eastern Europe moved to lead positions due to their ability to produce top-notch software without compromises. The region is well-known for its density of software developers, which is 1.3 developers per 100 people.

Also, geographically, Eastern European countries serve as a gateway to the West. They are located at the crossroads of major transportation routes from Europe to Asia and from the Scandinavian states to the Mediterranean region. IT outsourcing destinations, such as Poland, Ukraine, Estonia, Bulgaria, and others, are easy to reach from main global business hubs. For instance, it takes only 3 hours to get to London from Tallinn by air, and 1 hour 30 minutes from Tallinn to Berlin.

Helpful tip: with the era of lockdowns and travel restrictions gone, you may always use the chance to visit your outsourcing partner before you sign a contract. Even one visit to the vendor's development center can give you more food for thought than a dozen online meetings.

Intellectual Property and Data Security

Preserving your Intellectual Property, idea, and rights is crucial when it comes to software outsourcing. During the vendor evaluation stage, you must explore the legal practices and formal agreements the vendor uses to ensure that your intellectual property and company are fully protected. The Master Services Agreement (MSA) serves as the cornerstone of your outsourcing arrangement. Enhance your vendor agreements by incorporating AI into your MSA process, allowing for more thorough and efficient contract review.

Here is the list of subjects you should review and negotiate with a technology partner:

• Non-Disclosure Agreement (NDA). An NDA is a fundamental measure that protects your idea from disclosing it to a third party. For Upsilon, an NDA is a must. It can be signed either before a client reveals anything about his idea or before the project kicks off. An NDA also protects your vision after the project ends.

• IP Rights. The agreement you sign with a vendor must state that your company gains exclusive ownership of the code, product itself, and assets like designs, wireframes, documentation, and diagrams. 

• Non-Employment Agreement (NEA). A non-employment agreement is a protection for both sides. On the one hand, a company won't recruit or hire any of your employees. On the other hand, you won't do the same for them.

• Data Privacy. This add-on makes you sure that the vendor guarantees the safety and security of your data during every stage of the project, from exchanging information at the outset to storing it after the project has been completed.

As you can see, choosing the right outsourcing tech partner is not so obvious and simple. The vendor evaluation process includes both quantitative and qualitative assessments and is not limited to the vendor selection criteria discussed above: you can analyze additional factors that matter most to your product and business goals.

What's next? Once you've received the information from your initial list of vendors, it's time to compile it in one place and make comparisons. Here, at Upsilon, we have created an easy-to-fill-out vendor evaluation criteria checklist that will be your invaluable assistant for that kind of analysis.

Evaluating and Scoring Vendors

After collecting all data, you may go to the next step: comparing the vendors. Apart from making certain that selected vendors have good references, relevant experience, and required tech skills, you want to support your decision with numbers, don't you?

For this purpose, you will need an outsourcing vendor evaluation checklist or a comparative chart. We went further and prepared a spreadsheet with built-in formulas that allow you to easily rank potential tech partners based on eight key software vendor selection criteria. This document includes a generic list of questions designed to give you a proactive approach during the vendor evaluation process. You can adjust them based on your specific methods and needs.

While filling out the chart, you will see very clearly, for example, in which area the vendor scores more and what aspects the competitors outperform it. By comparing vendors' aggregate scores, you will be able to select which of them should be your top priority and which сan be excluded from further considerations. Now, let's move on to how to do vendor evaluation effectively.

Software Vendor Selection Process Explained

Let's break down the vendor assessment process that'll lead to a decision regarding your best-fit vendor of choice. You are welcome to use the software vendor assessment checklist we've provided above.

Step 1: The Preparation Phase

As we've briefly mentioned earlier, it makes sense to begin with internal discovery. Find answers to the most important questions at this point, including:

• What kind of project are you planning?
• What are your goals and challenges?
• What is in-scope?
• Which technologies are in focus?
• What are your time frames and deadlines?

Note these integral points that'll form the backbone of your search, preferably with detailed explanations of your needs and expectations. This will result in somewhat of a standard for your vendor evaluation plan that'll allow you to sift through and brush aside irrelevant candidates.

Step 2: Vendor Research

Then, move on to gathering data. As you "go window shopping", mark the fundamental findings about each potential vendor. You can use the vendor selection criteria and methods we've covered earlier to keep things organized.

Note their website, location, employee count, industry expertise, hourly rates, pricing options, client testimonial availability, and so on. Make sure to mark unique offers or terms, too (for example, Upsilon's dedicated team pricing offers a 2-week trial period with a money-back guarantee in case the customer is unsatisfied with the results, which is a great safety net).

If you can't find specific answers to some questions (such as the price estimation quote for your planned project), reach out to the companies, communicate with their reps, and get hold of the necessary information to fill the gaps.

Step 3: Evaluate the Vendors

Next, it's time to use your software vendor evaluation scorecard and compare the potential candidates. As you already know, the goal of vendor analysis is to funnel down your findings, leaving you with one (or maximum two) partner options. While evaluating vendors, screen the most important criteria, highlighting their strengths and possible advantages for your business.

Step 4: Choose the Optimal Partner

Based on your assessment and results generated in the software vendor evaluation template, shortlist the best vendor you'd like to partner up with. The final software vendor selection decision is up to the CEO, technical co-founder, or the person responsible for making such calls. Once you've settled and are ready to shake on it, negotiate on the final touches and terms, prep the contracts, finalize the details, and prepare to start the project.

Concluding Thoughts on Vendor Evaluation

No one ever partners with a software development company without conducting comprehensive research on its services, portfolio, and references. You might find this process tedious, but the time spent on vendor evaluating will help you minimize expenses, reduce future misunderstandings, and avoid any hidden mistakes in project management. That is precisely what this guide is for: to give you a practical vendor evaluation tool to assess your prospective software development partner efficiently.

Whether you're a startup founder looking to build a development team from the ground up, or you're an established business owner looking for additional resources to grow your existing tech team, our vendor selection criteria checklist will enable you to make better and more informed business decisions. Feel free to contact us to find out more about Upsilon's custom software development services, we'd be glad to consult you!

FAQ

1. What is the first step in the vendor evaluation process?

Vendor selection criteria and methods depend on the project's scope, requirements flexibility, and the type of system to be developed. So firstly, it is better to define the type of your project, the requirements and deadlines you have, which software development process model to select, and only then move on to the vendor evaluation process.

2. What should be outsourcing vendor selection criteria?

Vendor selection criteria should support your company mission, ethics, and business goals in the areas of technical competence and quality, cost and financial integrity, ability to communicate, social responsibility, and cultural commitments.

3. Why shouldn't you orient only on costs and rates when choosing a vendor?

Many factors influence the project estimate and cost. No project has the same goals, requirements, people, priorities and business context, technologies to use, and functionality to implement. Search for cost-effectiveness, where teams perform good-quality work and do not spend more hours fixing bugs and reworking.

4. Where can you find customer feedback about potential vendors?

Apart from the information that's available on the vendor's website, such platforms for professional reviews as GoodFirms or Clutch can be great for finding testimonials from other client companies.

5. What is a vendor evaluation checklist?

A vendor selection criteria checklist is a document defining and explaining the criteria that matter most to your company goals and by which you will compare potential partners. In this checklist, you can include criteria covering the vendor's tech competence and experience in the target domain, communication skills, pricing and engagement models available, and so on.