In-house product teams vs. product development companies: Which is better?

Let’s explore those in more depth.

In-house product teams are uniquely equipped with an understanding of your brand, your company, and your market positioning. They know your existing offerings and can understand immediately where a new offering would fit in.

That means work can start right away, without any onboarding.

What's more, once the product development is underway, they’ll be focused on your company’s objectives 100 percent of the time. And because the team is in house and under your full management, you fully control the product design process and can make sure the project is progressing as needed.

An in-house team can also make communication easier. Even if you’re not colocated, you have established communication systems and protocols. You and your team understand who to connect with for various concerns, which can make for efficient resolution of problems and streamlined approvals if and when they're needed.

But that doesn’t mean in-house product teams are a clear slam dunk for new product development.

One common drawback is that in-house teams are responsible for far more than new product development. In fact, creating something new is one of the most challenging things for in-house teams, who by definition have full-time jobs maintaining the existing infrastructure of your company.

Day to day, this can mean that core job duties with more urgent deadlines take precedence over the work of building something new. Without careful planning, product development can stall as your in-house team devotes their time to maintaining the products your customers are already using.

This can create a vicious cycle: people don’t have enough time to do all their core work and their product development work, which means the team doesn’t meet its deadlines, which means the company doesn’t meet its goals, which leads to a general sense of failure (see Figure 1). This can lead to burnout.

And even if your in-house product team does have the bandwidth for product development, they may not have a defined product development process or the experience necessary to make it work. This is especially true for startups, who often recruit less-experienced team members and help them learn on the job.

Now let’s take a look at the value product development companies bring to the table.

Product development companies: Expertise, for a price

Here’s a high-level overview of the benefits and shortcomings of outsourcing product development to product development companies.

Working with product development companies: benefits and drawbacks

Now let’s get into the details.

While in-house teams excel in familiarity with your brand, product development companies offer expertise in the work of (you guessed it) new product development.

It’s worth pausing a moment to appreciate that, because the work that goes into creating something net-new is decidedly different from the work that goes into maintaining and enhancing an existing product. This isn’t to say that your in-house team isn’t capable of creating new products, but if that’s not part of their day-to-day work, they don’t have the experience that the team at a dedicated product development company will.

There are other benefits to outsourcing to a product development company, too:

• Avoiding day-to-day project management: Just as your team may not have direct experience building new products, you may not have experience managing the product development process. Even if you do, you likely don’t have time to add hands-on project management to your day. When you outsource to a product development company, their dedicated resources take over the project management, which lets you focus on higher-level executive work.

• Broader pool of expertise and experience: Outsourcing lets you choose a full-service team that has the expertise and experience best aligned with creating a new product for your brand. Easily tap individuals skilled in market research, user experience or user design, e-commerce, software development, or even healthcare and medical devices, as needed. This is particularly valuable if you have a smaller in-house team or a team of people with similar backgrounds.

• Scalability: External teams scale much more easily than in-house teams, both up and down. If the initial engagement is a wild success, you can continue, driving ever more revenue to power the ongoing work. If it’s a flop, you can easily cut ties and refocus on the core of your business.

Of course, these benefits are only available to your organization if you have the budget to hire a product development company. That’s a key disadvantage of outsourcing product development work: it requires an upfront investment for something as yet unproven. Depending on the current state of your organization and its priorities, that can be tricky to justify.

Another potential drawback is the increased opportunity for miscommunication. While bringing in more people expands the pool of expertise and experience, it also increases the odds for miscommunication. That’s especially true given that third-party teams aren’t likely to be colocated with your team: remote work has been shown to lead to miscommunication.

Then again, many in-house teams work remotely these days, which positions them well to embrace external team members.

Finally, there are the bottom-line concerns that any leader has when considering working with a third party: that they deliver work that doesn’t meet your expectations and doesn’t add the value you budgeted for when you signed the contract.

This is why many leaders have difficulty ceding control to product development companies: until they’ve proven their ability to add real value, there's too big a risk that their work won’t deliver adequate ROI.

And if it doesn’t, that has consequences for you as a leader.

Again, there's no clear “best” option between having an in-house team build a new product and outsourcing to a product development company. But there is a third option that business leaders should consider: taking a hybrid approach. Let’s take a look at how a hybrid model can help manage the risks associated with both in-house product teams and third-party providers.

The hybrid approach: combining in-house and external product development teams

A hybrid approach to product development helps minimize the riskiest parts of both the in-house and third-party models. To understand how, let’s take a look at how hybrid product development engagements might function.

Scenario 1: External consultant guiding an in-house product team

In this scenario, your organization brings in a product development consultant to guide your in-house team through the process of developing a new product.

This solves for one of the biggest risks of relying solely on an in-house team: that in-house teams may not know how to do product development work. An experienced consultant can not only guide your in-house product team through the project at hand but also help upskill that team more generally so they’re equipped to do more product development work in the future.

It can also help ease the potential communication issues that sometimes arise when working with a third-party team. Adding just one new person to your workflow is simpler and easier than adding many, meaning there's less likelihood that this setup will lead to miscommunications.

What this model doesn’t address is the bandwidth issue: even with product development leaders who have years of experience, your in-house team may still have too much work to do to dedicate adequate time to their product development work.

One thing that can help: setting individual and team performance expectations that incorporate product development outcomes.

Scenario 2: Product development company serves as staff augmentation

Another common scenario is where the product development firm’s team serves as temporary members of your staff.

This model can help derisk product development by…

• Keeping control in your hands.

• Expanding your team’s expertise and experience.

• Preventing overwork and burnout.

• Making it easy to scale up or down.

On the other hand, new team members will require onboarding to learn your brand, company values, and communication norms.

Maybe the bigger risk, though, is that if you yourself don’t have experience leading product development efforts, you may not be able to provide the guidance necessary to develop a truly innovative new product––that is, one that delivers real value and wins wide adoption among your users.

If that’s the case, staff augmentation from a product development company can translate to an ever bigger waste of resources than attempting product development in house.

Scenario 3: Full collaboration between in-house and external teams

In this model, an in-house team and a team from a product development company work together in a fully integrated way, meaning professionals of various disciplines (design, development, and delivery) collaborate throughout the process. The main disadvantage to this model is that it requires an upfront financial investment.

For more complex projects, though (including those where the ideal outcome is unknown at the outset), an integrated team approach is actually more efficient and cost effective than a siloed approach.

What's more, this setup is uniquely positioned to minimize the other risks involved in product development. Here’s why:

1. Expertise and experience at every level: Full team integration means you can bring in experienced, leadership-level people from the product development company. This removes the burden of project management from you and puts it on people who know how to do it.

2. Visibility and accountability at every step: Fully hybrid teams include your employees, which means there's no risk of an agency “going rogue” on your vision. What's more, full team integration usually involves regular “stand up” meetings with all stakeholders, so you’ll be apprised of progress at every step and able to ask questions if and when a team’s direction doesn’t make sense.

3. Access to brand and company experts: Working side by side with your company’s employees is a great way for product development teams to absorb brand and company values. And when there's a question, the close working style means anyone can ask and get an answer quickly.

It’s worth noting, though, that not every product development company is equipped to work fully integrated with in-house teams. To evaluate whether product development partners have the capability to deliver this kind of service, be sure to ask the following questions.

Questions to ask your product development partners

If you think a hybrid approach to product development might make sense for your company, these questions can help you identify a partner who’s equipped to deliver an integrated, fully hybrid approach.

1. What's the smallest version we can test? Effective product development is iterative. No product development company, no matter how skilled or experienced, can predict how a product will perform. The most effective firms acknowledge this and have rapid prototyping strategies for identifying the smallest workable version of an idea (aka the MVP), building that in a low-cost way, and testing it to assess viability. This is the “fail fast” approach in action: rather than selling you a fully formed vision, they’ll offer you an approach to get you to valuable insights and, ultimately, successful products.

2. How will you derisk this project at every step? One of the most expensive mistakes an organization or small business can make is to build a product that nobody uses. But how can you know before you build something whether people will use it? The best product development companies will have a plan for this – which typically includes getting input from end users at every step, building an MVP, and iterating gradually.

3. How will you determine what the “right” thing to build is? This is a variation on the question above. Derisking essentially means making sure you’re not investing time and money in the wrong thing. The “right” thing to build exists at the intersection of what users want, what is technically feasible, and what is viable from a business perspective. In addition to getting user input, product development teams should have a plan for bringing in business and technical stakeholders early on and throughout the engagement.

1. What happens if this project fails? If you’re working with a product development company that has helped you develop an MVP and it doesn’t see the adoption you hoped for, that can be considered a failure. But it will also be an incredibly valuable learning experience. The best product development companies will guide you from the start on how to think about various outcomes, each of which can point you in a different direction for your future growth. This approach is much easier to accept when you’re working with a firm that helps you identify an MVP, so that you’ve invested a modest sum to learn something important – much as you might from a customer research engagement.

2. Is the focus product design or overall product innovation? One important distinction to make is whether a firm offers design services (e.g., UI / UX, graphic design, packaging design) or product innovation. While design is certainly important, even award-winning designs may not translate to user adoption and real-world performance. Product innovation work involves design, engineering, and delivery. Professionals from these groups work collaboratively as an integrated team to create a product that is optimized to meet users’ needs.

The above questions hint at the central tenets within product development services called product innovation. The product innovation approach is a demonstrated way to consistently create new things that win user adoption (see Figure 3).

For more insight into what it involves, check out the product innovation section on our blog.