What is cheaper: in-house development or an external agency?

With continuous full utilization (3+ developers permanently), in-house is often cheaper (€85,000-130,000/year per developer all-in). With variable demand or project-based work, an agency can be more economical since you only pay when there is actual demand.

How long does it take to build an in-house development team?

Expect 3-6 months per position for recruiting, onboarding, and training. Good developers are hard to find. With an agency, you can often start within weeks.

What happens to the know-how with an agency?

The knowledge initially resides with the partner. Important are good documentation, shared code repositories, and regular knowledge transfer. Hybrid models with an internal tech lead and an external agency are often the best compromise.

When does a hybrid model make sense?

Hybrid models combine a small in-house team for core competencies and coordination with external partners for capacity peaks or special projects. This offers flexibility while maintaining internal control.

In-House Development vs Agency – which fits better?

Comparison of development models: costs, control, flexibility, and knowledge retention.

In-House vs Agency: The Right Sourcing Decision

Build your own development team or work with an agency? This strategic decision has long-term impacts on costs, flexibility, and competitiveness. Both models have pros and cons – the right choice depends on your company strategy, the project scope, and your long-term IT goals.

In-house development means hiring your own developers and building an internal team. The advantages are obvious: Full control, direct access, knowledge stays in-house, and the team understands your business processes deeply. The disadvantages: high fixed costs (salaries, social contributions, equipment, training), long lead time for recruiting, and limited scalability. Good developers are hard to find – and to retain. When there is turnover, know-how is lost.

External agencies offer flexibility and access to a broad range of competencies. You only pay when you need development services, can scale quickly, and benefit from experience across many projects. For special projects (legacy modernization, AI, mobile), agencies often have deeper know-how than a small in-house team. The risks: dependency on the partner, communication overhead, and the need to secure knowledge through documentation.

Our recommendation: Hybrid models are often the best approach. A small in-house team handles core competencies, architecture, and coordination. External partners support with capacity bottlenecks, special projects, or when rapid scaling is needed. As a German agency, we frequently work in such constellations – as an extended workbench or as experts for specific technologies.

Comparison at a Glance

Criterion	In-House Team	External Agency
Initial Costs	High (recruiting, onboarding)	Project-based, predictable
Ongoing Costs	Salaries, social contributions, overhead	Only when needed
Control & Steering	Direct access, daily coordination	Through project management
Knowledge Retention	Stays in the company	With partner, documentation needed
Scalability	Limited (recruiting takes time)	Quickly scalable up and down
Technology Breadth	Limited to team skills	Access to diverse know-how
Availability	Vacation, illness, turnover	Team backup coverage
Long-term Commitment	Continuity possible	Project-based, switching possible
Cultural Integration	Full integration	External partners
Time-to-Start	Months (recruiting)	Weeks

When an In-House Team Makes Sense

Software is your core business – you are a tech company or SaaS provider
Long-term, continuous demand – permanently 3+ developers fully utilized
Deep domain knowledge required – complex business processes only insiders understand
Maximum control desired – fast reaction, direct access
Competitive advantage through technology – proprietary solutions as differentiation

When an Agency Makes Sense

Project-based demand – one-time or rare development projects
Quick start – no time for months-long recruiting
Specialized expertise needed – legacy migration, AI, mobile, specific technologies
Variable workload – sometimes high, sometimes low development demand
Capacity bottleneck – in-house team overloaded, additional hands needed

The Hybrid Model

Many successful companies combine both approaches:

Internal tech lead / architect – steers strategy and quality
Core team in-house – for core functionality and domain knowledge
Agency for scaling – during capacity peaks or special projects
Shared code repository – knowledge transfer and quality assurance

Cost Comparison

In-House Team (1 Developer/Year)

• Salary: €55,000 – €85,000
• Employer social contributions: ~30%
• Equipment, licenses: €3,000 – €5,000
• Training: €2,000 – €5,000
• Recruiting (proportional): €5,000 – €15,000
Total: ~€85,000 – €130,000/year

Agency (Equivalent Service)

• Hourly rate: €90 – €150
• At 1,500 productive hrs/year:
• Lower bound: €135,000
• Upper bound: €225,000
• But: only when actually needed
Flexible based on effort

Conclusion: With continuous full utilization, in-house is often cheaper. With variable demand or short-term projects, an agency can be more economical.

Need external support?

As a German agency, we work as an extended workbench or as specialists for complex projects. We complement your team – or take over completely.

Free Consultation Software Development Services

In-House Development vs. Agency: What Is the Better Strategy for Your Company?

The question of whether software development should be built internally or outsourced to an external agency has no one-size-fits-all answer. Both models have their merit, and the right choice depends on factors that go beyond a simple hourly rate comparison: strategic importance of the software, availability of skilled professionals, project scope, time horizon, and your company's long-term development strategy.

In-house development offers the advantage of deep domain knowledge. Developers who work daily with your product and your users understand requirements intuitively and can respond quickly to changes. Communication paths are short, the team identifies with the product, and knowledge stays within the company. The downside: Building a capable development team takes months, recruitment during skill shortages is extremely challenging, and ongoing costs for salaries, workspaces, tools, and training are considerable – regardless of whether projects are currently running or not.

An external agency brings immediately deployable capacity and broad technical know-how. Agencies have experience from dozens or hundreds of projects, know best practices across industries, and can start quickly without months of recruiting. Capacity is scalable – additional developers can be deployed as needed, and during quieter phases, you reduce the collaboration. The potential downside: Domain knowledge needs to be built up first, and the agency works on multiple client projects in parallel.

In our practice, we see the best results with hybrid models: A small internal core team that holds the product vision and domain knowledge, complemented by an external agency that contributes development capacity, technical expertise, and proven processes. This model combines the advantages of both approaches and avoids the respective disadvantages. What matters is a clear division of tasks, transparent communication, and shared quality standards.

We have been working as an external development partner for companies of all sizes for over 15 years. In that time, we have learned that the most successful partnerships work on equal footing: We bring technical excellence, you bring domain knowledge and product vision. Together, we deliver software that works, is maintainable, and can adapt to changing requirements. Talk to us if you want to find out which model works best for your project.