IT outsourcing cost breakdown analysis
Due to the post-pandemic acceleration of digital transformation, distributed work, and reduction of resources, today many companies put great emphasis on cost-efficiency and process optimization. They are embracing new operating models to adapt to the evolving business landscape and harness the benefits of remote collaboration and streamlined workflows.
Outsourcing with its flexibility and scalability proves to be a perfect solution to fulfill these objectives. However, companies often find it hard to calculate the full cost of IT outsourcing, as it involves assessing not only the apparent fees but also the plethora of indirect and hidden expenses that contribute to the overall financial picture.
This article delves into the various elements that comprise the cost of outsourcing IT tasks to provide businesses with a holistic understanding of the budget implications associated with hiring remote developers.
Total cost of IT outsourcing
The rapid pace of technological advancement, coupled with the need for specialized skills, has made offshore software development an attractive solution for tech firms striving to remain competitive. It offers access to a diverse global talent pool, accelerated time-to-market, an opportunity to optimize in-house resource allocation, and significant cost savings.
However, before embarking on this strategic transition, businesses must carefully evaluate the actual price of outsourcing their IT tasks. To find out how much IT outsourcing really costs, they should delve into the financial landscape, going beyond the visible, direct costs and thoroughly assessing the underlying indirect expenses and potential hidden fees.
Direct costs
Direct costs in outsourcing are the bills you actually have to pay. These include labor costs, such as developers’ salaries, taxes, vacation and holiday pay, healthcare costs, retirement plans, and bonuses. On top of that, there are monthly fees charged by your vendor that cover specific services, e.g. infrastructure management, technical support, or proprietary software development tools.
While outsourcing is often sought to reduce labor costs, compensation still makes up the lion’s share of offshore software development expenditures. Depending on your project needs, budget, and complexity, you may want to choose to hire a freelancer, work with an extended team or engage an entire cross-functional team to deliver you an end-to-end solution.
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IT outsourcing cost for a freelance specialist
If you need a coder that is available right now or you have a short-term project with clear tech requirements, a freelancer is the right choice. You can hire such an IT specialist on an hourly, monthly or project-based basis.
Despite the significantly lower outsourcing rates of freelance developers, there’s another side of this cooperation model that may lead to some unexpected costs. When working with freelancers many companies face such challenges as missed deadlines, lack of engagement and dedication, as well as the need to find substitutes when the engineer they hired before is busy with another project.
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IT outsourcing cost for a remote team
Augmenting your in-house team with remote staff is a perfect solution for a long-lasting project of significant volume and high complexity. Companies usually choose to partner with an IT service provider that will take responsibility for sourcing, pre-screening, and hiring highly skilled software developers that best match their requirements.
The cost-savings within team augmentation are usually more effective than in project outsourcing, as this approach allows companies to retain direct control over their extended team, harness the advantages of seamless collaboration, and exercise real-time oversight. They can also benefit from the specialized skills and extensive experience of offshore developers, ultimately leading to a more integrated and agile development process.
With team extension you can start with one developer and gradually scale the size of your remote development unit as your project requirements evolve, allowing for optimal resource allocation, efficient workload distribution, and seamless alignment with your core business activities. Moreover, this type of cooperation entails the complete commitment of your remote staff to your IT project, so you don’t have to worry about divided attention or conflicting priorities, ensuring a focused and dedicated effort toward the success of your product.
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IT outsourcing cost for an Agile pod
The pod model centers around building a small, cross-functional team that works together to develop, deliver, and manage a specific product, project, or service. Such a tightly-knit group of IT specialists has a full set of complementary skills that enables them to cover the entire software development lifecycle, from ideation to design, coding, maintenance and technical support.
Pod teams can develop complex software up to 40% faster than traditional outsourcing teams, leading to a significantly shorter development process. This streamlined efficiency translates to substantial budget savings, often ranging from 15% to 20%, making this cooperation model a highly cost-effective solution.
Indirect costs
Indirect costs encompass a range of expenses that are often overlooked but no less significant. They might not be immediately apparent but can have substantial implications for the success of outsourcing initiatives. In the intricate IT environment there are several key factors that extend beyond the obvious financial expenditures:
- Setting up the unit. The costs of transitioning from in-house operations to outsourcing can include expenses related to knowledge transfer, data migration, retraining of staff, and setup of communication channels with the vendor.
- Legal support. The outsourcing contract with all SLAs, timelines and non-disclosure agreements is a business imperative. To ensure all aspects of the cooperation you will need a legal advisor. The cost of legal support, as well as notary fees, are often overlooked when estimating the total cost of outsourcing.
- Remote monitoring and management (RMM). Outsourcing involves the utilization of specialized tools and technologies to remotely oversee and control IT systems, networks, and infrastructure. While it might not immediately appear on the balance sheet, the adoption of such solutions introduces a range of financial implications that can impact the overall cost structure of offshore software development projects.
- Quality services. Ensuring that the outsourced work meets the required quality standards might involve investing in QA processes and tools.
- Risk management. Mitigating risks associated with data breaches, service disruptions, or other potential issues could necessitate investment in risk management strategies and cybersecurity measures.
With outsourcing, the majority of the in-house expenses disappear leading to more transparent pricing and zero overhead costs. While the spending pattern becomes more simple and visible, there still might be some additional expenditure items to bear in mind.
Hidden costs can eat up to 20% of your outsourcing budget. These are the sums you’ll have to pay on top of the base price of IT services. Factors such as outsourcing location, the uniqueness of the certain tech skill in the given labor market, level of experience, English proficiency, and the length of the engagement will come into play, influencing the total expenditure of your outsourcing project.
Here are some additional costs to bear in mind:
- Vendor management. You may need to invest time and resources in overseeing the vendor relationship, including contract management, performance monitoring, and dispute resolution. On top of that, you will have to allocate internal resources for managing the outsourcing project, which could divert focus from core business activities.
- Cultural and communication issues. Working with offshore developers is often related to overcoming language barriers, different time zones, and cultural differences, which can potentially cause misunderstandings, resulting in rework or misaligned expectations.
- Long-term scalability. Changes in project scope or business needs usually entail adjustments to the outsourcing arrangement and additional spending of budgetary funds.
- Travel and on-site visits. In some cases, representatives from the outsourcing provider or the client organization might need to travel for meetings, training, or project reviews.
- Knowledge leakage. There’s a risk that proprietary knowledge might be inadvertently shared with the outsourcing provider, potentially impacting the organization’s competitive advantage.
In order to accurately assess the total cost of IT outsourcing, organizations need to consider all these factors and perform a comprehensive cost-benefit analysis to determine whether offshore software development is a suitable option for their specific needs and goals.
IT outsourcing cost savings
In an era defined by business agility and cost efficiency, the adoption of outsourcing has emerged as a potent solution to optimize operations and drive financial advantage. By strategically leveraging external expertise, resources, and specialized services, businesses can tap into a range of benefits that extend beyond mere monetary considerations. From tangible financial gains to strategic advantages, numerous outsourcing benefits help businesses achieve cost-efficiency goals in today’s competitive landscape.
Benefit #1: Nearshore software development costs less
Nearshoring is transferring software development activities to countries with similar time zones. Thus, a Germany-based company can outsource software development to India, or nearshore locations like Poland or Ukraine. While nearshoring is not the cheapest solution, it can save you more in the long-term perspective by offering comfortable cooperation hours and minimized travel fees.
Benefit #2: Best price-quality ratio
Over the decades, top outsourcing companies like Grid Dynamics have honed their skills in providing high-end services delivered by seasoned software engineers. With multiple engineering offices around the globe and access to a vast talent pool, Grid Dynamics is a sweet spot for hiring top IT specialists as our pricing model doesn’t compromise on the quality of the software.
Benefit #3: Easy team scaling
While in-house sourcing is a risky and time-consuming ordeal due to a severe talent shortage, offshoring ensures the rapid release of software solutions. You can start working with your team within 4-8 weeks after putting in an initial request with a dedicated IT service provider. The team scaling in outsourcing is also quite simple – you can grow or reduce your team depending on your current project scope and business needs at any time.
IT outsourcing cost analysis framework
Navigating the realm of IT outsourcing requires a comprehensive and structured approach to understanding costs. We’ve created a roadmap that can help you make informed decisions, allocate resources efficiently, and develop a holistic view that guides strategic planning and execution.
Define your task
A clear outline of the product or service you want to develop is imperative for better cost analysis. Do you plan a long-lasting large-scale project or just a simple application development? What are your expectations for UI/UX, backend infrastructure, and level of customization? All these factors are vital for choosing the right outsourcing cooperation model.
Since each software outsourcing model has its strengths and weaknesses, determining the one that best matches your specific business needs and goals demands thoughtful consideration. The following questions may help you figure out which model is right for you:
- Do you have an in-house specialist with a tech background to supervise and manage the development process?
- ✅YES – Team Augmentation
- ❌NO – Project Outsourcing
- Does your project require long-term development engagement?
- ✅YES – Team Augmentation
- ❌NO – Project Outsourcing
- Are project requirements likely to change during the development process?
- ✅YES – Team Augmentation
- ❌NO – Project Outsourcing
Calculate in-house expenses
When you’re hiring software developers locally, factors such as benefits, overhead expenses, office space, equipment, and administrative costs often prevent precise calculation of the in-house development costs.
The elements that are often overlooked when hiring an in-house tech team:
- Cost-per-hire covers all the expenses related to the recruitment process either done by the recruitment agency or the in-house recruiting team;
- Legally required benefits include sick leaves, annual bonuses, overtime pay, training tax, medical insurance, etc.;
- Office infrastructure encompasses everything from workstations and IT supplies to licencing fees for software development tools;
- Overheads refer to the ongoing expenses of operating a business;
- Taxes.
For example, to hire a developer in the US, you will have to pay \$118K. In Germany, the price is around \$97K. Hiring a developer in Australia will cost you \$93K. In Canada, you’ll have to spend \$89K to hire a programmer, while in the Netherlands it will cost you \$86K, and in the UK – \$84K.
Hiring a software engineer in the US can cost you between \$67K for a junior developer and \$119K for a senior developer. On average, 70% of the total developer cost consists of the net salary, while the remaining 30% represents taxes and benefits.
The cost structure of hiring an in-house developer in the US (annual calculation):
- net developer salary;
- supplementary pay (3.2% out of annual net salary);
- insurance (8%);
- paid leave (7.1%);
- retirement and savings (3.8%);
- legally required benefits (7.6%);
- overheads (15%);
- cost-per-hire (\$4K on average).
Calculate the cost of outsourcing IT
In outsourcing, software development salaries are the only cost items you need to address when building a cross-functional team. To kick-start your product development project you’ll typically need a junior and a middle software engineer, a designer, a QA specialist, and a project manager as a basic team. The cost of hiring such a team is just a sum of their base salaries since no other cost items are applicable here.
When you hire remote software developers by partnering with an outsourcing provider, you don’t have to invest in office rent, equipment and IT support services as they are already included in the vendor’s fee. Only if you have any special requirements for equipment or additional security mitigations, you might have to pay extra.
IT outsourcing cost: Conclusion
Tech talent demand, technology disruption, and the post-pandemic need to move online have impacted both the in-house and outsourcing costs. Qualified technical experts are getting more open to international job opportunities, making it possible for companies to benefit from their expertise regardless of geographical boundaries, and drive innovation and growth on a global scale.
Our mission at Grid Dynamics is to help your business grow through remote software development talent. Our clients have the option of choosing the engagement model which best suits their requirements, including team extension, dedicated teams, pod teams, and remote development centers. Grid Dynamics has offices offices across the Americas, Europe, and India, meaning that we have the resources to cater to the needs of companies of any size, no matter where they are located. Reach out with any questions you have by clicking the button below.
