How much should you pay for software outsourcing to get the very best price-quality ratio?

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What is the real cost of outsourcing IT services?

Cost of outsourcing IT Services – how to find the sweet spot?

Everyone knows that outsourcing software development offshore can greatly decrease software development costs. At the same time, everyone knows that these lower rates don’t necessarily translate into better price-quality ratio. However, it’s beyond doubt that there are a lot skilled developers in countries with lower living costs. So how to find them? How much should you pay to ensure quality software development services and still minimize software development costs?

 

As popular as software development outsourcing (and IT outsourcing in general with 63,5 billion in contract value in 2015 alone) is, it’s hard to deny that it has been given a lot of bad rap, especially offshore software development outsourcing, which usually translates into companies from high living cost countries contracting companies from low living cost countries to lower cost of outsourcing it services as much as they can.

After I had read a bunch of opinions from people who used offshore software development outsourcing services, I realized that one of the major reasons behind its bad image is the attitude of some customers. Enticed with the idea of greatly decreasing software development costs by contracting foreign developers, they often make price their number one priority. Disappointed with poor quality of service, they give up on offshore outsourcing altogether. Considering that developers from, say, Central and Eastern European countries such as Poland are often considered some of the best in the world, it shouldn’t be too difficult to find quality programmers there (also, check the best programming language to learn article for more tips on popular languages/salaries). But in order to do so, it’s essential to give up the the-cheaper-the-better attitude. In any given country the cheapest developers are also usually the weakest developers. Choosing more expensive developers from low living cost countries will still result in bargain prices without compromising quality. So – how much should you pay for good offshore developers? What is the sweet spot when it comes to the cost of outsourcing it services? Before I answer this question, let’s take a look at another important one.

 

Why do companies still outsource software development? Just to decrease software development costs?

Back in the day, the only way to develop great software was to hire a team of skilled developers and provide them with salaries, benefits, place and equipment to work etc. When the internet made working remotely so much easier, outsourcing software development have become quite common. No surprise there. Some of the most obvious benefits of outsourcing are hard to ignore.

  • You get to pay just for the time developers work while when you hire developers yourself your software development costs remain high regardless of the volume of work.
  • You don’t need to commit yourself to creating a large and costly team if you are not going to need one in the future.

Developers hired as part of software development outsourcing are in charge of all of common software development tasks, which include:

  • Preparing a project specification, which all necessary project requirements.
  • Software design, that is laying out how the solution is going to work and achieve its objectives, including descriptions of low-level and high-level components of it.
  • Project management, including thorough schedule.
  • Testing/Quality Assurance, or continuous delivery.

That’s a lot of tasks! If a company that provides software development outsourcing services does all the same tasks as an internal team, don’t you think it’s irresponsible to suddenly switch your focus from quality to price when going for outsourcing?

 

Cost of hiring developers vs cost of domestic outsourcing

Outsourcing doesn’t necessarily have to lead to having to deal with foreign developers. Some companies go for domestic outsourcing, believing that it will lead to higher quality and less troublesome cooperation due to smaller distance.

But if you are located in a high living cost country, you probably realize just how costly domestic outsourcing can be. After all, your contractor needs to bear all of the same costs you would if you hired your own team plus a plethora of other costs, which include:

  • operational costs,
  • marketing costs,
  • management costs.

On top of that, they also need to generate profit! We’re going to take a look at how much it costs to do software development in-house compared to the cost of domestic outsourcing. Let’s make a few assumption, which should provide a decent common ground for all of the high living cost countries in the table below:

  • The total cost of hiring an employee (salary + benefits and other things) is about 50% bigger than the salary alone.
  • The average number of working hours per year is 1720 (average annual working time for the European Union).
  • The hourly cost is the total cost divided by the average number of working hours.
  • The local outsourcing hourly cost is thus the hourly cost multiplied by 1,5.
Place Employee Salary* Total Employee Cost Hourly Cost Local Outsourcing Hourly Cost
Amsterdam $59,000 $88,500 $51 $77
Auckland $60,000 $90,000 $52 $78
Berlin $65,000 $97,500 $57 $86
Dublin $65,000 $97,500 $57 $86
Oslo $76,000 $114,000 $66 $99
Stockholm $65,000 $97,500 $57 $86
Sydney $70,000 $105,000 $61 $92
Toronto $66,000 $99,000 $58 $87
U.S. – NY $110,000 $165,000 $95 $143
U.S. – San Francisco $125,000 $187,500 $109 $164
Zurich $110,000 $165,000 $96 $144

* figures based on data from payscale.com

Outsourcing software development in high living cost countries may ensure quality. But that quality comes at a very steep price – very high software development costs. How much should you pay in order to achieve comparable quality with offshore software development outsourcing?

 

How to lower cost of outsourcing IT services and retain quality?

If you really wanted to focus on price only, the hourly software development costs in some low living cost countries are really low. As low as $10 for some of the lowest priced software houses from countries such as India. But relying on such contractors often ends up in a disaster as the dramatically low quality of code results in having to invest several time this much to revamp it (as long as the code is usable at all), denying any benefits such low cost of outsourcing it services can bring. In order to get quality, you need to be prepared to spend more. How much more? According to our experience, a fair hourly outsourcing rate for experienced (5 years and more) software developers in developed yet low living cost Central-Eastern European countries such as Poland is about $36.

 

Place Employee Salary** Total Employee Cost Hourly Cost Local Outsourcing Hourly Cost
Poland $28,000 $42,000 $24 $36

** figures based on data from payscale.com

Software development outsourcing is a great way to gain access to experienced developers quickly, save money thanks to flexible pricing and salary/living cost differences between countries, and avoid having to set up a team on your own. But if you want to retain quality assured by working with the best local developers, you need to take into consideration more factors than just cost of outsourcing it services With the right attitude, you can find great quality offshore and still save a lot on software development costs.
 
Sensinum is a Polish software house offering software development services of the highest quality to companies, marketing agencies and teams. Whether you need a subcontractor or want to cooperate with a software house directly, Sensinum guarantees smooth communication and developers experienced in working on advanced projects every day. If you want to know whether our offer suits you, contact us and consult your software idea for free.

Sebastian
Sebastian Data Engineer / COO