Putting the cost of a software developers outsourcing into perspective
One of the most important activities for managers is the quest for efficiency in their production system. In the post-pandemic context, the pressure to do more with less has become almost a mantra. Whether for resource optimization or strategic gains, we observe a growing trend in the adoption of outsourcing models, especially in the area of technology.
In this article, we will discuss some drivers and characteristics of this trend, aspects of supplier differentiation, composition and benchmarking of costs. This information will certainly support managers in making more assertive decisions when choosing their future software development supplier.
Using outsourcing to unlock business agility
The growing trend in technology services outsourcing has been accentuated in recent years. Even in a more daring economic scenario, research points to a 6% growth in demand for technology services and consultancies.
According to the Global Outsourcing Survey 2022 study, conducted by Deloitte, it shows that 76% of executives indicate that technology functions in their companies are outsourced.
As main drivers of this trend, executives point out:
Another interesting aspect presented in the same study is the search for outsourcing models where there is a greater vision of strategic cooperation in the long term, that is, the evolution of a traditional model (very focused on cost reduction and execution of discrete tasks) to a model of managed/operational services (in addition to the advantages of the traditional model, it is able to offer support to more complex business processes and functions, creating a long-term relationship oriented to performance, business value delivery and innovation). In the previous article, we explored a little more about how to obtain strategic gains with software development outsourcing.
Five critical factors that influence outsourcing costs
Finding the ideal partner with the appropriate pricing model greatly reduces the risks of your outsourcing strategy, let's understand some aspects that can impact the costs of this hiring:
In-demand skills: some specialties with high demand, such as architecture, DevOps, AI and data science are naturally more expensive, regardless of the supplier's location.
English Proficiency: language difficulties increase the probability of error and confusion, resulting in project slowdown and potentially the need for rework, incurring additional expenses. Fluent professionals tend to be more expensive, so an alternative is to look for a good distribution of fluent English speakers, from management to the developer level.
Location: certain regions develop a reputation for expertise, generating demand and raising prices. Rates also tend to be slightly higher in countries located near a first world economy. LATAM has been a region where there is a balance between affordable cost, cultural proximity and similar timezone.
Expertise: the cost of a professional is proportionally related to their specialty and their level of seniority. Therefore, more experienced professionals tend to be more expensive.
Engagement size: it is common for outsourcing companies to consider the size and duration of the project to get better cost conditions. If you are planning to carry out your engagement for several years, disclose this in advance for potential discounts offered.
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Analyzing outsourcing costs in detail
The first step to making a well-founded decision about outsourcing is to calculate the Total Cost of Engagement (TCE) of internal and external operations and compare them in a clear and transparent way.
In your cost evaluation, be careful not to decide that outsourcing is "too expensive" due to an incomplete comparison with your company's internal labor costs. When hiring internal developers, for example, the TCE includes much more than the base salary. Your costs to have a programming team will also include expenses for
We can analyze in the table below a comparison between in-house hiring costs versus outsourcing costs:
We already know how strategic a software development outsourcing option can be, we also understand factors that impact costs and how cost composition can be analyzed for a good comparison. In the next section, we will explore a cost benchmarking so that you have an idea of the values practiced in the market.
Cost analysis and quality factors
As mentioned before, software development outsourcing costs can vary considerably depending on the region, skill level, experience, technologies involved, and project duration.
However, there are studies that seek to provide a benchmark for the hourly rate for software development outsourcing services.
According to the 2023 Software Outsourcing Trending Rates research, conducted by Accelerance, the study shows that the overall average hourly rate for a software engineer is $64.
It is true that price is an influencing factor in the decision, but it cannot be determinative. Aspects of quality, experience, team culture, references from other clients, communication, cultural proximity, and timezone all greatly influence the overall outcome of the project. Balancing these factors leads to a more informed decision in choosing the supplier. The Accelerance research also shows in its study what would be a sweet spot for choosing suppliers, see in the table below.
Novatics, for example, is a technology consultancy specialized in system design and development and offers a great balance of these criteria. As a consultancy, the company goes beyond allocating professionals and is focused on delivering value. It has processes in place to ensure the best communication between parties and the quality of deliverables. Additionally, Novatics has over five years of experience working with innovative scale-ups in the American and Canadian markets. If you want to learn more about Novatics and our way of working, send us a DM here.