01/09/2022 | Last updated: 17/05/2023
Does outsourcing software development really pay off?
Nearly 8 in 10 global CEOs now expect a recession in their primary region of operation within the next 12 to 18 months or believe one is already underway – according to a survey released by The Conference Boardteaming up with a trusted and cost-efficient partner is more paramount than ever.
CIOs are facing a digital challenge
Many businesses had to work and serve clients remotely from the start of the COVID-19 pandemic, which accelerated their digital transformations. Before March 2020, it was easy to separate tech-savvy companies from one another. In 2022, according to a report by Mckinsey & Company, most businesses have undergone a digital change and have started to refer to themselves as technological and virtualized.
Now it’s clear that the trend toward digital transformations is going further and there is no turning back. Companies are increasingly comfortable doing business online, as the virtual way of functioning is easier and more efficient than the real-life alternatives. The benefits have been highlighted in various publications thousands of times, so there is no point in presenting them again. But there is a straightforward question worth considering: Would you ever go back to working from an office 5 days a week? Probably not, as according to Forbes, most companies have decided to work in a remote or hybrid model.
Many businesses around the world will take virtualization even further. At the very beginning of 2022, forecasted that worldwide IT spending would grow 5.1% in 2022, which means that total spending is going to be $4.5 trillion this year. Moreover, John-David Lovelock, distinguished research vice president at Gartner says, “2022 is the year that the future returns for the CIO. They are now able to move beyond the critical, short-term projects over the past two years and focus on the long term. Simultaneously, staff skills gaps, wage inflation and the war for talent will push CIOs to rely more on consultancies and managed service firms to pursue their digital strategies.”
To summarize, companies in 2022 will spend more money on IT solutions and, to a large extent, outsource software development to third-party partners instead of carrying the burden of software development on the shoulders of their in-house teams.
Gartner’s January predictions about a greater share of hiring software development services from third-party companies are proving to be accurate. As economic downturn fears loom over markets, more cost-effective solutions seem to be the best course of action. Crunchbase News reported that major technology companies like Apple, Microsoft and Google are instituting hiring freezes, and in some cases, reducing the number of employees by as much as 18%.
However, a hiring slowdown does not mean that software development should hit a standstill, especially when talking about pure technology companies for which software and its development bring profit and keep the company afloat.
Taking all the above into account, it seems that outsourcing software development services instead of maintaining a permanent, broad-based in-house development team is the best solution now to produce software continuously with less cost and effort. This hypothesis can be easily supported by doing a simple calculation and analysis.
The sweet spot for outsourcing
Global Software Outsourcing Trends and Rates Guide by Accelerance recognizes enterprise-grade offshore partners as ‘The sweet spot’ for outsourcing software services. Top software houses offer an hourly rate from $35 to $75, depending on the role. This is clear cost-cutting alternative to in-house employees, whose hourly rates range from $75 to $125 – as indicated by the guide.
Moreover, the cost of an hourly developer is not the total cost we have to reckon with for a standard employee. Costs of internal hiring go beyond the basic salary.
Complete list of the costs hiring one team member as a full-time employee entail:
- Salary, supplemental pay (overtime, shifts, etc.), bonuses associated with a basic wage, national health insurance payments, unemployment insurance, and taxes,
- Additional benefits like private medical care, retirement plan, gym membership, external development courses, paid leave, savings programs,
- Acquisition of an employee – advertising costs, HR/recruitment team costs or/and agency fees, general administration, and legal expenses,
- Onboarding cost – training and equipment costs associated with office space, hardware, software, licenses,
- Everyday perks like coffee, tea, water, juices, fruits,
- Incentive activities’ costs (like yoga, cooking classes) and team-building events.
Counting all the above and factoring in knowledge from the U.S. Small Business Administration it’s clear that the real cost of benefits is typically 1.25 to 1.4 times the base salary, depending on certain variables. To sum it up, the total cost is a minimum of $94 to $156 (overhead 1.25). There is also some tiny overhead for offshoring (travel, oversight), but with remote, self-managed teams, it is at the level of $5 to $6 per hour – as inclined by Accelerance.
The overhead costs per hour prove the difference even more, as the nearshoring total hourly rate is around $61, while the in-house hourly rate is roughly $125. Total savings equal approximately $64, over 50 percent – based on data provided by Accelerance.
Offshore partners deliver a far more cost-efficient proposition, but an experienced software house provides far more than just savings.
Outsourcing software services brings real-world value
The price differences alone may not be compelling enough to establish whether outsourcing pays off. In addition to lower costs, what other benefits does outsourcing software development bring? Here’s what Software Mind’s clients value:
- Speed of software delivery. Setting up and regularly managing a project can be stressful and time-consuming, while leaving it to professionals guarantees that it will meet desired deadlines. Multiple internal processes will be improved by introducing (Test-Driven Development) TDD and CD/CI, among others.
- Wide experience. Often, in-house developers, especially those working on one project for many months or even years, are experienced only in a narrow field. Software developers from companies like Software Mind work on several projects with different scopes, technologies and clients. It enables them to expand their knowledge and to keep up with technologies, which ultimately results in better quality code and software for you.
- Responsibility and involvement. Many of companies experience turbulence in projects due to sudden personnel changes. Nowadays developers have no problem finding a new job. More precisely, they don’t need to look for it regularly as new opportunities come to them. When you work with software delivery companies, it is rare to face such problems. A partner will not withdraw from collaboration overnight and will not be offended. An external dedicated development team will look for issues and focus on solving them, knowing its reputation depends on delivering results for clients
- Scaling up & down. Developing and maintaining products requires flexibility and changes during your project lifespan are almost inevitable. Employing in-house developers limits your options to scale your teams up or down. However, when you outsource software development services, you can easily set up a ramp-up plan with your supplier that covers long-term cooperation and includes the ability to both increase and decrease the number of engineers in a project. At the start, you may need two engineering teams from a vendor, each with 5 to 7 developers. But at a later stage, you may only require one team. Working with a software partner gives you elasticity to manage your resources and budget wisely.
- Billing model. Most software houses that help in software development work in a time and material model (T&M). It means you pay only for hours worked and the software produced (learn more about fixed price vs time and material model). Since hiring in-house developers in a time and material model is impossible and considering that the hourly rate of an internal employee must be multiplied (from 1.25 to 1.4) by the additional cost of living, this substantially raises the expenses, which proves that external software partners are a cost-effective alternative.
Considering the calculations and benefits, it is easy to conclude that outsourcing software development really pays off. Of course, variables can influence calculations like team size, seniority, time of contract and so on. The Wall Street Journal puts it – the economy shows signs of cooling and top executives are looking for a way to mitigate expenses, and Outsourcing software services seems to be the answer.
Outsource your software development in these uncertain times
The reports mentioned in this article show that IT executives will spend more money on software development from third-party partners like Software Mind. Gartner clearly advises that in the current economy, managers need to prioritize digital investments during an economic downturn, while being agile in securing outsourced digital talent is one of the top actions to take in the current financial environment.
If you’d like to know more about how an outsourcing partner can grow your business, get in touch by using this contact form – Software Mind’s experts are more than happy to help you find a tailor-made solution for your needs.