Factors that Affect the Cost of Outsourcing Services
Modern development methodologies and technologies open new horizons for innovative software creation processes. Most advanced IT teams actively implement the principle of remote work and use the opening prospects to the maximum. It is evidenced by the Statista research results, in which analysts report unprecedented growth in the global outsourcing industry. As of 2021, it was estimated at $415 billion, and according to preliminary forecasts, this amount will increase at least three times before 2028, certainly, the IT outsourcing cost will change.
The popularity of the outsourcing model is due to several factors that positively impact the development cost, implementation time, and the quality of a digital product. We offer you a brief tour of the pricing system for outsourcing projects.
IT Outsourcing Cost: Key Factors
The main drivers of IT development pricing are:
- Employee’s salary.
- Skill level of devs involved.
- Team size.
- Features to implement.
- Complexity of a project.
- Project timeline.
- Tech stack.
- Cooperation model.
Let’s consider each factor in more detail.
It is the main factor affecting the outsourcing cost. It depends, first of all, on the contractor’s region and qualifications. For example, hiring a senior developer in America will cost an entrepreneur $65-$70 per hour, and an expert from Ukraine will require only $35-$45. Such a difference is due to the economic situation in the labor markets in the regions.
The average annual salary of a senior in the US is $130,000-$180,000, while in Ukraine, it is only $20,000-$60,000, according to Glassdoor.
As for the quality of ready IT solutions, there is parity between the two regions. The main difference is only in the implementation rate of innovative technologies.
Developers involved in the project
The team will vary depending on the type of your project. It may include Full-Stack developers or a mix of engineers, designers, team leads, project managers, and testers. Obviously, each employee needs a salary, which affects outsourcing costs.
Workforce or Team size
The cost of outsourced IT is directly proportional to the size of your team. The more performers you have, the more expensive the project will be.
Features to implement
The more features you want to implement (in MVP or the final version of your product), the higher the final outsourcing app development cost. Even basic elements developed from scratch are priced differently. Every company estimates the components according to its own formula, so you should focus not only on the average market prices but also on the prices of the selected contractor.
Do you want a tip from the experts? Do not overcomplicate the project and do not burden it with functionalities in order to reduce the cost of IT outsourcing services. Leave room for scaling. This way, you reduce the initial cost and get the extra time you need to study your customers’ needs. Based on the audience’s wishes, systematically expand the MVP to a full-fledged digital product.
The competition in the segment of IT solutions is so great that just one day of delay can cost your business several thousands of dollars in losses. In some cases, only the timely release of a digital product allows a brand to secure its position in the market. Haste hurts business, but not in the case of digital products. That’s why it is so important to follow trends and initiate the development of advanced IT solutions.
We recommend choosing popular low-cost variants of technical stacks like MEAN (MongoDB, Express.js Angular, Node.js) or LAMP (Linux, Apache, MySQL, PHP/Perl/Python). They are enough for the timely implementation of complex functionality.
Outsourcing is a meaningful concept that includes not only remote cooperation with contractors but also an expansion of the team through freelance experts. There are cases when hiring a complex team is not justified if the project is short-term and does not require the full range of services. It is an additional opportunity to reduce costs, which should not be neglected.
Hidden Costs of Outsourcing: The Triumph of Bureaucracy
Almost all materials on the topic of “Costs of outsourcing” include only the essential expenses, and their authors forget about the critical aspects of official cooperation with developers.
Strange as it may seem, even the IT segment is subject to bureaucracy, which obliges them to document and regulate labor relations, taxing them, commissions, and license fees. Not all companies work honestly, preferring to bypass the taxation of services. And although these factors are not the basis of the cost of outsourcing, their presence also harms the pricing policy of both companies and individual freelancers, often private entrepreneurs, which imposes certain obligations on both sides of cooperation.
What is included in the outsourcing pricing policy? Let’s analyze this issue in more detail, focusing on the points that are mandatory for honest entrepreneurs.
The first point when hiring performers is to determine the size and members of the team allocated to a client. Often, to level out the risks and provide a guarantee of cooperation, a deposit is charged to cover the penalty in the event of premature termination of the working relationship. Such insurance makes it possible to compensate for downtime until the next order appears, should the entrepreneur suddenly refuse the services of a hired company or a freelancer.
A separate item of outsourcing costs is the development strategy, or rather the planning and creation of a project roadmap. It is only necessary when the entrepreneur can’t choose the optimal techniques themselves or if they need a consultation. This service is usually included in a comprehensive package.
Any development is, first of all, an author’s idea, which should be embodied in a digital product. It is essential that information about it not be leaked to competitors or published earlier. Most entrepreneurs develop NDAs (nondisclosure agreements) to ensure the confidentiality of their developments.
Outsourcing IT costs also includes contracts: hiring, cooperation, partnership, copy protection, etc. All documents are notarized and are enforceable. The development and control of these documents are also done on a fee basis.
Taxes are a specific cost item that depends primarily on the country where the deal is made and its laws. Taxes are levied not only on the clients who hired the implementers but also on the developers themselves, from whom up to 20% of the income from cooperation is withdrawn. Often it is the customer who has to compensate for the tax expenses.
One should not forget all sorts of intellectual, legal, or private property fees, as well as logistical expenses on business trips, accommodation, and transportation, which are also directly related to outsourcing costs. Sometimes you have to buy additional technical means and pay extra taxes.
Licensing can be divided into two types, included in outsourced IT costs, although in any case, these costs fall on the customer’s wallet. The first type has licenses for the use of technology, which in rare cases are paid by the performers. The second includes licensing future intellectual property to protect it from copying, theft, plagiarism, or other wrongdoing by outside parties. In both cases, these are paid processes that make up a decent portion of the cost of outsourcing.
The last category includes unforeseen costs. For example, exchange rate fluctuations (when working with international contractors), hiring new employees, increased motivation (rewards, bonuses), and purchasing required software & hardware.
Although these factors are not vital, they can reach 20% of the cost of outsourcing in exceptional cases.
A Step-By-Step Guide on How to Calculate Outsourcing Costs
Factors and service prices influence the final cost of hiring an outsourced team or specialist, but the basic principle remains the same. We can help you prepare for delegating development tasks to experts and guide you through the key points.
1/ Decide on a project and tasks
The base cost of the development is calculated precisely from the list of necessary functions, integrations, and implementation timeframe. Before delegating your tasks, you should plan the project’s components, technical stack, and deadline. If this is not possible, use a business consulting service.
If you want to expand your staff and have a plan already made with them, start by detailing the basic idea of the project on paper. It will help you develop a roadmap faster and give a picture of the future digital product.
2/ Choose the desired cooperation model
If you’re developing a long-term project and plan to scale or transform it, look into a dedicated team model. Such a service is more expensive than an expansion. Still, it has many advantages, such as high-quality execution, maximum team immersion in the project, and the interest of each participant in the success.
In the case of a freelance team extension, you will spend additional resources on adaptation and involvement in the project. This model is justified if the deadline is running short and you need one more expert to speed up the process.
3/ Find the best performer
Focus on the contractor’s experience and the prime rate. If you need narrow-profile experts (for example, in the field of telemedicine or marketplaces), get ready for increased costs. Specialized teams cost much more than ordinary developers.
Another issue is the region. Sometimes it is cheaper to hire specialists by onshoring or nearshoring countries, but only when their experience matches your needs.
4/ Contact the developers and find out the cost of the services you need
The individual cost of IT outsourcing depends directly on the contractor’s rate. As in the case of the contractor’s region, the price per development hour may vary greatly from company to company. When choosing the best price, be guided by the balance between price and quality, look at the candidate’s portfolio, and be aware of their experience in developing business products for your field.
5/ Calculate the cost of taxes and licenses
The use of commercial technologies incurs extra costs. Incorporating them into business products requires a license and paying taxes for use. Research the tariffs of companies that distribute or lease frameworks, servers, and databases in advance. Make a list of the necessary services and put them on your cost sheet.
As for licensing or patenting of finished digital products – these subjects are the state’s responsibility, on whose territory the IT solution will be released. Accordingly, the state authorities calculate the cost of licensing services individually for each project, based on its specifications.
6/ Compare these offers with your budget
The last but the most important step is to check the availability of the selected services and technologies. Do not spend the entire budget prematurely; leave some money for new tasks that may somehow arise later.
By sparingly spending the budget and evenly investing in the development, design, and testing of your product, you leave yourself room for maneuvering. For example, if unforeseen situations with bugs in the code arise – you can fix them without additional external investments. The money you save can also be used for marketing, providing you with an initial influx of audience after the process is complete.
As of 2022, outsourcing is the top cooperation model in the IT industry. Its advantages:
- Relatively low hiring price.
- Large selection of performers.
- High quality of development.
- No binding to the region of hiring.
- Low commissions.
- Availability of service.
Remote work with contractors saves on logistics, rent, equipment, and staffing. Working remotely also gives you greater freedom of choice of technology and IT’s experts, thanks to access to hundreds of international contractors.