Software development spending represents a significant portion of a company’s annual expenses. Salaries for developers can represent 50% or more of the annual IT operating budget. It’s in the company’s best interest to ensure that software development dollars are spent wisely. Accelerance wants you to fully consider the direct or “obvious” costs of attracting and retaining in-house programming talent as well as the NOT SO OBVIOUS costs that are very real and relevant. The not-so-obvious costs include:
- Recruiting costs
- Benefit costs
- Onboarding costs
- Retention costs
The Cost of “The Hunt”
In many regions, the pool of programmer candidates is low and the competition for qualified talent is high. The use of 3rd-party recruiting companies, who charge large fees (25% of annual salary or more), is common.
Even without the expense of a third-party recruiter, company staff inside and out of the IT department will spend weeks, perhaps months, scrutinizing resumes and conducting interviews to find properly qualified programmers.
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Fully Burdened Employee Costs
When your finance team thinks about the cost of a programmer - the TOTAL cost they calculate will be a dollar figure much larger than the employee’s salary. In-house employee costs go well beyond base wages. The fully burdened cost of a programmer (or any employee) will include cost of benefits including:
- Employee taxes
- Paid time off
- Retirement and savings contributions
- Paid time off allowance (vacation, etc)
According to the Bureau of Labor Statistics, the average cost of these employee benefits are 31% of an employee’s fully burdened cost. That percentage will be higher for a company populated by high skilled technology workers, versus hourly laborers.
Other Overhead Costs
In most circumstances, you also want to consider secondary cost factors.
Supervisory expense time
Management time is not free. Most supervisors must split their time between true supervisory activities, and other business-contribution activity. For each programmer youhire, there will be additional time expended for management of the employee: one-on-one meetings, mentoring and coaching, scheduling work assignments, managing reporting, etc.
Allocation of office space
Office space (don’t forget furniture, phone, internet, etc) is usually a scarce commodity for most companies. Providing work space for a newly hired programmer is a cost you should be able to quantify. This is especially true if you are thinking of adding staff headcount to fulfill new - or expanding - software development needs.
Your software engineers will need computers, data center computing power and storage (cloud or otherwise), and of course software development and testing tools. All of these tools for an employee will be purchased by your company. Usually, your new-hire expenses for tools will be a combination of one-time purchases and a subscription fee (typically with a minimum one-year commitment).
Onboarding costs are often overlooked in calculating costs for hiring a programmer. Managers, HR representatives, members of the software team, and even key users will all be involved in bringing the new programmer up-to-speed. There will be loss of productivity - not only from those involved in onboarding and orientation, but as the programmer slowly acclimates to new work assignments. For many companies, the onboarding of a new employee can be one of the most disruptive activities of the week.
OK… you (somehow) find a qualified person, hire them, put them on the payroll, get them properly tooled, and now they are fully oriented and assimilated. Are you going to be intentional about investing to ensure they stay with you - and stay relevant to your needs?
- Are you prepared to keep their compensation competitive with the local market?
- Are your career advancement opportunities attractive?
- Is there anything about your work office environment, commute time, etc. that might disincent someone from staying on?
- Are there any special certifications they need, which require regular re-training?
- Are the technologies (software platforms, package versions, coding languages) evolving, so that further education will be needed?
Internal Expense for Employees Compared to Software Development Outsourcing
When you use outsourced software development, the hourly rate of the programmer is your full cost to engage that developer.
Don’t allow yourself - or your management team - to dismiss the option of outsourced software development as “too expensive” because of an incomplete comparison of outsourcing rates to internal labor costs. You can’t simply divide your in-house software engineer’s weekly wages by 40 and compare this to offshore, nearshore or onshore hourly rates. Make sure you perform a true “apples to apples” comparison between the cost of in-house development and outsourced application development. It’s very important that you use the full cost of an IT employee as the point of comparison to outsourcing costs.
One of the key advantages of outsourcing software development is how it allows companies to leverage the services of companies whose core competency is developing high quality business applications. Software development companies have, by necessity, invested in the people, tools, security, and other technology required to run a business whose mission is to produce software for other companies.
The cost of your next programming hire is not just the cost of their salary. There are clear cost outlays for recruiting expense, benefits, tools, work area, and ongoing training. There are also more subtle costs in “people time” as supervisors, IT staff, and others expend time in recruiting, hiring, onboarding, managing, and retaining. Again, the cost of a programmer is not limited to the dollar-value of their wages… this is only a portion of the total cost.
Outsourcing software development is a business strategy that every company should consider. It has the benefits of allowing the organization to focus on core competency, improve flexibility, increase ability to scale, and reduce costs. Accelerance has proven experience in providing expert software development talent - through outsourcing. Our clients save thousands of dollars using our approach, while increasing the effectiveness of their software development activities.
Software Outsourcing Is More Than Just A Procurement Activity
Finding the best software outsourcing company for your engagement is just the beginning. Wouldn't an experience, hands-on advisor be helpful during every step of your outsourcing journey? We think so.