Insights | Beware the Low-Cost Software Development Provider

Beware the Low-Cost Software Development Provider

By Mike McAuliffe | July 15, 2020

“How much should I expect to pay when outsourcing my software development?” This is a question often asked by technology and business leaders, even those who have outsourced before. The answer, of course, depends on several factors. 

All but one have to do with the value a software development partner will potentially bring to the organization. The remaining factor is cost. Logically, then, cost should be weighted accordingly when it comes to making your decision. However, the reverse is almost always the case.

Obsessing too much about the price imperils all purchasing decisions, whether you’re buying a car or a house, or engaging a remote team to develop your company’s critical software.

 Don’t lose sight of what is even more crucial: the value of the product or service itself.

But Budgets Matter…

Over the past few months, the imperative of so many companies has been to reduce expenses to extend their “runway”. So, it is understandable that price might dominate the conversation – but be mindful of the tradeoffs.

This was the case for a smaller company that recently came to Accelerance for help. They needed to reduce their software engineering spend, which had been around $125 per hour (per person, fully loaded). Their goal was to achieve a 50% savings, so a target cost of $62 per hour had been set for the blended team. 

Imagine their excitement when they looked around and found two outsourcing options in the $30 per hour range. Suddenly, that was a “fair” rate, and their original target of $62 per hour looked well above market. In their rush, they never considered what they were sacrificing to get such a bargain.

One of the two potential partners they found was a 10,000-person group in Latin America. Because the client was a small business with 70 employees, including a team of 16 engineers, the two companies were not culturally aligned and the project would have most certainly floundered. 

The other group was also quite large (1,500 people), and located in Vietnam. Given the disparity in time zones, communication issues and staff turnover would have been a challenge. To allow some workday overlap with the US, the Vietnamese developers would be put on a late-shift schedule which is difficult to sustain. This most certainly leads to team turnover and production delays.

So Does Value

The company wanted to build a team of 14 with their new outsourcing partner. At $30 per hour ($840,000 a year), they would save 76% on their current annual spend of $3.5 million. 

Those are big figures, but all they tell you is the cost of those resources. If they don’t produce the intended results, the value to your organization is zero. In the long run, an investment that sews resentment and frustrations within the rest of the team, and potentially fails to meet its objectives, has a negative overall value.

Accelerance was able to find a partner with a workday overlap that better met the client's needs, at a cost of $50 per hour for a blended team. Over an annual spend of $1.4 million, this still produced a 60% saving for the company. Two months in, the CTO was impressed with the results: “It’s the best outsourcing experience I have ever been a part of.”

A 60% saving yielded real success, while a 76% saving – that might have looked better on paper – would have resulted in frustration and, quite possible, a failed project. 

What determines an outsourcing rate?

The factors taken into account when determining outsourcing costs are fairly standard. The final rate needs to provide a sustainable income for the engineer in the local market, and an acceptable profit margin for the development company. Whether you are using a team in San Francisco or Sao Paulo, the formula is the same:

  • Wages: Rates for developers who are proficient in a highly marketable, in-demand tech stack will be understandably higher.

  • Employee benefits: A developer’s total compensation will include benefits you most likely offer your in-house employees: vacation and sick leave, insurance, payroll tax, retirement contributions and so on. According to the Bureau of Labor Statistics, US employee benefits typically account for around 30% of what is known as the employee’s “fully burdened cost”. This will vary greatly by country, but always needs to be factored in.

  • Expense to supervise the employees: Software development teams have to be managed. A supervisor will set the software developer’s work priorities, coach and guide regularly, have formal status reviews, oversee time reporting, and conduct performance reviews.

  • Tools: Engineers, of course, need critical tools for development and testing: computers, data center computing power etc. These are purchased or licensed by the company directing the work of the software developers.

  • Office space and furnishings: Usually a company will provide a common workspace (including office furniture, phone, internet and so on). for a software development team in a leased office.

Fortunately, the cost of living is generally lower in the more popular outsourcing destinations. Add in favorable currency exchange rates with a strong USD and near or offshore software development becomes a cost-effective option.

What is “cheap outsourcing”?

If you have been contacted by a random outsourcing company, chances are you have been offered rates as low as $15 per hour. The companies you have to call can charge as high as $300 per hour. At Accelerance, we consider the prime range to be between $25 and $80 per hour. While companies priced above that range will be good, we highly recommend you discard all options below $25 per hour, regardless of location. That is “cheap outsourcing”.

Several common characteristics define a “cheap” group:

  • High turnover: It’s a red flag if employees leave after just a few months or even less than two years. Staff longevity is always important as a quality attribute – and it is crucial if you plan to partner on a lengthy, complex project.

  • Insufficient tools:  You wouldn’t buy a car from a manufacturer that doesn’t equip their factories properly, nor should you outsource software from a company that isn’t properly equipping their development team.

  • Poor internal processes: This can show up in very clear ways such as little or no industry certifications, where formal, well-documented processes are required. It can also be an issue when new developers are onboarded to your project or there’s a scramble to provide backfill for someone who suddenly becomes unavailable.

  • Limited talent: They may have a shallow pool, so the high-level experts whose resumes you were shown will rarely – if ever – spend time on your project (a strategy known as “bait and switch”). Some providers simply lack the expertise you need - not just in programming skills, but industry vertical experience and/or specific functional experience (eBiz, finance, sales, manufacturing etc).

  • Language barriers: Cheap outsourcers often fall short with English language skills – potentially disastrous if your business design requirements are literally lost in translation.

  • Poor workday overlap: Incompatible time zones mean important design reviews can only take place late at night. A good outsourcing partner will have incentives (and a plan) for key staff to be available for collaboration during US business hours. 

  • Poor communication: Speed and effectiveness is compromised because language barriers and/or time-zone logistics make communication between you and the outsourced software development team problematic.

  • Project delays: Team continuity is impossible when rates are uncompetitive and the work environment is poor. Mediocre staff may stay but leading talent will leave. Expect turnover in your team and missed milestones.

  • Poor quality: The delivered solution is below par, lacking the best development languages and/or rigorous testing tools to ensure code is“production ready”.

  • Substandard processes: This manifests through inconsistent code behavior: error/edit routines, user navigation etc. Additional or replacement team members seem to have a long ramp-up time when assigned to your project.

Outsourcing software development is a proven way to reduce costs. But by choosing a low-cost option, you are essentially making a trade-off. The question is, what are you willing to sacrifice?

There are some great deals out there that don’t compromise on quality – and Accelerance would love to help you find them. We’ve investigated 8,000 software companies around the world so you can outsource with confidence. Want to know who to trust? Talk to us.

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