The True Costs of Offshore Software Outsourcing (and Why It’s Much Less Than You Think)
Jul 22, 2021 |
One of our Silicon Valley clients came to us for help after weathering a rough couple of years. Product development schedules had slipped, due to problems finding in-demand engineering talent on a hot domestic market. Falling well off pace, the company urgently needed to make some critical changes.
First, management fired the VP of Engineering and most of the developers – many were contractors who’d been taken on at reasonably high rates out of desperation, rather than because of their software engineering skills – and replaced them with better-qualified direct hires. However, management made another misstep by outsourcing to a boutique software company in San Francisco to augment the new development team.
For the client, staying local seemed the safest way to quickly build the expertise they needed, but this proved a very costly approach. When a new CFO came on board, she couldn’t believe what she saw. “Why are we spending all this money on product development?” she questioned in one executive management meeting. “Haven’t you guys thought about looking for talent outside the US?”
In fact, they had. Some business processes were already being outsourced offshore, including back-office processes to South Asia, but for agile software development, management saw the 13-hour time difference as a downside. Meanwhile, their onshore outsourcing partner was bleeding the company coffers dry.
For the new CFO, that was a deal-breaker: “We’re literally spending millions more than we have to,” she told them, “and I don’t want to go to another executive meeting without options.”
What This CFO Did – And What You Can Do, Too
The company turned to Accelerance. First, we collaborated with management to evaluate in-house business processes, define objectives and establish costs. Then, we drew up a shortlist of potential partners from our global network of certified outsourcing software development providers. Now, they’re saving more than $5 million a year by outsourcing their software development to a quality nearshore team in Latin America.
Every company we work with has its own unique set of needs and priorities. Your best-fit partner might be in a different region, such as Eastern Europe or Southeast Asia. And your CFO will be impressed by the bottom line: our nearshore or offshore outsourcing partners can provide a team of experienced senior programmers for around one-half the cost of recruiting employees with an equivalent standard of skills in the US.
However, when you’re weighing up your options, it’s important to consider the total cost of engagement, compared to hiring in-house or contracting onshore. Selecting an outsourcing partner on rates alone will buy you only junior programmers who require constant oversight and need to be told exactly what to do every day, or who lack the level of skills and expertise you need.
The optimum price point that a medium-size software company should pay for a senior engineer is somewhere between $35 to $82 per hour, according to Accelerance's proprietary global rates analysis. Our certified partners are priced in this range, and because only the top 1% of outsourcing companies qualify for our global network, they possess all the attributes of an enterprise-grade US firm.
While these rates are more expensive than a freelancer from platforms such as Fiverr, Upwork, and Freelancer.com, you have the peace of mind that comes with outsourcing to ahigh-end software development business with well-trained and certified resources, solid business processes, strong IP protection, and a focus on quality output. For detailed cost information across global regions, click below to download our latest software outsourcing trends and rates guide compiled from exclusive insights available only from our world's largest certified software development network.
The guide is a useful resource to reassess your software outsourcing costs for the remainder of this year and into 2022. Over the past few months, there’s been a massive increase in labor market churn for software engineers, with LinkedIn reporting at least a 50% bump in movement compared to a year ago. That means the spot market price is on the rise.
Implementing the significant changes required can also take longer than you think – but working with Accelerance gives you a significant head start. With a certified global network of hundreds of partners already in place, we can run a thorough evaluation and selection process in two to four weeks, with another four to six weeks to ramp up a team with knowledge transfer and shadowing.
Remember, the aim should not be finding the cheapest programmers on the planet. Your goal is to create great software – produced by senior developers as smart and as skilled as the engineers you would consider hiring in the US as employees.
"The top technology growth inhibitors continue to be labor costs and the availability of skilled workers," says Accelerance CEO Andy Hilliard. "Global development is the model that makes sense — when done right. While quality is the most important factor when outsourcing, everyone wants to know 'How much will I save?' and those savings are significant to any IT budget."
How to Calculate What Hiring a Skilled Software Engineer Really Costs
Thirty years ago, your only choice was to hire a roomful of programmers. And it was your room and your computers. You paid the rent and the electricity bill. You even provided the coffee. That’s the way it still happens today if companies are running their development teams in-house. But is that the most cost-effective model?
Salaries for software engineers vary; so does the cost of living in various cities, towns, and rural areas. Generally, New York is more expensive than Kansas City, which is more expensive than rural states such as Maine and the Dakotas. The US Bureau of Labor Statistics reports that the average salary for software developers is now $110,400, with increases across all roles in the past year.
The COVID-19 pandemic has also created a new world that has shown it’s possible to work effectively from anywhere. We just don’t need to commute to the office every day. Companies now know they can operate remote teams with confidence. Why continue to pay big-city salaries when you can look further afield to get the same quality at a lower cost?
Of course, compensating an employee involves much more than just paying his or her salary. A reasonable estimate is that taxes, healthcare, retirement plans, and vacation time account for about 33% of a worker’s total cost to the company (in other words, a software developer’s salary covers only two-thirds).
The following chart shows a range of annual salaries for programmers across the US. To work out an employee’s true hourly rate, divide the total cost (salary + benefits, taxes, etc) by the number of hours in a year: Approximately 50 weeks x 40 hours/week = 2,000 hours/year. This calculation is shown in the third column of the table.
It’s obvious, really, but domestic outsourcing companies in the US have to pay the same kind of salaries, plus employee costs and benefits, that you do. Depending on the length of engagement and specialty of the skills required, outsourcing to an onshore software development team can easily be two or three times the cost of recruiting, once the company’s profit margin is factored in. That’s shown in the fourth column of the table, based conservatively on twice the hourly cost of an in-house employee.
Can you really find senior-level, highly trained programmers for only $35 per hour? Absolutely. And paying a rate of $55 per hour can still be a good deal. Programmers who are less expensive than this will be located further away, in time zones that make communication more difficult and have a higher total cost of engagement.
That’s difficult to quantify, but includes the cost of your additional management, travel, and overheads due to distance and communication issues, on top of the programmers’ hourly rate. Most outsourcing experts recommend factoring an extra 25% into your outsourcing budget to cover management and travel costs. Given the continuing curb on global travel, you can bank some of that travel budget or invest in even more development capacity.
The Risks of Sacrificing Quality for Cost
When you make the decision to outsource your software development, it makes sense to aim for the best your budget can buy. There’s a huge range of outsourcing rates available for any given technical skill, but going too cheap is a common pitfall. There’s definitely a cost versus quality tradeoff.
For starters, if developers are being paid below-market rates, the risk of high team turnover increases. A common tactic among cut-rate service providers is to provide an initial “A” team for the pilot project then switch to a “B” or “C” team of less experienced developers for the remainder of the contract.
A breakdown in communication or cultural understanding can also be disastrous, leading to missed deadlines or failure to achieve key goals. In the worst-case scenario, companies realize they’re hundreds of thousands of dollars down the drain and have to pull the plug – then spend that money all over again with another firm to get it right.
Accelerance helps you get it right from the start. Our pre-vetted outsourcing partners can scale a team that delivers specialist skills and bandwidth when you need them. They’re also more invested in your project. To large tier-one firms, in most cases, you’re nothing more than a number.
For $55 per hour, you know with absolute certainty you’ll be getting a senior-level resource from a quality company in an overlapping time zone, with an understanding of Western culture and experience working with US companies. Not only will the account executive you initially deal with have high English proficiency but the project manager and developers will have good skills too.
Every dollar you shave off the hourly rate comes at a cost, as the chart below shows. In higher-priced locations, quality can begin to drop off fairly quickly. Undercutting the market rate by $10 per hour might mean you’re sacrificing a level of core competency and experience in the tech stack you need or compromising the timeliness of delivery. Perhaps it will be more difficult to communicate with your partner team, because they’re less familiar with Western business practices, or only the senior management comfortably communicates in English.
If your project budget is tight, we can help you find a good outsourced development team at a lower price point than $55 per hour – within reason. Options include looking to lower-cost centers in Latin America, where you can find great firms for as low as $35 per hour, or working with an offshore team in Eastern Europe or South/Southeast Asia, where rates are lower but the distance and conflicting time zones make collaborations with the US more challenging.
Along with our proprietary insights, we’ve curated key trends and the latest data from our clients, certified outsourcing partners, and tech and outsourcing industry thought leaders to provide you with a 360-degree view on:
The outlook and opportunities for software development outsourcing and the highest-impact trends
Drivers making software developers the world’s most in-demand job
Global and regional rates for key engineering positions in Latin America, Central & Eastern Europe, and South/Southeast Asia
The cost-quality trade-off and how to make the right, value-based choices
Traits of enterprise-grade partners that offer the best chance for outsourcing success
To find out more about the Accelerance Global Network and our professional consultancy services, get in touch.
As Chief Customer Success Officer, Rich oversees Accelerance marketing and sales operations globally with a focus on helping customers make the best decisions for choosing a software development team and working together. Prior to joining Accelerance, Rich has worked in management consulting, IT advisory and outsourcing for over 25 years with Ernst & Young, Deloitte, Logica, Computer Sciences Corp. and Tech Mahindra.
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