Software Development Outsourcing Cost: Revealing The Mysterious Side of Budgets

Software Development Outsourcing Cost: Revealing The Mysterious Side of Budgets

Why Outsource In The First Place?

The Earth revolves around the Sun. Hopefully, we can agree on that.

Metaphorically though, it certainly revolves around money.

That is especially true when it comes to business. Most business decisions are heavily influenced by finances, from whom to hire to which market to move into next or to abandon entirely. And of course, whether the business itself succeeds or fails is measured by market capitalization. So once again — by money.

It comes as no surprise that business owners look for ways to grow their revenues and to limit expenses. And that’s where software outsourcing comes into play.

With software outsourcing — that is, when you employ external software development services to handle any of your projects — you can lower the overall costs of software development and save both time and money. While it also gives you access to global talents, streamlines the processes, and lets you focus on your business’s core strengths, cost–reduction is the reason more often cited (70%), as shown by the 2020 global outsourcing survey.

Can Outsourcing Really Save The Budget?

Doubtful? Then let’s compare the overall costs of hiring an in–house team versus via a software development company.

In–house Software Development

Office Space

Before you can start the hiring process, you have to set up office space for your future employees. The average cost for office space in the US by square foot is between $8–$23, and since the average size of an office in the US is 1,400 square feet, the average price might fall between $11,200–$32,200.

Of course, the total cost for rent space differs across cities and countries. In the US, New York is definitely the most expensive, beaten only by Hong Kong on the global scale, and with Tokyo and London hot on its heels. 

Annual average cost of rent around the world chart.

Besides putting the desks together with matching chairs, it’s also important to include access to a private kitchen, lounge area, meeting rooms, and most importantly, parking space. Which of course will generate additional costs, but will keep your employees happy in the long–term.

One way of lowering the office space costs is to consider sharing co-working spaces with different businesses, but this might be risky when dealing with sensitive information on a day–to–day basis.

Hardware & Software Infrastructure 

When you have space, you need to fill it with hardware and software infrastructure, which may include: computers, programs, subscriptions, servers, and so on, depending on your needs. But you also have to pay for general things as well, such as basic utilities and office supplies, which may need regular maintenance, repair, or even replacement after a few years of use.

Hiring And Recruitment

By that point, the office should be ready to welcome new employees onboard. What kind of expenses should you expect?

First, the recruitment. Depending on the process, there might be some costs involved if you’re not doing it on your own — that means hiring recruitment specialists or agencies to help you out in securing the best local developers for your software development project.

In Germany, the average recruitment cost is $5,732, while in the US it’s $4,129, and in the UK — $4,258

Then come the usual costs that surround the hiring itself. These include: the base salary, taxes, insurance, and fringe benefits, from paid sick leave and a retirement plan to access to welfare & recreational facilities, depending on the country. 

According to research done by UHY, the international accounting, and consultancy network, the average employment costs on a global scale are now almost 25% of an employee’s salary. The highest costs can be found in Europe, while the lowest are in Canada, Denmark, India, and the US.

Table presenting avarege exployment extra costs.

Furthermore, due to the impact of the pandemic on the workplace, additional benefits might become a new standard — such as extended remote work opportunities or even child care options. Not mentioning the hand sanitizers and disinfectants which quickly became a necessity used several times every day.

Onboarding, Training, Professional Growth

Next on the list is onboarding. It might be surprising, but the average cost of the onboarding process in a small to medium business is $400 per employee. This includes the offer packs, preparing the necessary equipment, and time spent on bureaucracy and showing the new employee the ropes.  

Then it’s time for training. Even if you hire experienced professionals in software development, learning the work culture, understanding the ongoing processes, and getting to know fellow workers will take some time. In some cases, it might even take 1 to 2 years for the employee to become fully productive in the new environment, according to Training Industry Quarterly.

And if you want to retain your employees for that long, offering help in their professional growth — encouraging self–development, providing opportunities for mentorships, and providing access to various courses — may make a difference in turnaround. This way, you show that you care about your employees and that there’s room for their careers to advance. All that though might require additional costs, especially in eventual pay raises that come with higher qualifications.

Losing Money

In some situations, money might be slipping through your fingers without you even realizing it.

With most contracts, you don’t only cover the software development costs themselves, but also all the hours spent in–seat. For example, if your company works on a project–to–project basis, there might be stages in the workflow where your senior software developers or software engineers — or any other employees, take your pick — are not utilized to the fullest extent. Due to circumstances, they might not be even able to work on their tasks, waiting for resources or their teammates’ input first. 

And if your employee goes on sick leave or simply on vacation, you have to pay for that as well. Of course, these things are important in the long run for keeping that turnaround low, but it’s something to keep in mind.

There also might be trouble when firing your employees. In some countries, like in Poland, the notice period can last up to 3 months, while in Germany — up to 7, depending on the length of the employment. For the employer, that means they can have a person on board that most probably isn’t as motivated as others to do their work well, which in turn might lead to monetary losses. 

How Does The Shadow Of Remote Work Affect The Overall Cost?

During the pandemic, many employees were forced to work from home. In the US, that amounted to 71% of people working remotely in sectors where that was possible, which take up 56% of jobs

It’s hard to say whether the trend will stay for long, but there’s a chance that telecommuting will prevail in certain sectors, mostly in the IT industry, Finance and Insurance, and Management. This could potentially mean lowered costs in office management, but in return, it requires providing the employees with appropriate hardware and software equipment to comfortably work from home, as well as programs, applications, or even intranet for proper task management. To fully utilize them, you might have to pay for subscriptions or even create your own intranet with the help of a software house, following the example of ib vogt.

Some companies even went one step further during the pandemic, deciding to cover the costs of the internet and telephone for their employees. After that, laws were enacted in certain places — like in ten states of the US — that force employers to reimburse employees for remote work expenses, similarly to the Netherlands, with Poland following their example.

So even though there might be some opportunities to save money in certain places, there might be some expenses in others to balance it out.

Outsourcing Software Development

All of the above doesn’t really apply to outsourcing. You don’t have to care about salaries, benefits, workspace culture, or office maintenance. What are you paying for then, exactly?

Payment Models

The only thing you’ll be invoiced for is the work itself, without having to stress over the little things. Most of the time, outsourcing companies offer two varied ways of payment for their software development services: Fixed Price Model and Time and Material Model.

The first one, the Fixed Price Model, assumes that payment will be either invoiced in pre–defined milestones or before and after the project, with the payment split into two parts in different percentages. This model is well–suited for software development services with straightforward and easy to predict processes, as well as for those whose goals and requirements are clearly stated and not up to change.

Business owners choose the Time and Material Model when they want their project to be scalable and flexible enough to employ changes throughout the development process or when it’s hard to measure the scope. In this scenario, the only thing you pay for is the time of the development team, as well as for any additional resources required.

Both models ensure that you pay for the output, not the time spent in–seat, and only for that.

So How Much Is That?

There are no universal prices set around the globe for hourly rates of software developers just like there are no set prices for specific projects. Each company sets its own rates, and even in famous, cheap outsourcing destinations, such as India, you can find surprisingly high rates. Just like you can find relatively cheap software development in countries known for being expensive. 

Why do the rates differ so much? First and foremost, each country has a different economic situation with varied wages and living standards. Thus, the prices constantly fluctuate, in response to what’s happening on the macro and microscale. 

Taking that into account, it’s easy to see how outsourcing can help you save money if you’re smart about it. By analyzing your financial situation and comparing available options, you can gain a lot of value by spending less.

But how much is that, exactly? It really depends on too many factors to clearly measure once and for all, so let’s look at the average rates across the countries and compare them.

Average Hourly Rates Of Software Developers Around The Globe

Software developer rates around the world represented in a table for comparison purposes.

The table above explicitly shows the astounding difference between countries in how much software developers can actually make. But how accurate is that data? It depends on how many people have shared their information about their careers, what industry they worked in, and other factors. It’s also good to keep in mind the effects of the pandemic on the labor market. Currently, with the world struggling to recover from the pandemic, the wages in the majority of countries — like in the US, Italy, Canada or France — have actually risen. And with certain sectors doing better than others, those fighting for great employees might have a higher competition than usual.

To cross-check this information with how the firms price their work, let’s look at Clutch.

As of today, you can find 18,897 firms listed under “Top Custom Software Development Companies”, and only 7,657 post their development rates. Thanks to the easy filtered search, we can quickly check the average hourly rates entered by such companies. 

Table comparison of software developers' hourly rates around the world.

To look at those numbers from a different perspective, let’s see how that translates into percentages. 

Table comparison of software developers' hourly rates around the world showed in percentages.

This data shows some correlation with the average rates in the IT services posted above, but it’s still noticeably higher. It does follow the general trends of the outsourcing market: Western Europe, North America, along with Scandinavian countries, fall into the higher pricing ranges when compared to South America, Asia, and Eastern European countries. But even in a famously cheap outsourcing destination such as India, you can find surprisingly high offshore software development rates. How can we explain that? 

We can assume that every software development company on Clutch caters to clients from well–developed countries, and thus they can raise their rates accordingly; so that their employees are appropriately compensated and yet stay attractive on the outsourcing market. Many of them present themselves as global software development companies, for whom the time zones and cultural differences are non-existent, providing their IT services to clients from all over the world.

So when you’re hiring offshore developers by average hourly rate, you can expect more than 75% of them to cost less than $99 per hour.

Hourly rates of software developers around the world, the conclusion showed in a table format.
Hourly rates of software houses around the world, findings represented on a pie chart.

Custom Software Development Cost Per Project

Let’s assume you’re more inclined towards the Fixed–Price Model or you would like to know the final cost. Clutch once again will help us out in our estimations, where you can filter through the software development companies by budget. Let’s see what they set as a minimum price per project.

Minimum budget needed for software development projects around the world, showed on a table for comparison purposes.

Let’s look at these numbers again, but in percentages.

Minimum budget needed for software development projects around the world, showed on a table in percentages,
Minimum budget needed for outsourcing software development, the conclusion showed in a table format.
Minimum budget needed for software development projects, findings represented on a pie chart.

The majority of projects, 33% of them, start with a $5,000 label, while there’s also a big chance of finding options at even cheaper price ranges. And there’s a 83% chance of getting your price estimated below $25,000.

The Conclusion: How much do you have to pay for software development outsourcing?

If you want to hire offshore developers per hour, you can expect 57% of them to cost below $50 and 75% cost below 99$.

If you want to outsource a whole project to a software development company, you have a 61% chance of having to pay less than $10,000, and 83% of paying less than $25,000.

Outsource Software Development with MPC

Taking the above into consideration, pricing at MPC stays at an average level while still providing sustainable quality based on the years of experience in delivering in–house products. And while we’re striving to reach challenging goals, learning how to optimize our work and how we can improve even more our services, we keep in mind our client’s financial restrictions and we respect their decisions influenced by it.

Average rate at MPC stays at $50. It varies depending on the skillset, position, and seniority level. A full stack senior developer with 6 years of experience under his belt will surely be a larger cost than a mid QA engineer. And in this market like any other, the supply and demand will come into play as well. Recently, we’ve noticed a big increase in popularity in JavaScript based technologies, therefore salaries of those specialists increased significantly, resulting in higher hourly rates. 

At the same time, the average Fixed–Price project doesn’t require any different budget than what the market usually does. Vast majority of new projects we’re facing are MVP versions of applications that fill in some niche. The amount between $15,000 and $30,000 allows us to provide value to the end user, challenge the idea, and in many cases, even monetize to expand the solution later on. 

Key Takeaways

Software development can be done in two ways: in–house, that is with your own team, or by partnering with a software development company that specializes in a niche relevant to your business. Both options come with costs in different areas, so there is no right choice for everyone. It all depends on the circumstances. That’s why each business owner should analyze their own situation first and deduct which software development model is more beneficial and convenient.

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