Determining the True Costs of Outsourcing

While organizations outsource for all kinds of reasons–be it scaling a startup on a shoestring budget, responding to increased demand, or innovating faster than the competition–all roads lead back to the bottom line.

Most companies use outsourcing to save money, increase profitability, or ideally, both.

That said, measuring the actual impact of your outsourcing strategy isn’t a straightforward process. If you’re not careful, it can lead to a lot of waste.

In this section, we’ll discuss how to analyze outsourcing costs, calculate benefits, and achieve the bottom-line benefits promised.

Determining the True Costs of Outsourcing Infographic

Determine the Cost of Keeping Development In-House

First, clearly define the software development projects your company plans on outsourcing and what you hope to achieve by working with an external provider.

From there, you’ll need to calculate the total cost of keeping development in-house, including the following:

  • Cost-per-hire
  • Upskilling existing staff
  • Onboarding and training new hires
  • Paid benefits
  • Overhead
  • IT expenses
  • Software licenses

Outsourcing, of course, can help you cut outsourcing app development costs while offering more value through faster turnaround times, access to hard-to-find skills, and by allowing the in-house team to focus on core business activities.

As such, you’ll also want to consider what can be gained by working with an outside provider.

Estimate the Total Outsourcing Costs of Different Models

Clients need to determine which resources they need to complete a project and how much that will cost. Unfortunately, there’s a long list of variables that can impact outsourcing costs. Spend some time weighing each of these factors and their potential impact on the bottom line.

There are the obvious expenses like labor and materials, but also several hidden outsourcing software development costs that can dramatically increase expenses. In some instances, these costs go to the extent that some outsourcing models may not be worth the effort.

While this isn’t an exhaustive list, here’s a quick rundown of some of the factors that contribute to higher outsourcing costs.

  • Communication. Poor or limited communication is one of the main reasons that a software development project falls short of its goals. The need for streamlined communication is high as it helps internal and external teams stay on the same page, avoid miscommunications, and allows to incorporate feedback into the development process. Ultimately, effective communication and planning play a critical role in ensuring that development projects stay within budget and are completed on time.

    That said, you may need to invest in new collaboration tools or upgrade existing plans to include more users.

  • Costs of rework or additional work. In some cases–particularly if you’re working with an offshore company–poor communication and long waiting periods that slow productivity can lead to quality issues. Often, teams are forced to place projects on hold while waiting to receive feedback from the client. Once feedback is received, they’ll end up rushing to meet deadlines to make up for lost time.

    As a result, teams may submit a sloppy or error-ridden final product, requiring rework. In turn, it increases overtime or the need to engage another outsourcing firm to correct those mistakes.

  • Travel expenses. Travel expenses aren’t part of every outsourcing engagement, but longer, ongoing partnerships often involve an introductory meeting and in-person check ins at critical milestones. The benefit here is that you’ll have an opportunity to make sure that your external team is on the same page as your in-house staff and that all are aligned around the same set of goals.

    In some cases, clients may require members of the outsourced team to visit the company’s US headquarters to collaborate on a project with in-house staff.

    Either way, as you evaluate potential outsourcing software development costs, consider how often you and your staff will need to visit external worksites or fly outsourced workers to your location. Costs include airfare, hotels, ground transportation, and meals. Note that you also need to calculate things like work visas and productivity losses from preparing for the trip, traveling to and from the worksite, and recovering from jet lag.

  • Turnover. Some companies have high turnover rates, particularly outsourcing firms competing on the lowest price. For US-based clients, high turnover means that you may eat additional costs training and onboarding new workers, as well as pushing back deadlines while bringing new workers up to speed.

    It’s also not uncommon for clients to be unaware that the original team has been replaced by new workers. In this instance, workers may never receive the proper training or direction to carry out your vision. This can cause quality issues, delays, and further potential re-work.

  • Legal issues. Outsourcing also introduces legal and regulatory issues that may require additional costs. It can include time spent learning the ins and outs of another country’s legal system and how it impacts your outsourcing project, and by extension, your business.
  • Knowledge transfer. Another issue that can impact outsourcing app development costs is knowledge transfer. It’s nearly impossible to guarantee that your external team will understand and implement the technical specifications you’ve provided at the same level as your in-house team.

    Even if you’ve provided detailed documentation, it may not include enough context to ensure that the team starts the project with a complete understanding of your expectations and how to deliver the desired outcome.

    Another issue is that in many cases, organizations fail to update static documentation to reflect changes made to internal processes or project requirements. The solution here depends on the outsourcing model.

    For instances when you’re working with a nearshore team, an Agile approach, which swaps documentation for constant collaboration and communication between in-house and external teams, is one of the best ways to ensure that the project aligns with your vision and business goals.

    With offshore teams, you’ll want to invest more time into documentation and planning before the project gets underway.

    While it might not be possible to collaborate every day, or even every week, you’ll also want to ensure you schedule a kickoff meeting before getting started and check-ins at critical milestones.

  • Lost productivity. Lost productivity is another major source of hidden costs. Productivity losses happen for all sorts of reasons. For example, language barriers can cause misunderstandings that lead to rework or require the client to pay for translation services to ensure smooth communications between both parties.

    Time zone differences can cause project delays, as teams rarely work on the same schedule, making it difficult to collaborate in real-time or quickly resolve issues.

    Cultural differences, too, may undermine a project’s efficiency, particularly if members of the external team are less familiar or comfortable collaborating directly with US-based leadership teams.

    Productivity losses are a key consideration for those companies looking toward outsourcing as a means of getting to market faster or enabling in-house teams to focus on areas that add the most value to the organization.

  • Management overhead. Finally, you’ll also want to look at the costs associated with managing outsourcing projects. Consider how much time you’ll need to dedicate toward activities like documenting requirements, designing workflows, and establishing policies around communication, collaboration, and escalating issues, should they emerge.There’s also the time investment of communicating with external teams and incorporating them into your company culture, as is typical if the development team is using Agile. Do you have the internal resources to support this level of collaboration?

    If you don’t have the time to manage projects in-house, you might look toward an outsourcing arrangement where the vendor provides a project manager–or even an entire leadership team to run the show while you focus on other projects. In this situation, consider what you might lose by outsourcing this function (control), as well as the potential gains (more time for core business activities).

  • Potential risks. What kinds of costs or reputational damage might you incur in the case of IP theft or a data breach? What is the likelihood of the project going over budget? Are you considering outsourcing to a company with aging infrastructure, economic instability, or civil unrest?

Consider the Costing Model Based on Goals & Project Requirements

The type of contract also has an impact on how much you’ll pay as well as how much control you’ll have over what you pay. Ask yourself the following questions to start moving toward a final decision:

  • What kind of project are you outsourcing and why?
  • Do you have a clearly-defined and documented idea for this project, or are you looking for an outside provider who can take a hands-on role in defining requirements?
  • Is the project you have in mind likely to change in scope after development is underway?
  • Are you outsourcing a one-off project or looking for an ongoing partnership?

If you’re paying an hourly rate or for time & materials, projects can easily go over budget if requirements change or additional work is needed. Flat rates, on the other hand, can lead to unplanned costs and quality issues, as there’s no incentive in place for external teams to do their best work.

You’ll also want to consider whether you’ll be using Agile or Waterfall. For predictable one-off projects with definitive requirements, Waterfall may be the more cost-effective option–though the trade-off is that you’ll lose the flexibility to change course once the project gets underway.

While Agile is generally a better choice for most development projects, it can get expensive if your contract has you paying for time and materials or an hourly rate. Additionally, Agile projects often don’t have a definitive end date, making it difficult to predict costs and manage budgets.

If you’re hiring for long-term projects that require close collaboration, it makes the most sense to keep a dedicated team on retainer, as you’ll pay a predictable rate each month, regardless of scope changes or changing requirements.

Compare Outsourcing App Development Costs by Shore

After calculating all potential outsourcing costs, compare each model to determine the best option for your project. What is the estimated cost of working with a third-party onshore team vs. nearshore vs. offshore?

A few things to consider:

  • How do development costs vary by country?
  • What potential risks or challenges might increase the costs for this project?
  • How likely are you to encounter those risks? And if you do, what kind of collateral damage are you dealing with later?
  • How much time can you commit to managing this project?
  • While one provider might offer the lowest labor costs, you may end up paying much more than you bargained for. Instead, focus on the value that outsourcing brings to the company.
  • What is the opportunity cost of choosing one option over another?

Final Thoughts

There’s often an expectation that outsourcing software projects unlock new opportunities to cut costs, as compared to keeping projects in-house. However, that’s not necessarily true across the board.

Outsourcing is a strategic decision that requires a significant amount of planning and analysis.

Determining the real cost of outsourcing requires business leaders to examine all variables that could drive up costs–from potential IP threats and communication breakdowns to investing in new tools and making time to manage outsourcing initiatives.

Tiempo Development provides clients with access to Agile experts who speak English and can collaborate with in-house teams in US time zones. Contact us today to learn more about the benefits our nearshore business model provides.