Measuring the ROI of Software Outsourcing

Return on investment (ROI) is easily the most important metric when it comes to measuring the business value of your outsourcing projects. It allows organizations to determine the impact of a project or product on its high-level business goals.

It also enables business leaders to identify how their outsourcing budget can be used to maximize profits, improve customer satisfaction, and set the stage for long-term growth.

Calculating the ROI on outsourcing software development projects requires organizations to evaluate various factors and weigh the cost and benefits. But, measuring the impact of each element in your outsourcing strategy isn’t always straightforward.

The true value of your investments isn’t determined by short-term profitability alone. Rather, there are several factors that come into play: Is it easy to communicate with your team? Did they deliver an end-product your customers love? Did they nail it on the first try, or did they need to go back and try again? While these elements might not provide an immediate return, they will set the stage for long-term profits.

Below, we’ll take a look at some of the most important areas to focus on in order to determine what kind of returns you’re getting from your outsourcing efforts.

A quick note before we dig in: we already discussed how to estimate the “true cost” of outsourcing back in chapter 13. Here, we’ll focus less on the planning side of things and more on measuring outsourcing ROI by looking at the results of your efforts.

Outsourcing Metrics to Measure

You can measure your outsourcing ROI from multiple angles—the metrics you choose, of course, correspond with what business goal you’re trying to measure.

What you measure can differ and might mean that you’re looking at the financial impact of a product or measuring whether the latest round of feature updates improved customer perception.

You’ll typically measure ROI using both qualitative and quantitative metrics, which break down as follows:

  • Qualitative—Qualitative ROI describes the benefits of an investment that may be hard to quantify, yet still have an impact on the bottom line. Think, how customers feel about an updated feature, employee satisfaction, increased productivity.
  • Quantitative—Quantitative ROI refers to clear, measurable outcomes like revenue generated, time saved, and so on.

In either case, metrics should always answer a specific question that reveals progress toward a specific milestone. Think, “how much revenue did X release generate?” Or, “how did Y feature impact our average NPS score?”

Below, we’ll dig into some common business goals, and the metrics can help you figure out if you’re moving in the right direction.

Financial Returns

Return on investment (ROI) is generally described as a metric used to measure how much profit has been generated from an investment—be it a marketing campaign, new software, or your outsourcing team. Here’s a straightforward calculation you can use to figure out if your investment generated the results you were hoping for.

Outsourcing ROI is typically calculated by taking either the actual or estimated income from a product and subtracting the actual or estimated costs. That number represents either the profit generated by a particular product release or what you’re expecting it to generate.

The calculation should look something like this:

ROI = (Actual or estimated revenue / total cost of investment) x 100

You’ll also need to think about things like taxes and overhead. It’s also worth noting that you might not hit your projected targets due to external forces outside of your control, like political unrest, natural disasters, or a global pandemic. Sometimes outsourcing is a front loaded investment that dilutes over time—in other words, it’s not a perfect science and no matter how detailed your strategy or how many scenarios you’ve modeled, the unexpected happens.

It only makes sense to measure your outsourcing results based on what kind of money the end-product generates. That said, there’s a lot more to it than looking at profitability alone.

Here are a few more examples of metrics you might track to ensure you’re getting the most bang for your budget:

  • Time-to-value. How long did it take to bring a usable product to market?
  • Hours worked/overtime. What did the team accomplish within a specific time frame? Were they able to move through tasks at a consistent pace, or did some tasks take longer than expected?
  • Bug fixes/code quality. How often do bugs/ errors appear in the code?

Additionally, you might focus on whether your outsourcing efforts enabled your business to grow. Growth metrics might not necessarily indicate an immediate return on your investment dollars.

However, measuring things like downloads, online engagement, beta test participation, or pre-orders can help you determine whether your investment will produce a positive ROI.

Impact on Customer Experience

Customer experience metrics help you determine whether product launches, feature releases, and updates have any meaningful impact on how customers perceive your brand and the products or services you provide.

According to Tiempo’s Director of Software Delivery Angel Almada, outsourcing engagements should begin with “robust persona interviews and market research to define a minimum viable product (MVP) that can start producing value during the early stages of development.”

Organizations can start generating profits relatively quickly while building out the rest of the features and functionality and making improvements over time as is typical in Agile.

You’ll want to continuously check in with customers to ensure that projects stay aligned around their needs, goals, and expectations. Part of that effort will involve speaking with customers directly, running interviews, user tests, and focus groups.

Additionally, consider tracking the following metrics:

  • NPS/CSAT scores
  • Survey results
  • Sentiment analysis
  • Customer reviews
  • Feature usage

Ultimately, you’ll want to track the impact changes/updates/new releases have on customer satisfaction and sentiment. Continue doing this on a routine basis to ensure the end-user’s voice guides every step of the development process and will help prioritize the features that will cause the most impact in terms of ROI.

Productivity and Quality

When measuring outsourcing ROI, you’re always looking to strike a balance between speed and quality. According to Tiempo’s Miguel Campuzano, organizations should focus on tracking the team’s “ability to meet target dates, as well as the quality of the deliverables.” Or as Francisco Carvajal puts it, “”good, fast, cheap. Choose two.”

Engagement & Release Manager Cesar Galindo echoes that sentiment, advising businesses to look at “velocity, delivery time; number of worked-on items, defects, and bugs.” The point is, fast delivery times, naturally, are always a top priority. However, speed should never come at the expense of quality.

If a product needs to be reworked, it means you’ll end up paying more for those extra hours. You may even end up hiring a new team to re-do the work. Additionally, rework means releases get delayed, which means you’re waiting longer to receive the return on your investment and may risk undermining the customer experience if end-users are waiting around for updates, bug fixes, or feature releases.

Tiempo’s Sergio Deras recommends looking at “the difference between expected and planned outcomes that have been accepted by the team (user stories, goals, or tasks) within a given timeframe. Were milestones and objectives achieved?”

Team Communication

Tiempo’s Julio Plascencia recommends looking at the “communication abilities of the consulting team with the appropriate business areas of the client company.” In other words, how well do in-house and outsourced teams work together, both on a holistic level and across different departments and stakeholder groups.

He also suggests that organizations evaluate their outsourcing ROI by looking at factors like “team availability when there’s an emergency, ability to stick to long-term agendas, as well as access and contribution to client practices and achieving critical milestones.” These factors might not be easily measured but they do play a significant role in producing a positive ROI.

Luz Maria Delgado says organizations should look at the “quality of the delivered work as well as whether the outsourced team can adapt to changing business needs and can communicate efficiently and effectively,”

You might measure the effectiveness of team communication by looking at the following:

  • Amount of bugs
  • On-time delivery rates
  • Overtime hours
  • Customer complaints

Issues like delays or code errors are indicative of developer capabilities; they may also point toward a miscommunication problem.

Language barriers, cultural differences, time zone incompatibility, as well as a lack of documentation/clarity coming from the client side can all cause problems—and have nothing to do with the team’s skills. Having to wait until the next day (or longer) for an answer from a team on the other side of the world won’t cut it, especially if you’re collaborating on a project requiring daily communication.

You might also look at velocity as a way to gauge whether your team communication is on-point or missing the mark. When you’re working with remote teams, tracking sprint velocity does more than clue you in to what your team can push out within a specific time frame. Velocity is also a good metric for helping leaders determine whether there’s a communication gap preventing the team from delivering the results that were promised.

Does the Team Deliver Predictable Outcomes?

Director of Software Delivery Angel Almada recommends tracking how predictably teams hit the milestones set before the project begins. He asks, “how much work can the team accomplish within any given time frame?” How much variation is there across multiple sprints, products, and projects?”

Consistency is essential for the forecasting and estimation required when planning future projects, which in turn, enables organizations to start using outsourcing as a long-term strategy rather than a short-term solution.

Companies that can reliably predict how long a project will take and how much it will cost are in a better position to take advantage of the benefits outsourcing can provide, a critical success factor when it comes to meeting the mounting challenges of digital transformation.

You’ll want to look beyond predictability and measure results over longer periods. Are teams improving over time? Are they working toward new goals? Taking on more ambitious projects? Per Software Engineer Paul Estrada, “over time, is the outsourced team working on bigger or more complex tasks? Is the amount of bugs declining or holding steady at an acceptable rate?”

He adds, “the outsourced team shouldn’t just collaborate with clients on simple coding tasks; they should participate in making business decisions and meaningful process improvements.”

Establish Transparency Around Outsourcing Metrics

Whatever metrics you decide represents success should be communicated to everyone involved—in-house and outsourced teams, product managers, decision-makers, and so on—and be discussed on a routine basis.

Miguel Peraza brings up a good point: making milestones, goals, and expectations part of the conversation from the get-go is essential to a project’s success.

He says, “defining milestones is a good way to show results and demonstrate progress to the client. They’ll see the outsourced team working for whatever was planned in any given timeframe.”

Or—if things aren’t going according to plan, they also have an opportunity to get back on track as issues can be detected early on.

Wrap Up

As you can see, there’s a lot of overlap between the goals an outsourcing strategy might target. For example, quality is directly connected to customer satisfaction, which in turn, has a direct impact on profitability.

High-quality end-products delivered quickly means that organizations aren’t wasting money on rework or overtime pay. Under these circumstances, the customer receives a positive experience, and the client gets the outsourcing ROI they were hoping for.

Tiempo Development pairs clients with high-performance teams focused on delivering ideal outcomes rather than output. In other words, we’re laser-focused on helping you achieve maximum outsourcing ROI.