The Surprising Reason Project-Based Pricing Actually Costs You More

As Nearshore Development continues to surge in popularity, the market is growing. Every year there are more Nearshore Development groups to partner with, but selecting the right partner demands a clear picture of both the services and the prices for an idea of what the total cost looks like.

Does this ring any bells? If you’ve already considered outsourcing development work, then you’ve probably heard the term ‘Total Cost of Engagement’ (TCE).

Before you select a nearshore partner, first you must understand the Total Cost of Engagement. But not all nearshoring or offshoring rate models are the same – if you’re only calculating flat rates and costs on paper then you might miss an accurate picture of the actual investment.

So what is the Total Cost of Engagement?

The Total Cost of Engagement (TCE) is the complete and final amount you end up paying for outsourcing development services. This includes any company hours or resources spent negotiating or prepping for the engagement, any travel required, monthly or hourly rates and any other resources spent on outsourcing your development project.

Here’s the reason you need to look past flat rates…

When you’re searching for the right software outsourcing vendor, outsourcing prices for development projects aren’t always straight forward. And there are other variables that can better represent the cost and value of a vendor that aren’t always as straight forward meaning you can’t make your decision based on the sticker price.

Because of the financial resources involved, CIOs and CTOs experienced in outsourcing development projects typically push the final purchasing decisions to Finance (or Purchasing), and that’s a big problem. Why?

Because as a result, more organizations use the most basic line-itemed criteria to make important purchasing decisions for their software services, instead of factoring in the fast-evolving and unpredictable pace of their IT projects.

Using a one-size-fits-all pricing model instead of a technical specs model can lead to unplanned costs and problems with quality and results. Plus, finding the right nearshore partner who can offer more robust quality control can reduce your overhead and Time to Market for almost immediate time and cost savings that need to be factored into your decision.

So which costs aren’t included on paper?

The problem with making decisions based on an hourly “sticker price” is there are many other costly factors that can go unaccounted for as a result. Here are just a few of them:

Let’s talk about Knowledge Transfer.

It’s basically impossible to guarantee that your outsourced team can and will read and understand the technical specifications to the level your team does. Even if they’re using your documentation as a point of reference, they may not cover all of their supporting documentation to have a full understanding of the project expectations. Another issue is that static documentation often isn’t updated to reflect changes in project requirements.

So what’s the solution? Involving as little documentation as possible which demands constant collaboration between in-house and outsourced team members, usually with face-to-face meetings or other important forms of real-time communication. The more frequently Development teams communicate, the better primed they are to solidify as a unified team with both trust and understanding.

What about Management Overhead?

Managing an outsourced development project means the addition of intermediaries which increases the management overhead. Even with a low base cost, the cost can be higher because of the need for constant communications.

This may minimize the development team’s direct communications with your team because of the reliance on an intermediary for important project details. This doesn’t promote the velocity, collaboration, and quality that agile software development methodologies are known for so the increase in management overhead should be as minimal as much as possible.

What’s the travel cost?

Any software development outsourcing project should include an introductory on-site meeting to ensure that your outside development team is aligned with your internal team and their goals. This onsite meeting should break the project scope down and solve any operational issues still existing.

Travel costs primarily depend on whether the outsourced team will travel to see you or if key members of the client team are traveling to your outsourced work site. In addition to usual travel expenses like airfare, meals, hotels and ground transportation, travel costs can also include the cost of work visa obtainment and lost productivity due to team members preparing for and recovering from their trip.

Lost Productivity

Lost productivity is another part of the picture, and it varies by the variation in time zones between the client and service provider. Language barriers can also dramatically pronounce lost productivity, specifically when intermediaries are required to translate and prioritize communications. Cultural differences can also come at the cost of efficiency if members of the outsourced team are less than comfortable working directly for someone based in the United States.

All of these factors require more robust support and additional communication that add to the TCE.

So is hourly or monthly billing the ideal project model?

Outsourcing development teams usually promote their hourly rates because of how economical they can seem in comparison to the equivalent rate for full-time American engineers. Unfortunately, these listed price points usually don’t come even close to the reality of the Total Cost of Engagement (TCE) – what you end up paying.

In addition to the base cost of engineering talent, you have to factor in additional resources, including the cost of additional management, the sometimes trying cost of staff turnover, travel costs, and (depending on where your outsourced team is) lost productivity stemming from lost communication and alternate time zones.

The problem is that when you total it all, the actual cost of outsourcing your development to an offshore location can cost upwards of 80% of the average U.S. cost. If someone’s telling you that you’ll get the services of three engineers offshore for the cost of one U.S., you need keep asking questions.

The Total Cost of Engagement usually doesn’t line up with the ‘on paper’ costs that providers use to attract new clients.

You can try to avoid some of the overhead by opting out of Engagement Management services, however; these savings can actually hurt project timeframes, outcomes and your Return on Investment. When you’re making this decision, Time to Market needs to be considered just as much as the cost is.

Why Tiempo?

Tiempo Development provides distributed teams at a monthly flat rate to complement your overall development budget. By having your team on retainer you can prevent rising costs if projects go over their projected time frames all at a deeper discount. With flat rates you are also guaranteed expanded availability of your nearshore development team – making it easier for their work and results to grow with your business.

About Tiempo Development

At Tiempo, we are making the business of software development easier and more affordable with a unique combination of a nearshore business model, agile methodology, and advanced talent management. Our Development teams engineer powerful technologies that align with the goals and strategies of our customers for both their internal and public-facing development initiatives. Tiempo supports companies in launching software releases sooner without draining important resources. Tiempo’s proprietary agile product lifecycle management framework called Tiempo Quality System or TQS is composed of principals and best practices that ensure productive client and team interactions and as a result, efficient software development.

Learn how we can fast track your projects and increase your ROI within weeks.

YouTube video