Continuing our previous article, we hope you got a picture of the outsourcing costs before choosing this kind of service from a software vendor. In this part, we will point out the difference between in-house costs and outsourcing costs. Also, let’s discover how to calculate outsourcing cost.
If you haven’t read Part 1 yet, check out now: IT Outsourcing Cost: The Ultimate Guide for Entrepreneurs.
Chapter 3: Cost of Outsourcing vs Inhouse
The only question on the customer’s mind is whether outsourcing would really be as beneficial as expected. Let’s suppose you plan to use outsourcing services for product development. Here is a breakdown of the in-house costs and the outsourcing costs. Let’s assume you are building a simple application.
You will need a full team of front-end and back-end developers, UI and UX designers, QA/QC, business analysts, architects, and a project manager to manage the work. Let’s see how much the in-house development team and outsourcing development team would cost.
In-House Product Development
Let’s figure out how much it would cost to develop and launch a product in-house.
The first step in building an in-house development team would be to go through several processes and have the candidates reviewed by a human resources team. You will need developers, UX/UI designers, product architects, quality analysts, testers, and other members for the development cycle.
The most important factor that gives remote developers an edge over the in-house developers is that they do not need to sign a long-term contract.
Besides, there are many additional paid benefits such as sick leave, annual bonus, overtime pay, training tax, health insurance, etc., that you have to pay to the developers on your in-house team. Apart from that, you need to provide the developers with the infrastructure, workspace, furniture, refreshments, etc.
Let’s look at the breakout of hiring an in-house product developer. These are the costs included in the in-house development:
- Cost per hire
- Developer salary
- IT expenses
- Software licenses
- IT system
- Technology training
- Paid benefits
- General expenses (25% of salary)
Outsourcing Product Development
What does the outsourcing of product development cost? This is the first question you would ask yourself when talking about product development. So let’s look at how much a remote development team would cost you.
Assume that we’re building a simple application. It would take a dedicated team including at least 3 developers (from the middle level), a designer, and quality assurance. Otherwise, a project manager or SCRUM master must be a contact person and a business analyst (BA) for the initial research on the idea.
Maybe you want to read: How to lead your offshore team efficiently?
In comparison with the cost of your in-house team, let’s calculate the number of hours you would hire the offshore team for. The basic or MVP version of a simple product can be completed in 4 sprints around eight weeks. Hiring a development team for two months would add up to 320 hours (8 hours per day multiplied 5 days per week multiplied 8 weeks).
Cost of outsourcing IT services are:
- Fees or salaries
- Hiring costs
- Various hidden costs
In-House Vs. Outsourcing Costs
Below is an example. We have taken the estimated cost of developing your own product and the breakdown of all costs. In addition, we also have the outsourcing costs for the same product development.
|Variable||In-House Development Cost In The US (320 hours)||Outsourcing Development Cost To Vietnam (320 hours)|
|Cost per Hire||$4,200||$1,000|
|Total Team Salary||$160,000||$37,100|
|IT Server||Mac: $1,800||$0|
|Technology Training Fee||$1,000||$0|
|Software License||$250 per person||$0|
You can easily deduce how you can save money by outsourcing compared to in-house development from this table. The in-house development team includes various other fees like overheads, increased salary, retention, benefits, and even the cost of hardware and software.
On the other hand, when outsourcing, you only need to pay the remote developer’s salary or offer when hiring an outsourcing agency and optional software license fees if necessary. In fact, outsourcing can save you more than $ 140,000.
As you can see, software outsourcing can certainly help you lower your development costs. It’s not just cost that drives entrepreneurs and startups to outsource, as it gives them:
- Access to a large talent pool that is not locally available
- Provides 24/7 productivity and support
- Promises high-quality codes
- Ensures faster project execution
- Allows entrepreneurs to concentrate more on their core business
Chapter 4: IT Outsourcing Cost Calculations
Calculating the cost of outsourcing would not convince you to turn to outsourcing product development. Of course, you’ll want to dig deeper and learn more about the cost benefits of outsourcing to validate your decision. To analyze the actual cost and cost benefits of outsourcing, we can choose one of three approaches:
- Differential cost analysis
- Opportunity costs
- Incremental costs
Although all three approaches can be used to calculate the cost benefits of outsourcing, the first approach, i.e., differential cost analysis, would give you the exact numbers you are looking for. So here’s a simple 4-step approach to differential cost analysis in outsourcing.
Differential Cost Analysis
The simplest answer for the question ‘What is differential cost analysis?’ is the amount that is left after you subtract outsourcing costs from in-house costs. But let’s understand this better by considering the costs that we discussed in our product development. Find out the real cost of outsourcing:
#Step 1: Tasks Analysis
The first step is to define the services that you want to outsource clearly. Clearly defined steps and service processes also help you with a better cost analysis.
Here we are developing a product, so we would have to describe all the tasks, such as the target platform, the user interface and user experience (UI and UX), functionality, backend infrastructure, degree of customization, MVP or prototype, creation, performance analysis, etc.
#Step 2: Actual In-House Cost Calculation
The next step would be to calculate how much you would have to spend if you didn’t outsource this operation by first writing down all direct and indirect costs like salaries, benefits, consumables, IT systems, hardware, software, etc. that you would have to provide.
In our product development case, the cost of in-house development was approximately $ 178,770. These costs only include the salary, benefits, IT supplies, training costs, etc., of the developer you would hire.
#Step 3: Outsourcing Cost Calculation
Now that we have the cost of developing a product in-house, the next step is to calculate the total cost of outsourcing services, including everything from the quotation price to any other integrations you may need to do for a smooth transition.
In our case of outsourcing an application, the cost of ownership was approximately $ 41,000. This would be your total IT outsourcing cost.
#Step 4: In-House Cost Minus Outsourcing Cost
This is the final and easiest step in a differential cost analysis of your outsourcing costs. Here it would be:
[su_highlight background=”#FFFF66″]$178,770 – $41,000 = $137,770[/su_highlight]
Well, that certainly ensures that outsourcing cuts costs. Instead of having the product developed in-house, it costs $117,469.
This was just the differential cost analysis method that gave us the numerical value of the amount saved through outsourcing. Let’s look at two more ways to calculate outsourcing costs.
Opportunity cost is the cost you could leave if you chose to do the operations in-house rather than outsource development. It could also be the benefit you would otherwise have received but ended up in-house instead of outsourcing.
[su_note]Investopedia Definition: “The cost of an alternative that must be foregone to take a particular action. In other words, the benefits that could have been obtained from an alternative action.”[/su_note]
Let us know how much it will cost your company not to outsource your IT services:
- You cannot concentrate on your core competencies
- Must commit to low-tech skills for your business
- You overload your internal team with multiple tasks and strain them but create no value.
- You are not using your available internal resources to the best of your ability.
Another cost factor that many companies overlook when making an outsourcing decision is the additional costs a company incurs in planning to change the way they operate and work. The additional cost would be any extra cost that you would have to arise when you outsource your business.
[su_note]Investopedia Definition: “Incremental costs, also known as marginal costs, are the total changes a company experiences in its balance sheet or income statement from the production and sale of an additional unit of product.” [/su_note]
However, based on the calculations in the previous chapter, it can be concluded that the additional costs of subcontracting versus internal would always be negative. Still, if in each case it turns out that the costs of subcontracting are higher than the internal costs, the right way to decide whether or not to want still to outsource is to know how much sales or profit you would make.
To be continued… In the next article, let us show you the successful tips to reduce the cost of IT outsourcing. Don’t miss it.
Reliability is one of the elements to make the best decision! Hence, we shall show you our reputation via Our Case Studies.
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