Outsourcing vs. In-House Development: Real Cost Comparison

Explore which path should you go - what makes the most business sense?

Outsourcing

This classic question with a sense of uncertainty behind it can easily be applied to our today’s topic. Just to paraphrase – to outsource, or not to outsource?

When it comes to a dilemma of having in-house developers or outsourcing IT resources, the answer is never black or white. And it’s usually a tricky question forcing you to take into account many factors — cost being the primary one.

Indeed, how to understand which practice is more cost-effective? 

Imagine you need a Scrum team comprising 8 US professionals for your 6-month project. Considering all the additional costs, we get the following numbers for comparison [per team, per hour]: $1,050.26 (in-house) vs. $300 (outsourcing to Europe), i.e. building a software solution in-house will cost 3.5 times more.

To assist you with an estimate of your future venture, we analyzed the rates of US in-house software developers and European outsourcing firms.

Is Outsourcing a Better Option?

Outsourcing enables you to hire a professional for a limited time, according to the requirements of your project or specific business operations.

The hiring process takes time for in-house. A specialized vendor can provide you new seasoned professionals faster and delivering the product on time lies with the outsourcing firm.

A seasoned professional that can’t be productive all the time costs a lot of money. Outsourcing can get you a high level of productivity at reduced costs. For example, studies show that with outsourcing the savings on overhead costs can be up to 60%.

Hidden Costs of In-House Development

The mere comparison of hourly wages of local and offshore professionals will not give an accurate picture. It’s vital to factor in all the hidden costs that in-house development includes (payroll taxes, health insurance, paid time off, traveling, vacations and sick leaves, pension contributions, and more). 

Be ready to add up equipment purchase and operating costs, as your new hire will need a decent workplace and advanced tools to bring your business idea alive. Recruiting, on-boarding, and retention expenses that tend to be very high should come as no surprise, either.

How Much Does a Typical Scrum Team Cost?

Imagine you need to engage a cross-functional team in your six-month project. This is how the cost structure for an in-house Scrum team comprising 8 US professionals might look like.

Table 1. Hidden Cost Per Employee:

[table-1]

* On average, US firms spend $700 per employee per month, i.e. $4.38 per hour

** With the average cost per hire of $4,129 in a six-month project, the hourly amount of recruiting a new employee will be $4.1

Our calculations show that the average hidden cost per team member reaches $79.24. Now let’s add this sum to software engineers’ hourly rates and get the total amount you have to consider for in-house development.

Table 2. Fully Burdened Cost Per Employee (including all the compensations):

[table-2]

**** Average net wages in Eastern Europe: Clutch

Those who started comparing apples and oranges from the very beginning, i.e. hourly rates of both in-house and outsourced engineers (without hidden costs), might have experienced a bit of a shock looking at the figures we got in the end: $1,050.26 vs. $300 (per team, per hour). But that is what we call a fair comparison.

Trends in Outsourcing

According to Deloitte’s 2016 Global Outsourcing Survey, outsourcing is expected to grow, particularly in Finance, HR, and IT.

The same survey reveals that the primary reasons for outsourcing are cost cutting (59%), focusing on core business (57%) and solving capacity issues (47%).

Did you know that Skype, Github, MYSQL and Slack were built with outsourced development?

Which side your scale outweighs in the dilemma: in-house or outsourcing?

ABOUT THE AUTHOR

Sophia Erasmo

Chief Marketing Officer at Starshot Software
With extensive knowledge and experience in a variety of disciplines in Marketing, Sophia oversees the planning, development, and execution of the organization's marketing and advertising initiatives. Her role is expanded to include new business development, product development, and distribution channel management. She ensures the organization's message is distributed across omni-channels and targeted audiences to meet overall Sales objectives.


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