OUTSOURCING VS. HIRING IN-HOUSE: THE REAL COST SAVINGS FROM IT OUTSOURCING

A lot has been written and said about outsourcing software development. Concerning the best reasons to employ Ukrainian developers, challenges involved with outsourcing app development, while it is safe to employ an offshore development team, what outstaffing means, and how to manage dedicated teams’ accessibility.

What most businesses are interested in when they get to explore outsourcing opportunities is how cost-efficient this is and if these financial benefits justify the possible trade-offs. That’s a wonderful question which might genuinely cause managers to struggle with doubts and anxieties. We totally relate to these feelings and, because of this, keep writing blog posts addressing these general yet delicate problems.

Many businesses embrace outsourcing as a way to realize cost savings. But what managers might not know is that expected gains from IT outsourcing do not narrowly focus on the reduction of operational costs. Software development outsourcing might also help reduce other expenses, such as overall, sales, and administrative costs.

For the purpose of this report, we will focus on assessing qualitative market research information, followed by our own experience  of working with overseas clients. We’ll offer a comprehensive breakdown of the costs of in-house outsourcing software development solutions which you better understand the projected drop in costs you should anticipate assigning IT and non-IT functions to a company like Vilmate.

Thus, if you hesitate to outsource your development or build an in-house staff, we’ve done all the heavy lifting and are ready to talk about our findings that will help you make an educated choice!

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Key information on outsourcing

Before we dive into the subject, let’s use some data to explain how things have been going recently in the landscape of outsourcing in general and in software development outsourcing in particular.

#1 In 2019, the international outsourcing market aggregated $92.5 billion, which is a substantial increase compared to $85.6 billion it amounted to in 2018.

#2 Outsourcing is not an exclusive prerogative of big companies as characters claim.  37% of small businesses were reported to outsource their business processes in 2018, while over one-third of the total of outsourced services have been in the IT domain.

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#3 In 2020, application development is outsourced, entirely or in part, by 60% of IT organizations. IT tasks require competence and skills that they might not possess internally. This is one of the principal reasons for outsourcing frequency growth. The report also suggests that IT security outsourcing suggests the most considerable growth rate of outsourced functions. Thus, 55% of respondents report that they intend to raise the amount of safety work they outsource.

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#4 Staggering 93% of survey respondents report they are considering or have adopted cloud solutions, as it allows companies that outsource to be more nimble, more rapidly expand their offerings, enter new markets, and alter their internal operations.

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#5 The global IT outsourcing market is forecast to grow by $98 billion during 2020-2024.

#6 Outsourcing is an engine of innovation. Outsourcers and their customers are generally under pressure to achieve more, so they tend to incorporate the newest technology and techniques to the working procedure, which leads to increased efficiencies.

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#7 A $121.14 million drop in non-IT operating costs corresponded to a $96.14 million expansion in IT outsourcing spending.

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#8 The agency expertise is reported to be the same for 58% and better for 26% of these organizations in comparison to when they perform precisely the same service in-house. Therefore, the app development outsourcing service-success speed is considered ordinary, with 84 percent of organizations experiencing the exact same or better support outsourcing application development.

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#9 43 percent of U.S. companies are outsourcing jobs from the IT industry, with cost savings being the main reason (44 percent ).

#10 Strategic outsourcing is regarded as one of the principal causes of IT budgets to continue getting increasingly more satisfactory. It has the capacity to create room in the supplier’s budget and allows for more flexibility.

The cost of hiring in-house

Well, it is apparent that IT outsourcing has been experiencing an upward trend for the last couple of years. And mostly so for cost reasons. However, the potential gains are not that explicit as it may appear. So, for individuals that doubt the trustworthiness of the announcement or find it too vague to rely on, we would like to break down the true costs of employing an in-house personnel and compare them to the expenses that IT outsourcing imposes.

It’s no surprise, but this truth can be overlooked sometimes — the IT budget is complex. It covers a considerable number of expense categories, like expenses on IT personnel, application software, data center, network, end-user engineering, and many others. The IT personnel course encompasses all personnel costs, including salary, compensation, taxes, benefits, recruiting, and training fees. Personnel costs are the type where most cost savings happen if you choose to outsource. Thus, this is our keen attention area. Below, we will examine the five significant costs associated with staffing a software development group in house.

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1. ) Hiring

According to the Society for Human Resource Management (SHRM), the world’s largest association devoted to HR management, the average cost-per-hire (CPH) is $4,129, and the average time required to fill a given position is 42 times .

CPH is an American National Standard metric that factors in the total of internal and external costs:

    • talent acquisition system costs
    • advertising and marketing expenditures
    • job fair and recruiting event costs
    • travel expenses
    • relocations fees
    • office costs attributed to the recruitment section
    • the salary and benefits of the recruiting team that is responsible for job posting, screening, interviewing, onboarding, and training

Anyway, the average cost per hire will fluctuate dependent on the industry. A normal hiring cost at a retail environment is $2,691. However, for applications development purposes, it can be higher because of a slumping market for applicants.

The numbers maintained in the recent report by Glassdoor do not differ much from the above data. It has concluded there that the normal U.S. company spends approximately $4,000 and 24 times  to hire a new employee.

Time to use is the metric that directly impacts the whole hiring cost. A variety of roles require hiring processes of various lengths. IT positions generally take more time to fill since they’re more specialized than others. But in some areas, it can be simpler and quicker to do.

There’s another critical matter to take into account. Software development is a very competitive market, so talent acquisition there is becoming only more complex. Tier-1 countries are now facing a growing skills gap.

Hiring talent is the second top challenge for tech managers. Competition from other companies, lack of the needed work experience, the perfect technical and soft skills, or interest in the company are one of the top causes of institutions’ struggles to employ appropriate candidates.

Reportedly, 39% agree that there’s a talent gap or a shortage of IT talent. Despite this, however, some companies opt not to hire IT employees at higher levels due to the limited funding, having difficulty filling some open positions, or adverse business conditions. A fifth of respondents admitted that outsourcing has been a more appealing option at the moment than hiring full-time workers.

Therefore, picking in-house improvement, a business ought to be prepared to devote much money and effort on finding the essential talent.

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2. ) Software programmer salaries

As Jim Collins said in his book Good to Great,”People are not your most important asset.  The perfect women and men are. Get the appropriate individuals on the bus, the wrong people off the bus, and the appropriate people in the correct seats.”

And these perfect people usually expect to be paid in accordance with their educational background and eligibility.

The wages you pay to a developer will depend on their education, skillset, and experience, which can be evident. But how big a base salary figure will turn out to be is also influenced by the job type, company size and age, and importantly, the developer’s place . These are a couple of essential influencing factors to keep in mind.

Some places are outliers when it comes to wages. Differences in cost of living, local demand for technology ability, candidate’s experience, and taxes are the critical determinants for enormous discrepancies in payroll figures.

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Outsourcing of software development to nearshore and offshore destinations can save a company 40% to 75% of its total spendings. You can see for yourself the difference in hourly rates of IT specialists is actually substantial:

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However, as we all know, the cost of hiring a new employee is not their base salary alone. In addition, it includes the cost of recruiting and other expenses we’re going to discuss.

3. Benefits

Many IT employees in the united states and Europe expect to get a comprehensive benefits package together with their brand new project. Access to a choice of benefits that are meant to make one’s livelihood rewarding can make a gigantic difference. Health and wellness, flexible work schedule or workplace, time off, paid sick leaves, health and life insurance, retirement programs, reimbursement of education fees, and much more — this is an approximate breakdown of benefits most employees in a private sector should expect. According to the Bureau of Labor Statistics (BLS), benefit costs account for 30.0 percent of total employee compensation costs within the private sector, with wages averaging $25.18 per hour and benefit costs — $10.79. Within the data business group, this ratio is 67.1 to 32.9 percent.

Therefore, according to BLS data, a software developer with a median hourly rate of $51.73 will cost their business $77.09 per hour. This way, the median yearly salary of $107,590 become $160,342. Impressive, isn’t it?

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Because of this, hiring employees in house in tier-1 nations can turn more costly if you include all of the benefits to developers’ net salaries. An environment in Ukraine proves to be more welcoming for overseas clients who hunt for specialists capable to meet their software development requirements.

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4. ) Social security

Social security contributions are compulsory payments that confer an entitlement to be given a potential social benefit. Calculating them is, typically, a complicated endeavor. Nevertheless, it’s also undeniably a massive portion of their administrative and financial side of entrepreneurship. Payroll taxes, since these contributions referred to in the U.S, must be dealt with by the employer, employee, or both if a individual either works for a company full-time or is self explanatory. Each tax comes at a different rate and can end up to some hefty quantity of money deducted from a worker’s salary.

In the U.S. specifically, these taxes include federal income tax, state and local income taxes, Social Security and Medicare taxes that are paid by an employee and Federal Unemployment Tax Act (FUTA), State Unemployment Tax Act (SUTA), State Disability Insurance, and Workers’ Compensation that are insured by the employer. What’s more, every tax has its own remittance and reporting rules, so that making errors on payroll taxes can bring quite expensive penalties.

In Sweden, by contrast, monthly social security benefits may change from $1,300 to $3,000 and retirement benefits — from $220 to $330 for each software developer, and of course other types of compensation costs and fringe benefits.

So as to not confuse you with a great deal of numbers, we included the approximation of social security contributions to the total of benefits.

5. ) Gear and overhead

Software development is an office-based job. Accordingly, besides hiring costs, developers’ salary, benefits, and social security contributions, there will be added equipment and overhead costs.

Overhead is the continuing cost of operating a business or, as it is also known, indirect costs. It includes office rent, office space use (heat, light, and even more), office equipment and consumable supplies, accounting services, payroll services, legal and audit fees, travel and entertainment costs, internet costs, etc..

These days, the fundamentals for high tech workers must include not just a few physical space but a computer that could cost up to $1,000+ and certified applications, which incurs another $500 to a few thousand. In Sweden, overhead costs which an employer pays for each developer monthly can be as big as $600. Consequently, if we take into account such one-time overhead expenses as computer setup, applications, and furniture cost, then the total will go up to $3,000.

Annual cost of an in-house software developer (the U.S.)

The cost of outsourcing software development

By comparison, when choosing to outsource software development, you should expect to save not only on the developer’s salary but also on hiring, benefits, social security contributions, and overhead.

IT outsourcing is called contracting with a service provider (like Vilmate) to perform an IT function as opposed to doing it internally. From the client’s standpoint, any purpose that is not served with its own IT staff is deemed outsourced, be it outsourcing onshore, near-shore, or abroad. Moreover, one is free to assign this function execution to a third party entirely or partially. This implies that you, as a client, have three options:

1. ) Project outsourcing: It is undoubtedly the most hands-off version of cooperation whatsoever. In cases such as this, a service provider is an organization that manages and performs the job. By job outsourcing we mean complete outsourcing of IT functions to another software development firm.

Locating experts locally could be hard and costly, so job outsourcing helps organizations address both these issues. Job outsourcing allows access to an international talent pool and eases the burden of hiring and managing staff. The third party applications development agency takes over the work completely, which is very beneficial to clients who aren’t well-versed in technology and have very little idea how to confirm applicants’ expertise.

2. ) Staff augmentation: In comparison to finish job outsourcing, staff augmentation gives a company more control over the recruitment process and project management. Suppose you intend to employ a temporary employee or contractor who will continue working under the IT organization’s supervision but will be handled directly by your own team. If that’s true, you should look for staff augmentation services, not outsourcing.

Arguably, this version proves to be the most valuable one as it allows finding the perfect balance between local and outsourced resources. It offers a business more flexibility in how large the workforce is, therefore it’s not hard to ramp it up or down as needed.

3. Consulting: The difference between a consultant and a contractor hired to augment an existing in-house staff arrives to the depth and extent of involvement. Functions of an IT consultant can and sometimes should be outsourced to a third party vendor. Consultants work with organizations to get the best solutions and provide expert advice.

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Whether you are unsure where to start or want to fine-tune the present processes, consulting will address your needs. To identify areas of improvement and possible gaps, IT consultants inspect the supplier’s processes and operations and suggest best practices aimed at revamping what’s already available. Consultants normally have extensive expertise in the domain of the expertise and possess the specialized knowledge that a client may benefit from.

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The complete cost of outsourcing

For our cost comparison, we will use the exact same criteria that we referred to, describing where extra costs of using an in-house employees come from.

    • Hiring.  At this stage, you can, without doubt, have a load off your mind. Opting to outsource software development, you don’t only save the effort of recruiting the ideal candidate but also save the money that this search would otherwise cost you.

      The recruitment, training, and onboarding of a superb workforce are on us.

      Partnering with a software development vendor can help businesses save on local recruitment and, at exactly the exact same moment, get access to markets with wider technology talent pools.

    • Software developer salaries.  As a rule, applications engineers’ wages in these popular outsourcing destinations as Eastern Europe are reduced per se — which the corresponding infographics are available for your reference above in the report. Outsourcing reduces labor costs. The principal reason for this distinction is that the cost of living, which, in turn, significantly drives down operating expenses.
    • Benefits and social security.  A company which outsources IT functions should also expect that hired specialists will pay much lower taxes. And what is more, there will be few to no benefits that the customer will be legally obliged to pay.

      The taxation agreements in Eastern Europe or India are different from those in the USA or Western Europe. Given the fact that salaries are lower, too, clients will certainly find themselves in a position to enjoy substantial financial benefits by choosing outsourcing.

    • Equipment and overhead.  IT outsourcing providers calculate software developer rates like this to cover the initial overhead costs too. The client will not even know about the one-time equipment expenses or continuing workspace maintenance costs. In the case of outsourcing, management- and – HR-related costs may also be considered overhead, and that is the reason they’re still entirely on us.

For that reason, typically, companies will save quite a great deal of work and money by outsourcing to high quality software development suppliers.

Although there are some additional costs, such as governance and management, communication with the offshore development center, and international travel between sites, outsourcing normally turns out to be cost-efficient than hiring an in-house improvement group.

As you can see below, outsourcing to applications development solutions, compared to creating onsite in a Western European nation like Sweden, is the apparent winner:

Average monthly salary of a software engineer

Why you should outsource with Vilmate

In case you’ve resolved to try outsourcing into a software development organization, you should notice that not all IT companies are equal. All of these offer different pricing models to follow and define unique terms and conditions of collaboration to meet. At Vilmate, we will do our level best to make sure that each and every client’s business goals are matched with the most appropriate value proposition, be it complete job outsourcing, staff augmentation, or consulting.

We’ve been in the software development industry since 2012 and have a great deal of experience delivering long- and – short term jobs to dozens of businesses globally. Our offering is diverse enough for you to choose the form of involvement you are going to be familiar with: Time & Material, Dedicated Teams, or Fixed Price — you discuss the must be accommodated, and we select the most suitable project delivery approach.

By getting in touch with us, you will get access to a talent pool that we are proud to have grown during the past decades. The Vilmate team is IT and non-IT specialists who qualified for and passed a rigorous selection process to later on give it one hundred and ten percent working on your work. Our objective is your satisfaction and accomplishment. Our toolset in attaining this is our extensive software engineering experience, exceptional customer service, and dependability.

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