Outsourcing Costs: The Ultimate Guide for Entrepreneurs

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Outsourcing Cost

When businesses think about outsourcing, the first thing that comes to mind is cost savings. According to a 2022 Deloitte study, 70% of organizations prioritized reducing costs as the main reason for outsourcing.

But how do you calculate the potential cost savings from outsourcing? And what factors should you consider to maximize its benefits?

Entrepreneurs often face the most challenges with outsourcing. In their early stages, they may lack the necessary knowledge to outsource effectively, which can lead to drawbacks.

This blog post aims to address that. Here, we’ll explore the ins and outs of outsourcing to help you make informed decisions.

Proven Stats Around Outsourcing

Global spending on outsourcing is predicted to hit $1.1 trillion by 2025
37% of IT operations are outsourced
An average of 13.6% of IT department budgets is allocated to outsourcing
Outsourcing IT can save you up to $6,474/month (85% savings)
Companies that outsource recruitment enjoy a 97% satisfaction rate

Why You Are Unable To Calculate The True Outsourcing Cost?

Before you decide to outsource your software development project, it’s important to know exactly how much it will cost. Many entrepreneurs struggle with this because there are a few main reasons that make it hard to figure out the real costs of outsourcing, including:

Reasons that make it hard to figure out the real costs of outsourcing

Poor Cost Consciousness:

Many entrepreneurs fail to fully understand the various components of outsourcing costs. They often focus on upfront charges like hourly rates or fixed project fees but overlook indirect costs such as project management, quality assurance, and communication overhead. Because of this, they end up underestimating the total cost.

Scarce Data Collection:

Accurate cost estimation requires reliable data, such as industry benchmarks, vendor pricing models, and project requirements. Without collecting sufficient data, entrepreneurs rely on guesswork or vague assumptions, which results in unrealistic budgets.

Rare Data Analysis:

Even when data is collected, it’s rarely analyzed effectively. Entrepreneurs often fail to identify patterns or factors that impact costs, such as time zone differences, skill levels, or scalability options. This lack of analysis prevents them from making informed decisions.

Insufficient Collaboration:

Outsourcing success depends on clear communication and collaboration between the client and the vendor. Misaligned goals, incomplete project briefs, or unclear expectations can lead to extra work, scope creep, and higher costs, making the overall expenses unpredictable.

These problems make it hard to figure out the real cost of outsourcing, which can result in going over budget and not meeting expectations.

What Are The Direct Costs Of Outsourcing?

The costs of outsourcing are more complicated than they appear.

Some people think that outsourcing costs are simply the amount you pay the vendor based on their proposal. However, others believe it’s important to consider the additional costs and missed opportunities that come with outsourcing.

To understand outsourcing costs better, let’s look at the real expenses first:

Salary Or The Pay Check

The main cost you need to think about is the salary you pay to the remote developers or the team you hire for your product development. Depending on what your project requires, you might decide to hire just one developer to work with your in-house team, a full team of developers, or even have another company handle the entire product development for you.

Now, if we’re talking about outsourcing product development, what costs are involved? Let’s take a look.

Showing different team model for outsourcing

Hiring Single Developer:

You can hire a developer, programmer, or coder to work on your project. You can choose to pay them by the hour, every month, or through a long-term contract based on what you need.

When Should you Hire a Single Developer?

  • To Address a Short-Term, Specialized Requirement
  • When Prototyping or Building an MVP
  • For Startups or Small-Scale Projects
  • When a Tight Budget Requires Efficient Development

There are different costs to consider when hiring a single developer. If you hire developers from countries like India or the Bangladesh, the rates can be as low as $25 per hour and usually go up to $45-$50 per hour.

The hourly pay for remote developers depends on their experience, skills, and the type of technology they know. In other countries, the cost can range from $50 to $150 per hour.

Cost Savings on Hiring a Single Developer:

When you pay for only the hours that remote developers work, you can save money compared to hiring in-house developers, who are paid even when they take breaks or aren’t being productive.

For example, hiring remote developers from Bangladesh can cost as low as $20 per hour and go up to $45 per hour, while in some other countries the cost is between $50 and $150 per hour.

Hiring Dedicated Teams

These teams can include everyone you need, like developers, designers, testers, quality assurance specialists, and a project manager, or they can focus on specific tasks like design or development.

You can create a team that works entirely off-site or have a team that acts as an extension of your in-house staff. A dedicated team works as part of your in-house group but from a different location.

When Should you Hire Dedicated Teams?

You should hire a dedicated team when you need to:

  • Scaling Beyond In-House Capacity
  • Expert Knowledge in New Technologies
  • Tackle difficult, long-term projects
  • Speed up your launch times
  • Access affordable and flexible resources

Cost Of Hiring Complete Teams

When you choose to work with a company from another country to create a product development team, there are several costs you need to think about. Usually, the outsourcing company will give you a set price for the whole team. However, you can figure out the cost on your own by adding up the hourly rates of each team member.

For example, if your team includes a senior developer, a junior developer, a project manager, a business analyst, a QA engineer, and a UI/UX designer, you can sum up their individual hourly rates. On average, this could come to about $225 per hour, which would be around $36,000 per month for a complete team.

Saving Money with a Dedicated Team

Choosing a fully assembled product development team, which includes important roles like front-end and back-end developers and a QA engineer for ongoing support, can help you save a lot of money. Instead of hiring separate experts for each role, working with a dedicated team allows you to get all the skills you need in a more cost-effective and efficient way.

End-to-End Product Development Team

End-to-end product development means working with a company that takes care of everything related to your project or product. This process includes improving your initial idea, creating a basic version of the product (called a minimum viable product or MVP), testing it thoroughly, launching the product, and helping it grow after it’s released.

When Should You Think About End-to-End Product Development?

  • If your product or software has complicated features or designs.
  • When you want someone to help you through every part of the process—coming up with ideas, developing, testing, launching, and expanding.

How Much Does Full Product Development Cost?

The cost can vary based on different factors like the size and complexity of your project, the skills of the team, and how long it will take to develop. For example, making a simple MVP with a team of six people over eight weeks might cost around $74,000.

Cost Savings with Managed Development Projects

Choosing a managed product development service can make things easier and save you money. Here’s how it helps:

  • You only need to share your requirements and approve their plan.
  • The company takes care of setting up the team, development, and delivery.
  • A dedicated project manager watches over the project, which saves you time and the extra cost of managing everything yourself.

Ad-HOC

When you outsource work, it’s easier to see the direct costs, but there can also be unexpected expenses that pop up along the way. Here are some examples of extra costs you might face:

  1. SSL certificate costs
  2. Travel expenses for on-site visits
  3. Cost of technical consultant or project architect

These are just a few examples of additional costs that could arise, based on what your project needs.

Direct costs in outsourcing

Hidden Costs in Outsourcing

There are several hidden costs in your outsourcing contract that you might not be aware of! Let’s take a closer look at some of these hidden expenses:

Cost of Hiring

The hiring costs include:

  • Creating a Request for Proposal (RFP)
  • Screening applicants
  • Negotiating contract terms
  • Handling documentation

Cost of Creating an Outsourcing Contract

Having an outsourcing contract is crucial for the success of any outsourcing project. This contract should clearly outline everything needed from the outsourcing relationship to avoid any errors, confusion, or misunderstandings.

It serves as a legal document that details what both parties expect from each other. The contract includes timelines, schedules, and other important information, as well as clauses for protecting intellectual property and ensuring confidentiality.

It’s important to have an expert create this contract because they understand the legal aspects involved. This cost is often overlooked when figuring out the total outsourcing expenses.

Free format of outsourcing contract

Cost of Transitioning or Knowledge Transfer

When outsourcing your development work, the transition phase can be one of the most expensive parts. This is when you hand over your project to the outsourcing provider in Bangladesh.

During this time, you need to explain your project to the developers and share all the necessary information. It might take them two to three weeks to fully understand your product before they can start working on it. Although this cost might seem small compared to the overall savings, it’s important to be aware of it beforehand.

Cost of Server Management

You need to ensure that your product experiences no downtime, which can cost a business around $100 to $400 a month for a single server.

These are just a few of the hidden costs involved in outsourcing. Make sure to consider all of these expenses when planning your software development outsourcing.

Hidden costs in outsourcing

In-house VS Outsourcing

One big question that clients often have is whether outsourcing will really be as helpful as they hope it will be. To explore this, let’s imagine you want to use outsourcing services for product development. We’ll compare the costs of doing this in-house versus outsourcing.

Let’s say you’re creating a simple app.

You will need a full team, including front-end and back-end developers, a UI and UX designer, a QA analyst, a business analyst, and a project manager to keep everything on track. Now, let’s look at how much it would cost to develop this app in-house compared to using remote developers.

In this chapter, we’ll discuss what is included in the costs for both in-house and outsourcing options. We will also break down the costs using the example of building a Minimum Viable Product (MVP) later on.

In-house Product Development

Building software in-house comes with various expenses. First, you need to create a human resources team to help find the right candidates. Since you’ll need a complete team to develop the software, you should hire an expert to assemble that team. This includes developers, designers, product architects, quality analysts, testers, graphic designers, and more.

You also have to consider extra costs like sick days, annual bonuses, overtime pay, training fees, and medical insurance for your developers. Plus, you’ll need to invest in infrastructure, set up workstations, furnish the office, and provide refreshments for your team.

Here are some costs involved in building in-house software:

Cost Per Hire:

This is the amount you spend to hire someone before you pay them their salary. You might have specific requirements like experience and skills. According to Forbes, the demand for tech talent has increased, driving up hiring costs. On average, it takes about 42 days to hire someone, which adds to your expenses.

Developer Salary:

The biggest expense in creating software in-house is paying the developers. They are asking for high salaries, and with many leaving their jobs for better offers, companies need to pay well to keep their developers. Even large companies are adjusting salaries to retain their staff.

IT expenses:

You’ll need to invest in IT systems and infrastructure, including servers, hardware, and networking equipment.

Software licenses:

You will need to purchase licenses for various types of software and SaaS products necessary for building your software.

Technology Training:

According to a Harvard Business Review article, organizations spend over $350 billion on training globally, yet 70% of employees feel unprepared for their jobs. Companies spend time and money training new hires or upskilling existing employees, which adds to the overall costs.

Paid Benefits:

To attract and keep tech talent, offering benefits like bonuses and salary increases is essential. These benefits can add 1.25 to 1.4 times the base salary.

Overhead Costs:

Additionally, there are other costs like utilities, support staff, and management expenses that contribute to the total cost of in-house development.

cost included in In-house product development

Outsourcing Product Development

We already know what costs come with outsourcing product development, but let’s review them again:

Outsourced Product Development Cost:

This is the cost if you hire an outside company to create a complete product for you. For a basic Minimum Viable Product (MVP), outsourcing can start at around $40,000.

Remote Developer Fees:

If you hire remote developers through outsourcing companies, these are the fees you will need to pay them.

Dedicated Team Charge:

This is the cost when you hire a full team to work on your product development exclusively.

Cost of Hiring:

This includes the expenses involved in finding and hiring the outsourcing vendor for your product development.

Knowledge Transfer:

This cost covers sharing important information, tools, and documents with the outsourcing team to help them understand the project.

Server Management:

This is the fee you pay to a company for managing servers, ensuring they can handle growth, and protecting against security risks.

Contract Formation:

This cost is related to creating a contract that includes important sections like intellectual property (IP) protection and non-disclosure agreements (NDAs).

Cost included in outsourcing product development

In-house Vs. Outsourcing Cost

We are looking at all the important factors and figuring out how much money we can save based on the size of the project and the number of people needed to complete it. These two factors are important because they make up most of the costs for the project.

Let’s say we are developing a medium-sized software application. To create this, we would need a team of 6 to 8 people. The team would include a front-end and full-stack developer, a project manager, a business analyst, a QA engineer, and a UI/UX designer.

In-house Product Development:

To provide an updated cost estimate for building a mid-sized software product in-house, let’s consider the current average annual salaries for each team member in the United States, based on recent data:

Full-Stack Software Developer: $110,000 annually

Front-End Software Developer: $105,000 annually

Project Manager: $90,223 annually

Business Analyst: $73,495 annually

QA Engineer: $99,581 annually

UI/UX Designer: $96,212 annually

To calculate the hourly rates, we’ll assume a standard 2,080 working hours per year (40 hours per week over 52 weeks):

Full-Stack Software Developer: $110,000 / 2,080 hours ≈ $52.88 per hour

Front-End Software Developer: $105,000 / 2,080 hours ≈ $50.48 per hour

Project Manager: $90,223 / 2,080 hours ≈ $43.38 per hour

Business Analyst: $73,495 / 2,080 hours ≈ $35.33 per hour

QA Engineer: $99,581 / 2,080 hours ≈ $47.88 per hour

UI/UX Designer: $96,212 / 2,080 hours ≈ $46.25 per hour

Assuming a team of six members (one of each role) working on the project, the combined hourly rate would be:

$52.88 (Full-Stack Developer) + $50.48 (Front-End Developer) + $43.38 (Project Manager) + $35.33 (Business Analyst) + $47.88 (QA Engineer) + $46.25 (UI/UX Designer) = $276.20 per hour

If the project is estimated to take 320 hours, the total in-house development cost would be:

$276.20 per hour × 320 hours = $88,384

This amount only covers what you will pay the developer or their hourly rates. There are many extra costs involved, such as IT infrastructure, extra benefits added to salaries, employee benefits, overhead expenses, technology training, and more. All of these can quickly increase the total cost of in-house software development by an additional $50,000.

Cost FactorsIn-house Development Cost (320 hour)
Hiring Cost$4000
Team Salary$88,384
IT SystemMac: $12,000 for 8 people
Technology Training$1,000
Paid Benefits$6,500
Software Licenses$2,000 for 8 people
Overhead$25,000
Total Cost$138,884

Outsourcing Product Development

Once again, we are figuring out the cost for a team of 6 to 8 developers, just like we did for in-house development.

Here are the hourly rates for hiring remote developers:

  • Senior Software Developer: $35 to $40 per hour
  • Junior Software Developer: $25 to $30 per hour
  • Project Manager: $45 to $50 per hour
  • Business Analyst: $40 to $45 per hour
  • QA Engineer: $30 to $35 per hour
  • UI/UX Designer: $35 to $40 per hour

If you want to hire just one developer, you can use these rates to find someone who fits your needs. You can pay them by the hour or choose a monthly rate. For instance, if you need to hire Laravel developers for your project, it might cost around $3,400 per month.

We also looked at the average hourly rate for the whole team needed to build the software. This totals around $225 per hour. For the development of a minimum viable product (MVP), we estimate it will take about 320 hours. So, the total cost for hiring outsourced developers would be:

$225 x 320 hours = $72,000.

When it comes to outsourcing software development, there are more costs to consider than just the basic fees, these can add another $1,000 to $2,000 to the total price.

Cost FactorsOutsourcing Development Cost (320 hour)
Hiring Cost$1000
Team Salary$72,000
IT System$0
Transition Cost$1000
Technology Training$0
Paid Benefits$0
Software Licenses$0
Overhead$0
Total Cost$74000

Cost of developing software in-house: $138,884

Cost of hiring an outside company: $74,000

Money saved by outsourcing: $138,884 – $74,000 = $64,884

There’s no doubt that outsourcing saves money. Even though the costs can vary based on the size, complexity, or other aspects of your software development, the overall profit margins tend to remain similar.

Factors That Influence the Software Development Cost

To accurately figure out the costs of outsourcing software and understand how much money you can save, you need to know the factors that influence these costs.

This image shows different factors that influence the software development cost

Factor 1: Software Complexity

It’s clear that the more complicated your software is, the more it will cost.

Complex software has many features that increase its total price. As your software gets more complicated, you’ll need a bigger team and better technology to create it.

For simpler websites or mobile apps, you can use user-friendly platforms like low-code or no-code development tools, such as HubSpot, and others. However, if you want to create a more complex software product for customers, you’ll need custom software development, which will drive up the overall cost.

Factor 2: Software Size

The next thing that affects the cost of software development, whether done in-house or by an outside company, is the size of the software. Different organizations need different amounts of development based on how many users they have.

Small Size: This involves creating simple software that doesn’t need a lot of custom coding.

Mid Size: This is about developing a minimum viable product (MVP) that has one main feature and a basic version.

Large Size: This includes building big software that has many features, connects with other applications (API integrations), and uses databases.

Enterprise Size: This is for creating applications that are used by large companies with thousands of users, where providing a great user experience is essential.

The size of the software you need will determine how many people you need on your remote product development team. The bigger the software project, the more team members you’ll need, and this means it will cost more to outsource the development.

Factor 3: Available Resources

When figuring out how much it will cost to outsource work, one important thing to think about is the resources you already have.

Start by making a list of the people you have on your team, such as technology experts, developers, and other engineers. Next, look at what their current jobs and responsibilities are, and see how much work they already have.

Once you’ve done this, you’ll have a better idea of how many resources you have and how many more you’ll need from the outsourcing company for your software development project.

This will help you figure out how big your team needs to be from the outsourcing company. A typical software development team usually includes two developers (one senior and one mid-level), a QA engineer, and a UI/UX designer.

Depending on the size of your software project and the resources you have, you can decide how many people you need from the external company.

Factor 4: Stage of Development

Another important thing that affects the cost of software development and outsourcing is the stage or size of the project. Many companies team up with an outsourcing company right at the start of their development. They grow their product using the same outsourced team.

However, some companies create a minimum viable product (MVP) or the first version of their software in-house or with a different vendor and then switch to another company later on.

Factor 5: Type Of Development Outsourcing

When people think about outsourcing software development, they usually just think about creating the product itself. But there are actually different types of outsourcing that you can consider. Here are a few examples:

  1. New Product Development: This is when you have a new idea for a product and need to build it from the ground up.
  2. Software Integration: This involves adding a new feature, API, or database to your product, either by building it yourself or connecting it with an existing one.
  3. Application Modernization: This is when you have an old application that runs on outdated systems and need to update or move it to a newer version.
  4. Custom Software Development: This is when you have very specific needs and require a product that is tailor-made, going from initial designs to the final launch.
  5. Software Scaling: This is when you have a basic version of your product already, like a prototype or MVP (Minimum Viable Product), but you want to expand it into a larger, more advanced version.

These factors can help you figure out the costs of development. Whether you’re outsourcing the work or doing it in-house, you can’t really estimate costs accurately without considering these things.

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