How to estimate the cost of IT-outsourcing services

Price is the first thing a client pays attention to when choosing an outsourcing company.

Each client has their own requirements, therefore the cost of services will be different. Moreover, there are numerous aspects to be kept in mind. To shed some light on the topic, in this article I will consider external and internal factors, as well as carry out analysis of calculations of expenses to define what exactly is ‘value for money’ when it comes to IT outsourcing.

Factors affecting the cost of IT outsourcing

1. Geography

Geography is one of the most important factors affecting cost. The better an economy is developed, the more expensive software development is.

According to the Accelerance report, the price range in 2019 looks like this:

On the basis of the table, it can be noted that the most expensive developers are in the U.S. and the cheapest in South Asia. Nevertheless, Belarus, as part of Eastern Europe, represents the golden mean in the ratio of developers’ qualification to the cost of services.

2. Pricing and strategy

Pricing models and cooperation strategies directly determine the real cost of outsourcing. To be precise, the models are determined by the client’s business objectives.

The project specification is another aspect that defines the outsourcing cost. As it includes software development from A to Z, project management, design, development, quality assurance, etc. Whether the project is short term or long term, you can easily estimate the cost of software development.

An additional advantage of outsourcing is that you are expected to pay using only borrowed funds. What’s more, you can easily change project requirements, change goals, or even suspend development at any time.

3. Managed IT Services

With outsourced managed IT services, your development team will take care of their execution every day. In addition, your outsourcing partner will be primarily responsible for monitoring and maintaining the IT environment, among other things:

  • Assessing network organization and processes

The cost of outsourced managed IT services depends on the quantity and quality of the service. The client pays all fixed prices that were determined before becoming a partner on a monthly basis.

Estimation of expenses for works execution “independently” and with the attraction of outsourcing companies

Internal cost analysis

When you develop software yourself, you must pay for overheads in addition to employee training, various benefits, and the purchase of related hardware and software.

Here are the main categories:

  • Insurance

Outsourcing cost analysis

If you outsource your IT developments, you will not have to pay the overhead directly, which is an essential criterion in determining the costs. Instead, you will pay your IT outsourcing partner a fixed fee.

Outsourcing is a complex solution. But knowing how much software development will actually cost can radically change your point of view.

Internal cost analysis: Key risk factors

1. High costs

The cost of hiring staff members is much higher than outsourcing, due to overhead costs and high local salaries. In fact, the cost of hiring a qualified local development team can be so high that it may take too long for some companies to get a positive return on investment from their projects.

2. Workload

One of the main problems for a small or medium-sized company is whether it can keep its internal team dedicated at all times.

3. Innovation

Internal teams often live in their own world, without being able to meet the new trend in the technology world. In addition, working on the same projects for the same company cannot be compared to the scale and variety of projects handled by an outsourcing company.

When is the right time for outsourcing?

1. Flexible cost

Since outsourcing can be increased or decreased, this allows us to pay variable costs. For example, you have hired a development team to develop your mobile application. Initially, it required 20 developers and you had to pay $20000, but as the development phase moved to another stage, you only needed 8 developers. Also, you can quickly reduce the rates and not pay for 12 developers who are not needed now. This way, you can save a lot of money.

As for internal developers, you will have to pay a fixed monthly salary to each developer even if they are no longer working on the project.

The result is a large cash flow, leading to waste of money and resources.

2. Focusing on core business

With outsourcing, management and staff can easily focus on their core business rather than on what is not their strong suit. In fact, outsourcing software development to an expert organization gives senior management time to focus more on the business.

3. If the business grows, but is difficult to scale.

If your business cannot include growth strategies such as cost reduction, then it is the right choice to hire offshore developers. Outsourcing companies work as partners that provide operational flexibility, and the average cost of IT outsourcing services is much lower than internal processes. In addition, it allows businesses to remain flexible and to sacrifice less software development costs.

Anyway, I hope this was helpful. Best luck in finding the right company!

Lansoft, Co-owner, CTO & Producer | Software Automation Expert |