What Constitutes the Cost of Outsourcing in 2023?

Amid concerns about non-local talent integration, one of the top items on the list focuses on the cost of outsourcing software development.

“What comprises the cost?” Are there any hidden costs? What if a project demands any additional activities, who covers them?”

These are only a fraction of questions a person who considers IT outsourcing might have. Found this relatable? Then you’ll find this article incredibly helpful. Jump aboard!

First of all, let’s throw a glance at why IT outsourcing should be considered on the whole.

Although many complaints against outsourcing, especially on an international level, have existed for decades, today’s economy supports its practice more than ever before. Due in part to the Covid-19 pandemic and the resultant reconfiguration of business operations across industries, remote teams have become an exceptional asset. Most of the reason for increased outsourcing stems from technological advancements in communication and collaboration platforms.

People simply do not need to be in the same place anymore to get the same job done. In fact, companies are investing more heavily than ever before in out-of-office talent teams. Projections from Deloitte show IT outsource spending on track to hit $519 billion in 2023. That represents an increase of 22% in the past three years alone.

Why does an ever-increasing number of companies turn to IT outsourcing for everything from network security to new software platform integrations to app development? Many factors play into these decisions, one of them being a cost vs. results equation. Outsourcing costs and benefits lead to exceptional outcomes that boost small and medium-sized companies’ bottom line and place in their chosen markets.

This type of amorphous claim, however, means little without your own data backing it up. Every choice depends on an array of company-specific factors. However, with statistics that show eliminating the need to hire an employee can save you at least three times their salary (we have a detailed article on how IT outsourcing optimizes hiring costs, be sure to check it out), and that 90% of small businesses look beyond their employment roles for operational functions, the idea deserves a closer look.

Overall IT outsourcing benefits are considerable:

Now that you know how you can benefit from IT outsourcing, let’s jump straight to what comprises its cost. As said, there are direct, situational, and hidden costs of outsourcing.

Let’s review them successively.

Across the board, direct costs to hire a remote team pale in comparison to in-house development setups. These include all expenses associated with acquiring the right talent team and doing the actual work associated with the project. Outsourced IT costs cover the same results without the need to invest in the entire hiring and onboarding process, increased office space, equipment purchase or rental, and everything else from pencils to more coffee pods in the breakroom (read more on how IT outsourcing optimizes hiring costs).

The direct cost for software development falls into two main categories.

The most obvious upfront cost covers the paychecks or salary of the team members. The people responsible for IT system installation, overhauls, development, or maintenance deserve fair and equitable compensation. However, the possibility of saving a lot in comparison to building an in-house solution remains one of the major draws of outsourcing. This is especially true if you focus on international talent with exceptional skills and experience but lower paycheck expectations.

For instance, in Poland, a full time IT expert makes the US equivalent of approximately $22,683 per year, whereas in the US this number reaches $74,273. That’s $51,590 saved a year, each year.

Although you don’t purchase office equipment for an outsourced team directly, all the hardware needs associated with the project are still covered by the check. Besides, the server, be it in-house or cloud, carries a monthly or annual bill that can come separately or be embedded in a price tag, depending on the ownership.

Depending on unique project demands, these direct costs may be accompanied by some situational ones. Here are some of the most typical examples that you might need to work into your budget.

In the time/money/effort equation, many situational costs associated with an outsourced project exist. These mostly deal with integration of a new or upgraded app or platform into your in-house operations. For example, you may need to update the brand website and other parts of your online presence. Training employees to use the new systems efficiently will take time. It is possible that you will need to put transitional systems or tasks in place to smooth processes before the software is complete and functioning without delays or glitches. Even things like sending out announcements of new methods or needs to stakeholders, other vendors, or consumers can incur additional costs.

The other part of direct IT cost focuses on actual expenses related to the development process itself. Do you need to pay for an SSL certificate? Are there fees associated with software integration with third-party platforms? Do you need to factor in regulatory fees or licensing? Is it necessary to upgrade other systems or network security to suit the new development schedule? The answers to these questions depend on a multitude of factors specific to your industry, software plans, and existing systems. They are, however, direct costs that your company needs to cover independent of outsourcing contract payments in most cases.

Even though outsourcing involves long-distance communication and virtual meetings, outsourcing IT costs may include travel expenses for initial planning stages or final implementation. This depends on two things: how comfortable you are with a more hands-off approach and if the project requires physical actions to complete. All costs for travel to the office and temporary living situations in hotels or other accommodations rest on the hiring company’s shoulders.

Learn how we organized these travels with WePay (Israel) and Bosch (Germany).

Apart from direct and situational costs that are visible and on the forefront, there are also some hidden ones which are not so obvious. Let’s see what they are.

First and foremost, this phrase should not fear you. These are not the ‘ghost’ charges that aren’t stated in estimates yet drag the money from you. They are rather ‘underground’ ones that aren’t so obvious and don’t have a direct monetary value (like developers’ salaries). In other words, they are a kind of overhead that mostly deal with onboarding and preparatory activities and indirectly increase the overall outsourcing cost. Much in the same way, some of the depicted below costs arise when you make in-house hires as well.

Not only does IT outsourcing include expenses of actually acquiring the team and paying them for services rendered, choosing the right partner also takes time and effort on its own. This adds to the overall project’s duration and thus is the first example of the non-monetary cost of IT outsourcing.

The old adage, ‘Time is money’ stands true for all businesses. Research and choice process costs can include proposal writing, additional parameter documentation, legal fees, and travel expenses for in-person meetings. However, the effort pays off as with a high-quality vendor, you won’t have to worry about the upheaval of onboarding outside talent and integrating them into in-house departments. This is a process the experienced IT professionals know and navigate with ease. Here are, for example, the case studies of our projects with the Clients.

Examples of the hidden cost of outsourcing with such a provider can manifest in delays and misunderstandings, which negatively impact not only the ongoing process of app development or network upgrades, but also may cause unwanted outcomes due to missed expectations.

Transitional challenges of IT outsource opportunities carry risk only with unreliable outsourcing companies. A right team erases it through soft skill capabilities and experience working with a variety of firms across industries. Every company’s culture differs from others, and it is important to recognize diversity as a benefit when it comes to creative and agile development and implementation of new systems and solutions.

When you outsource software development, a lot of things on the technical end should be carried out. These include giving access to your systems to remote staff or setting the environment on their powers, establishing security, developing common work practices, etc. All of these actions take time during which your company doesn’t accomplish any value-generating tasks (i.e. developing software). Thus, such a delay basically translates to a loss of profit (although perfectly expected) for business, which is exactly in what this hidden cost is reflected.

Your choice of provider can directly influence this aspect, as different companies have different onboarding periods. At SENLA, for instance, onboarding takes only 5-10 business days, depending on the engagement model you choose. You can see that within this period, you barely lose anything substantial, especially considering the fact that many other outsourced software development companies have a much higher onboarding period.

Now you know what aspects play into the total cost of outsourcing. We do hope that by putting together this article we’ve helped you settle down your fears and start trusting IT outsourcing more. If you have any questions left or got interested and would like to receive a personal estimate of how much IT outsourcing will cost exactly for you — just fill in the form below and we’ll be in contact no later than the next business day!