Outsourcing is a popular term nowadays, which means the practice of delegating some tasks to external companies or individuals. It’s popular because outsourcing allows access to talents worldwide without the need to hire them and pay all accompanying costs, including taxes.
In this article, I’m going to talk about the reasons why companies outsource and the factors that define the costs of outsourcing. I will also examine one specific region, India, in detail since it is quite a popular outsourcing destination.
Types of Outsourcing
Outsourcing is commonly divided into offshore, nearshore, or onshore outsourcing. The change of these terms depends on the company’s geographical position in the world.
Offshore means hiring an external organization in a different distant country, often on another continent. Nearshore means referring to the services of a company located in a neighboring country. And onshore means hiring an outsourcing company within the same country.
Choosing an outsourcing type is a strategic decision that is motivated by different business needs. Let’s clarify them:
| Type | Example | Pros | Cons |
| Offshore | The U.S.-based startup hires an outsourcing company in India for their mobile app development. | – significantly lower costs due to lower living expenses in the outsourced country;- access to a global talent pool;- operational scalability. | – huge time zone differences;- cultural and language barriers;- potential quality and compliance issues. |
| Nearshore | The same U.S.-based startup decides to refer to an outsourcing firm in Mexico. | – reduced costs compared to onshore, but higher compared to offshore; – relatively similar culture and language; – face-to-face meeting available;- similar time zones that facilitate communication. | – costs are higher than offshore;- limited options compared to the global talent pool. |
| Onshore | The U.S.-based startup finds an outsourcing company within the country. | – no language and cultural barriers;- real-time collaboration and communication during business hours;- easy legal compliance; – better control and oversight;- supports the local economy. | – highest cost due to higher local wages and operational costs;- limited talent pool compared to global options. |
Reasons Why Companies Outsource
There are several reasons why a company may resort to outsourcing its software development needs. Some of the most common ones include:
- reducing and controlling costs.
- gaining access to the best capabilities and higher expertise.
- freeing internal resources.
- increasing efficiency for time-consuming tasks.
As a result, the outsourcing of software development offers a wide range of benefits. The use of leading technologies and practices, the acceleration of time-to-market, and the expertise that high-quality development teams bring are just a few to name. However, one of the most attractive bonuses is the ability to optimize the budget by paying less for considerably higher-quality software.For instance, according to ISG, if you just take into account IT outsourcing contracts worth over $5m a year, globally there are nearly 3,000, worth over $270bn (£175bn). These stats are impressive, to say the least.
Factors That Define the Outsourcing Costs
There are 3 major factors that define the software development hourly rates you may face when contacting your future partner – location, experience, project scope and complexity.
Other less significant factors to keep in mind:
- project duration;
- currency fluctuations;
- the required level of quality
- legal and compliance costs;
- additional services (like training, implementation support, post-launch maintenance);
- infrastructure costs.
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Factor #1: Location
The prices may drastically vary depending on the region because the cost of living varies in them, and this affects how much do coders make an hour. The average price in the US is $80-$110 – it will serve as a benchmark for comparing software development hourly rates. I want to examine 3 main destinations for outsourcing:
Eastern Europe
Famous for their professional skills and expertise, developers in Eastern Europe are considered to be in the most demand in the market. According to many resources, Eastern Europe’s software development hourly rate is $40-60 (ranging from 30 to 80 dollars).
This region covers countries like Poland, Ukraine, Romania, Bulgaria, and Balkan countries. For instance, world-known media outlets like Reuters and the Wall Street Journal praise Belarus as “the Silicon Valley of Eastern Europe.”
Central, Western and Northern Europe
European developers gained their indisputable reputation over the years. However, the huge demand for developers and the high costs of living (in comparison to Eastern Europe or Asia) have caused a sort of insufficiency making the average software development hourly rates for IT services close to $60-$80 per hour.
Asian Region
Outsourcing of IT services has played an important role in the economy of many countries in Asia, especially, India and China. Meanwhile, as commonly known, the quality of services isn’t always good. Meanwhile, the average rate for this region is $25-$30, which is the lowest on the list.
Factor #2: Required Expertise
Expertise here refers to the set of skills, knowledge, and experience that the outsourcing team possesses. It varies depending on:
- programming languages (Python, Java, C#, etc.);
- expertise in working with some industry-specific software (Cerner for healthcare, Bloomberg terminal for Finance, etc.);
- the number of years of experience;
- knowledge of different legislative regulations;
- industry knowledge (like customer expectations, typical business processes, etc.);
- specialized knowledge (like blockchain, artificial intelligence, machine learning);
- certifications and qualifications (like AWS, ISO certifications, etc.).
The level of required expertise defines the software developer’s hourly rate and the total cost of outsourcing. The level of expertise also defined the efficiency and speed of the development and the quality of output. Here are examples of average yearly salaries of different specialists in the U.S. By checking them, you can calculate the software developer hourly rate:
- Big data scientist – $121,417;
- backend engineer – $133,072;
- machine learning engineer – $133,407;
- Android/iOS developer – $123,982;
- embedded systems engineer – $125,924;
- cloud computer engineer – $153,235;
- game developer – $79,750;
- QA engineer – $82,793.
Factor #3: Project Scope and Complexity
Project scope, in simple words, comprises all the work necessary to develop the project.
In more formal terms, the project scope is a set of features a project must have to be released. It includes the development of functionalities, user interface design, integrations with other systems, data migrations, etc.
Project complexity, in turn, is an abstract estimation of the various aspects like technology, budget, desired timeline, regular compliance, etc. that make the project challenging to execute and deliver.
Let’s break down this factor into some elements that make up the total software development costs!
Technical Complexity
This element is associated with the technologies and tools used in the project. Advanced technologies like machine learning, artificial intelligence, blockchain, and large-scale cloud infrastructure require more effort, time, and money for integration.
Functionality Complexity
This refers to the depth of expected functionality from the software like:
- business logic – the complexity of rules, calculations, processes, etc., the software must handle.
- user interaction complexity – it’s about user interfaces and user experience. Highly interactive dynamic interfaces, various permission levels, customization opportunities – all this requires additional development time compared to static layouts with a unified view for all users.
- integration with other systems – seamless communication with other systems is another challenging point that affects software development costs. This may require custom API development and data mapping or the usage of available APIs or third-party services.
- advanced security features – this implies the usage of encryption, integration of multi-factor authentication, compliance with various regulations (GDPR, HIPAA), data storage security, implementation of different transfer protocols, and more.
- real-time operations – this is an optional functionality that possesses significant complexity. Real-time data synchronization across platforms for corporate systems with multiple subsystems or real-time requires processing and responses for trading platforms are several examples that require real-time operations.
The project scope and complexity affect not only one but four cost types:
- development costs;
- testing costs;
- maintenance and scalability costs;
- user training and support costs.
Detailed Overview: India Region Outsourcing Market
We want to give the Indian region more detailed consideration.
This region gained traction in recent years because of the low software developer hourly rate and an extensive talent pool. The average web developer hourly rate for this region ranges from $6 to $11. There are several distinctive features of this region that define its popularity:
- The country has a population of almost 1.5 billion people – this number explains where the large Indian talent pool derives from.
- The government created several tech hubs (Bangalore and Hyderabad) and supports them with benefits like lower taxes or Special Economic Zones with privileges.
- The overall level of English proficiency among tech specialists is high.
Nevertheless, when a company contracts an outsourcing provider from India, they often face the same set of challenges.
Low Quality for Low Costs
Unfortunately, this is often the case when a development company from this region stays satisfied with several initial payments and doesn’t aim for long-term cooperation. This resulted in many uncompleted projects and a non-responding development team.
At SumatoSoft, some of our Clients approached us after cooperating with Indian companies that left the project unfinished. These companies suddenly stopped to reply for several months which made the Client look for a new software provider.
Time Zone Difference
The time gap between India and the USA ranges from 9.5 to 12.5 hours. From a practical perspective, this means extended response periods on any question because of a low number of overlapping working hours.
Cultural Differences
Indian professionals prefer indirect communication. For instance, in Indian culture, saying “no” directly can be considered impolite.
This doesn’t sound bad until an Indian development team agrees to unrealistic deadlines or project scopes offered by a Client rather than openly discussing the realistic ones.
Moreover, the Indian corporate culture is more hierarchical than that of companies in the U.S. and Europe. This implies that any project-related decision must go through a long approval process from the bottom up. `
Language Barrier
Despite the prevalence of English, the Indian English dialect differs from the American one due to historical, linguistic, cultural, and educational factors. So even the knowledge of English grammar and vocabulary doesn’t guarantee that communication will be seamless.
High Specialist Turnover Rate
The IT sector in India is highly competitive, while skilled professionals are highly valuable. The practice of headhunting good specialists is prevalent in this region which results in high turnover rates and often specialist replacement.
For the project, it means that starting the development with a great team doesn’t necessarily imply that the same team will be working on the project in the future.
IT Outsourcing Rates 2024
This chart shows the overall prices for the 2024 year:
We wish you good luck with your project and happy outsourcing! If you have any questions about outsourcing, don’t hesitate to get in touch with SumatoSoft team!
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If you have any questions, email us info@sumatosoft.com
