Reality check: The REAL cost of outsourcing

Even if it is not your first consideration (and it often is), rate is always a factor when looking offshore for software outsourcing help. As with most things, you get what you pay for and you have to know what you are looking for in order to make the best buying decision. But keep in mind that hourly rates are just part of the equation when calculating outsourcing costs. Here are some other considerations:

Administration and vendor management

It will take someone’s time – an administrator, project manager, scrum master or other person – to manage the relationship with an outsourced supplier. You will need to consider everything from billing to performance reviews to project management. Research from the Aberdeen Group has found that 76% of offshore outsourcing customers underestimate these costs.

Vendor selection

This process can take several months to a year or more, and it can consume a good amount of key decision makers’ time. Among the steps you need to plan are:

  • Requirements documentation
  • RFP creation
  • RFP distribution
  • Response evaluation
  • Travel and associated expenses for on-site evaluations
  • Contract creation/negotiation


Transition and ramp-up

It often surprises organizations that costs go up during this time. But consider the following issues that must be addressed as you begin a relationship with a new partner: on-boarding; knowledge transfer; implementation of new processes and systems for communicating and sharing information. Add to these the time for your teams on both sides of the ocean to get used to these new relationships and systems. Note: Be wary of firms with high personnel turnover. This causes transition and ramp-up to be on-going.

Communication and coordination

Reaching a new norm with a software partner takes time. Teams in all locations need to be patient and committed to the relationship. There will be learning on all sides – which often leads to better long-term results. But these benefits are accrued after years, not months. Look for a partner that offers onshore delivery management too. This key role can make the difference between success and failure, as issues and events receive the kind of in-depth communication needed to keep projects and teams on-track.

Real cost = rate X productivity

Just getting started in offshore outsourcing may seem overwhelming at this point. Yet the long-term benefits can make it worthwhile. The key to understanding actual outsourcing costs is in being able to gauge your long-term productivity – and then multiplying that times a vendor’s rate. Let’s look at some sample hourly rates vis-à-vis productivity. See the chart below.

outsourcing-costs-294x300In illustration A, the outsourcing company B charges an average of $25/hour for software development work. But its productivity rate is low too, requiring 10,000 hours to complete your project, which ultimately costs you $250,000. Outsourcer A looks 30% more expensive at $35/hour, but if their productivity rate is also 30% greater, they will only need 7,000 hours to complete the project. Total cost for outsourcer B now comes to $245,000.

Going even further, Outsourcer C charges a premium rate of $40/hour which is a 14% increase over $35/hour. But if this supplier can also increase productivity by 14%, you are looking at 6,020 hours for a total cost of $240,800. Not only have you saved $9,000 over the low-cost supplier, you’ve also saved nearly 4,000 hours getting to the end result!

Of course, measuring productivity is difficult. You need baselines and metrics that could take years to collect. And you want this information before you commit to a provider. Higher rates suggest more competent professionals, but how can you be sure? Besides gathering the best data you can about your own development processes and costs, you need to rely on the soft skills and approaches of suppliers you are considering. Look for a partner who understands and responds to your priorities, as well as one who can fill in your areas of weakness. In the end, communication and collaboration are as important as any metric.