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Are You Really Saving Costs with Software Outsourcing?

19 Sep 2019

Are You Really Saving Costs with Software Outsourcing?

The Business Process Outsourcing Market is expected to grow at $343.2 Billion By 2025. This creates a market opportunity to develop new business and partnership models between the outsourcing provider and the client.

We recently got together the latest data and benchmark info in regards to outsourcing rates and fees in different areas of the world, especially in most known outsourcing destinations. You can download a copy of the “2019 Outsourcing Rates benchmark study” here.

2019 Outsourcing Rates and Fees Benchmark Report StudyWhile looking at the market, we realized what are the conditions for cost savings when outsourcing software development and what other factors influence the outsourcing decision. Since cost-saving accounts for almost 90% of the outsourcing decision, one would think that the outsourcing destinations that provide the lowest costs are the most searched after. However, what we found what that, the Total Cost of Outsourcing matters much more than the hourly outsourcing rates and fees between different providers. The Total Cost of outsourcing is a holistic approach to all costs and efforts comprised in the outsourcing collaboration. Preparing to outsource, understanding what other benefits are needed and other factors are involved so that the partnership can work between an outsourcing provider and the customer. Economies of scale can be accomplished when outsourcing fills skills and resourcing gap; also outsourcing can mitigate some of your inhering industry or vertical risk of doing business; software outsourcing can also solve challenges when you are looking into bringing a fresh perspective to your product development by accessing new competencies and innovation cultures. 

Why do companies outsource software development?

Most companies (around 60%) hope to reduce costs with outsourcing while focusing more on core business functions.

Only a third of the companies – 31% are struggling with capacity and scaling issues and outsource to accelerate organizational and digital transformation while tapping into a skilled pool of resources.

Expected vs actual benefits of Software OutsourcingIs it true that companies realize cost savings with outsourcing?

The good news is that actual results exceed the reasons the companies outsourced in the first place.

Benefits such as an increased focus on core competencies and cost reduction are exceeded 10 to 20% against expectations while vendor expertise and improved quality of delivery can contribute to gaining a technology edge with outsourcing.

Does the cost of outsourcing influence the preference for a specific outsourcing destination?

The short answer is yes, it does. But it is not the only factor a company is considering when choosing an outsourcing partner.

While Asia will always be cheaper with hourly rates ranging form $20 to $50 it presents also many challenges related to timezone, communications and time zone differences, resulting in a staggering 57% of outsourcing projects failure.

Outsourcing to the US is also an option realising about 40% cost savings compared to in-house employees with outsourcing rates ranging from $70 to $300 per hour.

According to Accelerance market data from 2018, Eastern Europe is one of the most attractive destinations due to a stable political system. viable cultural compatibles and a good fit in terms of time zone differences. Cheap flights and overnight turnover of work make it seem almost near-shoring everywhere in the area, while high level of developers skill is well recognised. Outsourcing rates range between $25 to 75$ based on the level of expertise and specific country.

You may consider also Latin America, however political climate and different work and cultural ethics may weigh in more than the cost savings realised. With outsourcing rates ranging from $30 to $70 per hour it is still a destination you may want to consider.

Is there a “right” outsourcing provider?

If you add all the components costs and efforts in the  Total Cost of Outsourcing,  you can level pretty much all your outsourcing prospects to similar overall price. Therefore price is not a good differentiator to choose a long-term outsourcing partner.

2019 Outsourcing Rates & Fees Comparison StudyThe ideal outsourcing partner needs to provide vertical expertise, specific knowledge and ability to ramp-up the team and the flexibility on scaling down, timely and proper communication, good development and project management methodologies, and many more.

It is advisable to conduct a hands-on due diligence and RFP processes to make sure that you are considering all factors prior to any decision making, with a clear list of prerequisites that will help you set expectation and a basis for a good partnership.

We are looking forward to receiving your feedback regarding the “2019 Outsourcing Rates benchmark study” that you can download here as well as any other feedback regarding your own outsourcing experiences and challenges.

Please connect with us if you need help figuring out how to prepare for your outsourcing project or if you have challenges with your current outsourcing project. We look forward to hearing from you!

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