What Factors Impact the Cost of Outsourcing IT Services?

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The costliness or scarcity of local professionals drive companies to outsourcing services and to farm out projects to external providers. Information technology is no exception. More companies resort to offshore outsourcing to reduce their IT-related expenses.

If a service provider is located in the same country, chances are they are bearing similar costs that the client would incur. Add to that their operational, marketing and management costs, plus markup, and the value of domestic IT outsourcing services will likely turn out 1.5 times higher than an in-house team. The saving is achieved mainly due to the distinct difference between the salaries domestically and abroad. However, the lower cost of offshore software development, maintenance, etc., doesn’t necessarily go hand-in-hand with high quality and smooth cooperation.

To get an optimal price-quality ratio, it’s crucial to know what determines the cost of outsourcing IT services. Let’s take a look at some primary factors.

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IT Professionals’ Rates in Foreign Countries

The more developed an economy is, or the closer it is to the USA or Western Europe, the more valuable its IT specialists are. Newest tech stacks specialists tend to demand higher rates than those skilled at traditional technologies. Senior developers earn more than juniors. You can compare some of the IT personnel rates in the U.S. and primary outsourcing destinations in 2018 (info from an Accelerance report).

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Latin America is attractive due to being in the same time zones as the U.S. and Canada. The rates in Mexico are slightly higher than in Argentina and Brazil. Costa Rican IT specialists offer $25–50 rates and generally have a good command of written and spoken English. Moreover, because Puerto Rico follows U.S. laws, it’s more suitable for American companies to outsource projects there.

South Asia, and particularly India, offers the lowest rates. However, often the saving is achieved at a cost of subpar quality. Other disadvantages include cultural differences and time zones that could hinder communication with a remote service provider.

East European countries offer higher quality as compared to Asian countries. The programmers there have good English skills, and with only a 1–3 hour time difference with Western Europe, communication is usually not a big issue. The 7–12 hour time difference with North America can be an advantage too: some of Onix’ U.S.-based customers like to assign a task, go to sleep, and wake up to see the job done.

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IT Outsourcing Services and Pricing Models

In addition to location, the cost of outsourcing IT services is determined by the cooperation and pricing models utilized by offshore vendors. The choice of a model often comes down to your business objectives. Take your time communicating with a potential IT service provider to find out and negotiate the details.

This approach is quite popular. The outsourcing services provider assumes responsibility for a software development project from A to Z. That includes preparing a project specification, if needed, software UI/UX design, project management, quality assurance, etc.

A fixed price agreement is suitable for short-term projects with clear requirements that are unlikely to change. Landing pages and simple WordPress sites are good examples. The project’s scope and deadlines are set in a contract. If it takes longer to complete, the extra work the developers have to do is free for the customer. However, you should remember that outsourcing providers add 20–30% to the project’s estimated value to cover that risk. If you wish to change the requirements after signing the contract, expect to pay additional charges for that work.

The time and materials (T&M) model gives a customer greater freedom to modify the requirements, shift goals, or even pause or stop the development at any point. That’s because they pay for every hour the developers spend working on their project. This flexibility may result in a budget overrun but if you work in iterations based on business/product priorities, planning the budget for releases or milestones (such as quarters) becomes easier.

Both hourly rates and a fixed cost of outsourcing your project will inevitably include the time the developers had spent on the vendor’s bench before joining your project, the services of project managers, solution architects, business analysts, and probably other additional expenses.

This model works well for long-term cooperations and projects that require a substantial amount of work, especially where the requirements change frequently. The outsourcing provider supplies all the developers, designers, project manager, QA, and other staff required to complete a project. All of them will work on that project full time under one roof. The customer may communicate with the team members directly, but usually, the PM is the only contact person they need.

The customer usually gets a list of rates for all involved staff and is billed on a monthly basis. Good communication is crucial for cost-efficiency: if the developers can’t code because they are waiting for client feedback, the client will end up paying for their ‘idle time.’

If you’d like to manage the development team on your own and don’t mind it being geographically dispersed, consider this model. You can personally interview and select each of your extended team members. Say, a designer in Brazil, a junior developer in Ukraine, and an Indian software tester. Although employed by an offshore software development company, each of them will be working full-time with your senior developer under your oversight (or that of the CTO, tech lead, or an external PM). Basically, you hire remote specialists who may become a part of your in-house team for an extended period of time.

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You pay the extended team members’ monthly salary plus a fee for their foreign employer’s services. (That fee helps them cover the payroll, taxes, office space, the developers’ workstations, and support staff.) Since you pay for the employees’ time, you’re free to change the requirements. Because you know the rates and the vendor’s fee is fixed, you can plan your spending.

A managed service provider (MSP) is a company that is outsourced to take care of businesses’ IT services on a regular basis. The value of the managed IT services thus correlates with the quantity (such as the number of servers or the number of users in the business) and quality (e.g., of the monitoring offered and the depth of expertise the MSP can deliver).

Managed IT services providers typically charge their customers all-in fixed fees, such as a certain amount per user per month. In return, the MSP must ensure consistent results promised in the scope of work and the service level agreement. The prices may be scalable, depending on the size of the company, the makeup of a clients’ IT infrastructure, or seasonal changes. This helps customers plan their budget consistently.

This pricing model places more accountability on the MSP to plan proactively and prevent issues. Otherwise, they’ll lose money on repairing errors that may occur. However, if a customer has no IT issues, they’ll likely ‘waste’ money on unnecessary reactive services. For that reason, many clients opt for a minimal package and pay extra for additional project work or if they experience an occasional emergency. These result in supplemental bills, but still such a hybrid pricing model allows for better transparency.

However, beware of cheap managed IT services. It may be that a modest ‘all-in flat-fee’ does not cover some of the essential services because the MSP intends to charge additional fees for them.

Miscellaneous Factors

The cost of outsourcing IT services and software development is not comprised solely of fixed fees or hourly rates. Some providers offer affiliate programs and discounts to loyal customers, so consistent offshore software development may become cheaper in the long run.

The price of IT services everywhere correlates with a service provider’s operational maturity level. A provider advertising a low-cost fee is likely offering low-level services. A cheaper IT services outsourcing provider may also lack the back-end processes necessary to ensure its operations’ stability and longevity.

There may be unexpected costs too. Assess the potential need to travel, as well as public holidays and minimum annual leave in the country you are considering. These and other country-specific factors may add as much as 30% on top of the planned IT outsourcing price.

Wrapping Up

In today’s global economy, IT services or software development outsourcing is a great way to engage professionals without employing an in-house team and to save money thanks to flexible pricing. Hiring external developers in low living cost countries often results in dramatically reduced costs. If you aim for high quality, though, more factors should be considered. If you focus exclusively on bargain prices, you might end up with a product or service that isn’t worth the lower price.

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Outsourcing relationships and pricing models influence cost as well. The fixed pricing model helps avoid cost overruns, while a ‘time and materials’ approach promotes flexibility and transparency. It’s important to understand which model meets your business needs best.

Be it in Indiana or India, a service provider must deliver the best possible service for the money. This is a universal truth. Whether it’s a mobile application or web development, logo design or user experience, plus a million other things — you generally get what you pay for.

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Onix-Systems provides IT services in website, mobile app and emerging technologies software development. Check our blog -> https://onix-systems.com/blog

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