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Outsourcing Cost: A Practical Guide For Entrepreneurs
Know your outsourcing costs, calculate cost-benefits of outsourcing, and read the tips and strategies to succeed in reducing costs with outsourcing.
Why You Need This Guide
For entrepreneurs, the main concern is to launch, establish, and scale their startup within a shoestring budget. Outsourcing comes as the feasible way to bring experts to the table while staying within the budget limits.
However, a majority of the entrepreneurs still have their own inhibitions about outsourcing product development to other countries,
This guide seeks to clear out all the questions and doubts surrounding outsourcing costs. It will help you analyze your outsourcing costs, calculate your cost benefits of outsourcing, and give you some amazing tips and strategies to save even more with outsourcing.
In This Guide:
Chapter 1: Outsourcing Cost: An Overview
Many startups have succeeded with outsourcing costs!
But, why are you still unable to calculate your true outsourcing cost? Know in this chapter.
Chapter 2: Life Cycle Costing of Outsourcing
Outsourcing bill only comprises the bid price or the salary of the development team!
You are mistaken if you feel the same. Get the complete analysis of outsourcing cost.
Chapter3: Outsourcing: Effective In Cost Reductions
Outsourcing can reduce cost! But how?
This chapter throws light on how outsourcing can help you reduce your costs.
Chapter 4: Outsourcing: Tips & Strategies To Reduce Costs
Can you increase the cost savings from outsourcing? Know the mistakes that can cost you along with the tips and strategies to save more.
Chapter 1: Outsourcing Cost: An Overview
The when, how, what, and to whom of outsourcing are important questions. But a more important question is For ‘How Much’.
Knowing the outsourcing cost is imperative to venture successfully into any outsourcing contract. In fact, for many companies, outsourcing cost is the first thing that comes to mind when they plan to outsource IT services or development work.
Breaking it down even further, it is now an accepted fact that a majority of the companies that outsource, outsource to reduce costs!
And in order to know how much cost you have reduced, it is imperative to know the outsourcing cost inside out. But before we start talking about outsourcing cost, we’ll throw light on some mind-numbing outsourcing cost stats.
1.1 Are There Proven Stats Around Outsourcing & Cost Reductions?
Outsourcing is not an emerging technique, it has been in the industry since the 1960s. In the past half a century, it has ballooned to a mammoth. Let’s start by focusing on this study by Gartner to understand it better.
A Gartner study has revealed that the worldwide spending on IT outsourcing crossed the U.S. $300.7 billion benchmark in 2011 itself. Analyzing the growth, it has forecasted that this global spending would see a growth by 4.4 % CAGR till 2015. For the coming years, the industry analysts have predicted that the IT outsourcing industry might see a growth of 4.42% in the years between 2019 and 2022.
The need to expand with a shoestring budget for the entrepreneurs and the growing digital transformation in the industry for enterprises are key drivers for increasing inclination towards outsourcing.
Well, that was just a glimpse of the bigger picture!
Let’s take a more focussed approach talk to the point. Here are some research and studies that show how companies have embraced outsourcing to cut costs.
A lot of research and studies have been done to reach these concluding numbers. But in order to reach the number around cost, profits, and margins in your outsourcing ventures, you need not drown in such research or studies.
So, why is every startup, outsourcing IT services to India, unable to estimate its outsourcing cost?
1.2 Outsourcing Cost: Why You Are Unable To Calculate The True Cost?
Some companies are naturally organized and data collectors. They know the importance of analyzing the cost of their business operations and are able to compare both the estimates. If that’s you, Congratulations! You already have a competitive edge.
But for the rest of us that need to start putting more efforts, let’s quickly talk about the problems companies face with their outsourcing costs.
Before you start outsourcing and exploring more about outsourcing cost, you need to focus on your current cost. One of the biggest hurdles faced by companies when outsourcing is their poor cost consciousness.
Poor Cost Consciousness: Not knowing the actual cost of operations at various levels like process, product, and activity.
Not having complete information about the cost of the current operations could drive you far away from deriving the actual outsourcing cost. Before you even think about outsourcing to reduce costs, you need to calculate your company’s true cost of operations.
Some other challenges that a majority of companies face are:
- Scarce data collection
- Rare data analysis
- Insufficient collaboration
These also pose challenges to proper cost estimation and might deter you from succeeding with outsourcing.
1.3 Now You Know
- The outsourcing industry has boomed over the past decade.
- Many companies have accepted cost reduction as major driver for outsourcing
- Many companies have even successful in reducing cost with outsourcing
- Still, many companies are unable to calculate outsourcing cost, let alone reduce it!
In the next chapter, we will be diving into each component of outsourcing bill and outsourcing cost calculations!
Chapter 2: Life Cycle Costing of Outsourcing
Outsourcing- the proven way to cut down operational costs!
We’ve gone through this pointer quite a number of times but still, many companies are unsure about their true outsourcing cost.
While some say outsourcing cost is the sum you pay to the vendor as per the bid, there are others who incline on the opportunity and incremental costs of outsourcing.
To break outsourcing costs, let’s analyze the true cost of outsourcing, the bills attached to this venture, the hidden costs, compare it with the in-house cost, and then calculate to find the true cost of outsourcing.
2.1 What Are The Direct Costs In Outsourcing?
How could we go further deep into outsourcing cost without first understanding what all costs will you incur if you start outsourcing IT services, web development, or any other services? Here are the main cost components of outsourcing relation:
- Salary Or Remuneration
The first and the foremost cost is the remuneration or salary you are supposed to pay for the remote developers or the dedicated team. Hiring remote developers would not be a big task and one needs to pay much less of a cost than hiring an in-house employee.
Let’s say, we are outsourcing an iOS developer from India. What would be the cost come for us?
Or what if you are getting a dedicated team on board for your app development? Would it cost the same?
What about getting managed projects? Would the cost be variable or fixed?
Let’s read it out:
Remote Developers: You can hire a dedicated programmer or coder who would work on your project on a per-hour, month-to-month or long-term contract base depending on your requirements.
When to hire remote developer:
- Simple project
- Limited requirement
Cost savings on hiring remote developer:
By paying only for the hours that the remote developers work for you, you save on all the money you would otherwise spend on the breaks and hours when you in-house developers are being non-productive.
Here is how much you might have to pay for hiring a remote iOS developer from India. The cost comes out to be as low as $20 per hour only and ranges up to $45 per hour.
Advantages Of Hiring Remote Developers
Icons
Dedicated Teams: A dedicated team is a part of your in-house team, just working from a different location. You can set their salary and leverage the skills that they bring to the project.
When to hire a dedicated team?
- Dedicated team for a complex project
- Long-term requirement
Cost savings on hiring dedicated teams
Getting a complete team with everyone from the developer, testing person, quality analyst to maintenance & support and full-stack team and much more could save costs. You need not hire an expert from any field individually and can simply get a team that would comprise of all the professionals you require.
They work dedicatedly on your project based on your technology choices and the speed you require. These teams get monthly salary as decided upon initially. The salary of a single in-house developer could easily be replaced with the salary of a dedicated team while you also save on the infrastructure cost and IT cost.
Advantages Of Hiring Dedicated Teams
Icons
Managed Project: Get a team that would fully manage your project, from brainstorming around your idea to creating MVP to launching it post-testing through managed projects.
When to get managed projects?
- Clear project idea
- Fixed requirement
Cost savings on getting managed projects
All you are required to do is provide the company with your idea and the specific details you want to be integrated into your software. Using true agile and SCRUM methodologies, your project will be completed successfully.
While having an in-house team, you need to take care of a number of things and even have a project manager to ensure everything is being handled. With a managed project, you simply need to send your requirements, get the quote from the outsourcing agency, have a team set-up for you, and get the project work done. There are extra monetary benefits you need to pay to the team, just the quote decided by both parties.
Advantages Of Getting Managed Project
Icons
Summing it up, the remuneration you pay to the remote developer, dedicated team, or the cost of the managed project is the main cost that comes to your head when outsourcing. At Classic Informatics, we follow all the three models of outsourcing and offer remote developers, dedicated teams, and even manage your project fully to help you save on outsourcing costs.
- Software Licenses
The next cost that companies incur in outsourcing is the cost of software licenses. It could be the software that they are using presently. It could be the existing software that the outsourcing company is using and planning to customize it for you. Whatever the case, buying software licenses could be hefty on the pocket for you.
A study conducted by the Business Software Centre Ltd (TBSC) with Professor Ashraf Labib from Portsmouth Business School, the University of Portsmouth on 400 respondents concluded that organizations outsourcing their operations might be paying higher than the average software licensing cost.
Moreover, there could be certain customizations in the existing software that your project may require. For example, you might need to renew your software, require permissions for additional users, or the most important, need license for the ownership of the software created by the remote developer.
http://itamchannel.com/outsourcing-increase-software-licensing-cost/
- Collaboration Tools
So, you have decided to outsource your work! How do you plan to collaborate with the outsourcing company?
It’s not the same as going over to your team members on their desks to clear and confusions or discuss your next idea!
You need collaboration tools to stay in a closed-loop with the remote developers or your managed team. While most of the collaboration tools have a FREE basic model that could work for you, for more advanced versions, these collaboration tools might come with a price tag for you.
Here are some of the collaboration tools and their price which might add on to your outsourcing bill:
- Skye: One of the most popular collaboration tools today is Skype. It lets you directly communicate with the remote team members and is FREE of cost for the basic version. It even allows screen sharing with the teams. You can use the FREE version for most of your operations but if you need to get more features and functionalities, here is the pricing model:
This is great collaboration software for entrepreneurs who are not working with very large teams in offshore locations. You just need to get Office 365 to get Skype for business.
- JIRA: The Atlassian JIRA has a special set of features that let you manage your project and collaborate with the remote developers on a professional level. You can create organized workflows, manage projects, assign tasks, create checklist, set priority, log time, set due date, etc., for each project. This would also keep everyone in the loop as and when you require it.
With JIRA too, you can use the basic version for free. It allows a number of functionalities in the FREE version but if you need a more advanced JIRA for your software requirement, you can view the price here:
- Trello: Go to any project manager handling outsourcing of any project and their familiarity with Trello would be visible on just its mention. Its drag and drop option for job boards and leaving certain messages and tag other members on the board too. It allows you to set and assign deadlines and attach filed with the job explanations.
You can collaborate with your remote developers and know what all mini-milestones they have covered and the deliverables they have completed. As you can see, the basic version for Trello for one person is free. Tellos’ price could start from $9.99 per user per month for a team that is within the 100 team members’ capping limit.
- Basecamp: Basecamp is one of the most easy-to-use collaboration tools that let you manage your projects, assign tasks, keep a tab on the deliverables, assign deadlines, etc., all at one place. You can send away messages here, perform real-time chats, schedule meetings, store files, manage docs, etc., as well with the Basecamp business model.
You can use it for free for a month but for extended usage, you need to pay a monthly fee. At $99 per month, it offers unlimited usage access, unlimited projects, unlimited contracts, a storage space of 500 Gb, project templates, and 24x7 VIP support.
- Slack: With biggies like BBC, SurveyMonkey, and AutoDesk improving their collaboration everyday using Slack, this tool is great for streamlining your outsourcing collaboration. For just $2.67 to $12.50 per month per active user, you can get complete assistance for your communication. You can organize conversations, share documents & files, find archives, and integrate other collaboration tools like JIRA, Zoho, Google Drive, and many more on Slack.
- Zoom: Another amazing tool for screen sharing on VoIP is Zoom. Being an entrepreneur, you might not need any plan bigger than $14.99 per month. You can include different participants in your team and even manage the users here itself. The feature that sets Zoon apart from other screen-sharing collaboration tools like Skype is that it also allows download of the screen sharing.
- Managing Project
Have very specific requirements that can be declared clearly in the scope along with prior cost estimation? Getting managed projects could be your solution!
For all others, hiring remote developers might require you to assign a separate project manager who would head the developers and ensure all the work is done as per your specific requirements. The average salary of a project manager could be over $95,000 per year.
This could be a major addition to the outsourcing bill and needs to be kept in mind beforehand. Even if you plan to hire a freelance project manager for your project, they might ask for anything between $20 and go to $75 as well.
However, any charges for project management are nullified when you outsource your project to us. For each of our projects, we assign a dedicated project manager who looks into the project deeply and ensures that it is going as per your requirements. They keep in close contact with you and make sure that the developer or teams are working as per the decided project scope.
- Ad Hoc Costs
While these are some of the direct costs in outsourcing, there could be a number of ad-hoc costs that might crop up during your outsourcing venture. Some of these out-of-pocket costs are listed down below;
- SSL Certificate Cost: In order to secure your website, it is imperative that it has the SSL Certificate. It makes your website secure and changes the link from ‘http’ to ‘https’ with a lock sign. You might have to pay extra for this SSL certification.
- Sample Creation: You might want the company to create a sample for you like a web page before handing them the web development project. For this, the outsourcing company might charge a certain fee.
- Travel Cost: Many times, you might want to see the remote team or developer or vendor for yourself. Meeting them in any location would incur traveling costs.
- Technical Consultation: You might need an expert view on your idea and for such technical consultation, you might be charged an extra fee. This is where you can turn to Classic Informatics to save costs as it offers a free consultation.
2.2 What Are The Hidden Costs in Outsourcing?
Think you have got it all on the tab?
Did you include the cost of upgrading your existing IT systems to raise to par with the advancing technologies coming your way?
Is the cost of selecting the outsourcing company included in the bill?
You would have certainly skipped on the cost of transitioning that your existing teammates would have to undergo!
Well, while most people think that paying the bid price to the outsourcing company or paying the salary of the remote developers is the only cost they would have to incur. But this is a mere misconception that we are going to clear today.
There are many costs that are hidden in your outsourcing contract! Let’s throw light on some hidden ones:
- Cost of Hiring
This is essentially the cost of selecting the remote developer or outsourcing agency in India. This cost would also include:
- RFP: Creating a request for proposal for attracting proposals from the prospective outsourcing agencies. You need to analyze and keep a tab on various things like your project overview, company’s background, project goal, project scope, timeline estimate, and SLAs. This requires efforts or even addition in a team that can create one that attracts only the best.
- Screening: Screening through the many applications received. You might even need some software to track the applications and ensure they are meeting up with all the requirements mentioned in the RFP.
- Negotiating: Negotiating the contracts and the costs is another cost included in hiring or selecting an outsourcing agency in India. You might need to find an arbitrator as well who could negotiate on your end with the second party. Creating the contract and recreating it post negotiation might also cost money.
- Documentation: Documenting everything in one place is also a task that involves both efforts and money. You might require some tools to keep everything documented in one place and that might cost you too.
If you outsource your development to us, we create your RFP, screening of the developer, negotiation for the outsourcing project, and even documentation for FREE of cost; so, no extra charges.
- Transitioning Cost
When you are outsourcing your development work, the costliest stage might come out during the transition. This is the phase when you are actually handing over your work to your outsourcing provider in India. There would be migration to new IT platforms, adoption of the existing software and systems and their licensing might also add to the cost. The software might be proprietary instead of open-source and might need you to pay extra for sharing with the remote developer.
Projects that are more complex might turn out to be more expensive during the transition phase. Most outsourcing service buyers (clients) feel that the cost of training the employees is totally nullified when you go for outsourcing. But that’s not the case!
You need to transfer your knowledge and skills that you have to the outsourcing company or the remote developers, whatever the case. This is the period when you are explaining the developers about your project and sharing what you have and they have to brainstorm about the idea. This is the phase where complete efficiency is not achieved.
Apart from that, integrating the infrastructure might also pose a costly task. The integration between your hardware & software and the outsourced company’s systems might also cost you.
You might also incur other charges like severance pay, unemployment compensation, compensation for early termination, etc., if you are transitioning from insourcing to outsourcing and planning to dissolve your in-house team to go for a complete outsourcing solution for the development of your product or completion of your project.
Classic Informatics is appreciated by its clients for the smooth transition of knowledge, infrastructure integration, or any other added cost during the transition phase. When you choose us for outsourcing IT services to India, we make the transition FREE of cost. You need not worry about getting added charges for the transition.
- Ramping Up
The next cost in outsourcing is the cost of ramping up to the highest standards in the industry or the state of the art technology to match the level of the remote developer’s technology niche. In order to make your outsourcing venture successful, it is important that your internal software, hardware, and IT systems are up-to-date.
If your in-house processes are not up to the mark, you might not be able to leverage the skills that the remote developers are coming up with. Improving your existing software development process might come with a price tag and add to your outsourcing cost.
The best part about outsourcing your development to India with Classic Informatics is that it adapts to your company’s requirements. You don’t need to pay any sum for ramping up as we ensure that your project requirements are met without asking you to ramp up.
- Cost of Contracting
Forming an outsourcing contract is imperative for the success of any outsourcing venture. Everything required from the outsourcing relation needs to be specified in the outsourcing contract so that no scope for error, confusion or misunderstanding is left on both ends.
It is the legal document that puts forward all the details of the venture about what the two parties are expecting and expected to offer. It also lays down the timeline, schedule, and everything. Signing the outsourcing contract would bind you and could be a factor in determining your outsourcing success.
You need to get the contract formed by an expert who knows the legalities of creating contracts. This cost is usually forgotten when calculating the overall outsourcing cost.
There is no added charges in your bill for creating contracts for you. We consider outsourcing contracts as a part of our outsourcing service. No extra charges for outsourcing contract creation is charged by us.
You Might Also Like: Outsourcing Contracts: Things To Know
- Cost Of IP Protection
When you are outsourcing IT services to India, China, or any other offshore company, there is a risk to your intellectual property. This is one of the biggest inhibitions of a majority of the clients is if their idea would be safe or not.
The cost of IP protection like trademark registration of your intellectual property, patent registration, signing the Non-Compete and Non-Disclosure Agreements, etc., could also lead to extra costs that most people do not count when calculating the cost of outsourcing.
At Classic Informatics, we believe that your IP is your property and we treat it sameways. We comply with the non-compete and non-disclosure terms even if you have not legally secured your IP.
2.3 Outsourcing Vs. In-House: Which Is The Better Option?
The one question that looms over the minds of clients as if outsourcing would actually be as beneficial as it is expected to be. For this, let’s suppose you are planning to outsource iOS app development to India, here’s a breakup of the costs that you will incur:
Outsourcing iOS Development
What is the cost of outsourcing app development? This is the first question that you would ask when talking about iOS development from a remote developer. So, let’s see how much would your iOS app development from an outsourcing company cost you in reality.
To begin with, let’s assume that you are planning for a simple mobile app with basic functionalities. The total time for the iOS app development would be around 700 hours. So, let’s calculate the cost for 700 hours of work.
https://lifehacker.com/this-graphic-explains-how-much-time-and-money-it-takes-1735164869
Variable
Cost
Total For 700 Hours
Remote iOS Developer
$40 per hour
$28,000
Collaboration Tool
$10 - $15 per month
$50
Software License
$250 per person
$250
IT System
$0
$0
Total
$28,300
In-House iOS Development
Now that we know developing an iPhone app through a remote developer would cost around $28,300, let’s check how much it would cost to make the app in-house.
The first step in setting up an in-house development team would be that you would have to go through a number of processes and have a human resource team to screen through iOS developers. The biggest factor giving remote developers an edge over the in-house developer is that you do not need to sign a long-term contract with the developer!
It could simply be project-based. You can hire the developer for the project and pay for the hours of work that is done. But when you hire an in-house iOS developer, you would have to hire for a long term and might even have to offer severance pay or other pays if you intend to terminate their services after the project.
There are many added paid benefits like sick leaves, annual bonuses, overtime pay, training tax, medical insurance, etc., that you need to pay to the in-house developers you hire in your team. Apart from that, you need space, workstation, furniture, and also have to provide some refreshments, etc., to the developer.
Let’s see the break-up for hiring an in-house app developer.
Variable
Cost
Cost per Hire
$4,219
iOS Developer Salary
$126,750 per year
IT Expenses
$120 per year
Software License
$250 per person
IT System
Mac: $1800
XCode: $99
Technology Training
$1,000
Paid Benefits
$37,497
Overhead (25% of Salary)
$31,680
Total
$203,415
2.3 Outsourcing Cost Benefit Analysis: How To Do It Step-By-Step
Calculating the outsourcing cost would not convince you to turn to outsourcing development, in this case, iOS app development. You would obviously want to dig deeper and know the outsourcing cost benefits to confirm your decision. In order to analyze the actual cost and cost benefits of outsourcing, we can go for either of the three approaches:
- Differential Cost Analysis
- Opportunity Cost
- Incremental Cost
While all the three approaches can be adopted to calculate the outsourcing cost benefits, the first approach, i.e, the Differential Cost Analysis is what would give you the exact numbers that you are looking for. So, here’s a simple 4-step approach to Differential Cost Analysis in outsourcing
Differential Cost Analysis
The simplest answer to ‘What is differential cost analysis?’ is the amount left when you deduct the outsourcing cost from the in-house cost. But let’s understand this better by taking the costs that we have discussed our iOS development work. Here’s how you can find the actual cost of outsourcing:
#Step 1
Analyze Task
The first step is to clearly define the services that you are planning to outsource. You would not want to be in the list of those companies that failed in outsourcing because their outsourcing relations were based on assumptions. Having clearly defined steps and processes of the service would help you make a better analysis of the cost as well.
Here, we are developing an iOS app so we would need to outline all the tasks like the platform that you need to target, user interface & user experience (UI & UX), functionality, backend infrastructure, level of customization, MVP or prototype creation, app performance analysis, etc. This would help you in knowing what exactly you want, deciding the sprint tasks, estimating time, and setting a deadline.
#Step 2
Calculate Actual In-House Cost
The next step would be to calculate how much you would have to spend if you did not outsource this operation. This would help you identify all the costs that you could actually avoid if you outsourced your operation. Start with jotting down all the direct and indirect costs like salaries, benefits, supplies, IT systems, hardware, software, etc., that you would have to provide. Make sure to only jot those costs that could be avoided not the overall in-house cost.
In our case of iOS development, the cost of our in-house iOS app development came out to be around $203,415. This cost only includes the salary, benefits, IT supplies, training cost, etc., of the iOS developer we would hire.
#Step 3
Calculate Outsourcing Cost
Now that we have the in-house app development cost, the next step is to calculate the overall cost of outsourcing the services. This would include everything from the bid price to other integration you might have to undertake for a smooth transition.
In our case of outsourcing iOS development, the cost of the operation came out to be around $28,300. This would be your total cost of outsourcing. However, suppose by outsourcing, you are able to sell the existing Mac for $1,000. This would have to be subtracted from your outsourcing cost as this would be a sort of revenue. So, your total outsourcing cost would come out to be around $27,300.
#Step 4
In-House Cost Minus Outsourcing Cost
This is the final and the simplest step in the differential cost analysis of your outsourcing cost. Here it would simply be:
$203,415 - $27,300 = $176,115
Well, this certainly ensures that outsourcing reduces costs. Your savings from outsourcing iOS development instead of getting the app developed in-house comes at $176,115.
This was just the differential cost analysis method that gave us the numeric value of the amount saved from outsourcing. Let’s look at two other ways of calculating outsourcing costs.
Opportunity Cost
Opportunity cost is the cost that you are giving up or forgoing when you are choosing one option over the other. Here, the opportunity cost would be the cost that we might let go of if you choose to undertake the operations in-house over outsourcing development. It could also be the benefit that you otherwise would have received but eventually gave up by in-housing rather than outsourcing.
Investopedia Definition: “The cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action.”
So, let’s know how much is not outsourcing your IT services costing your business:
- You are not able to focus on your core competencies
- You have to compromise with low-tech skills for your operations
- You are keeping your in-house team burdened with multiple tasks and stressing them
- You are just getting work done but not creating any value for it
- You are not utilizing your existing in-house resources to the best of their capabilities
Incremental Cost
Another cost that many companies ten to overlook when making their outsourcing decision is the incremental cost. It is the extra cost incurred by a company when it is planning to change the way it operates and functions. In outsourcing, incremental cost would be any extra cost that you would have to incur when outsourcing your operations.
Investopedia Definition: “Incremental cost also referred to as marginal cost, is the total change a company experiences within its balance sheet or income statement due to the production and sale of an additional unit of product.”
However, going by the calculations made above, it can be concluded that the incremental cost in outsourcing over in-house would always come out to be negative. But, if in any case, the outsourcing cost comes out to be higher than the in-house cost, the right way to decide whether you want to still outsource or not is by knowing how much revenue or profit it would generate.
Also Read: Can Outsourcing Save Your Money? A Detailed Analysis
2.4 Now You Know
- Outsourcing cost is more than just the salary of the remote developer or the bid amount
- There are many costs like transition cost, hiring cost, IP protection cost, etc., hidden in outsourcing
- When comparing outsourcing cost with in-house development cost, outsourcing cost came out to be pretty low
Chapter3: Outsourcing: Effective In Cost Reductions
Want to reduce your business costs?
Try outsourcing!
Many have been singing the praises of outsourcing in cost reduction but none have cared to venture deep down and unveil the truth!
Does outsourcing actually reduce your cost?
How does it reduce your cost?
Do different outsourcing models have different cost reductions?
Do we only see the cost reduced in the operations we outsource?
This chapter finds the true answer to all these questions.
3.1 How Outsourcing Reduces Cost
By now, we have deduced that outsourcing does reduce cost. In fact, according to AMR Research, it was found that more than 70% of the respondents considered reduced costs as the main reason why they outsourced. The question that we would have to answer now is how?
https://terpconnect.umd.edu/~smithas/papers/hanmithas2013misqcost.pdf
How does outsourcing reduce cost?
To understand how outsourcing reduces cost while also improving the business operations and the end product, let’s start by analyzing the table for outsourcing cost and in-house cost once again.
Cost of In-House Operations
Variable
Cost
Cost per Hire
$4,219
iOS Developer Salary
$126,750 per year
IT Expenses
$120 per year
Software License
$250 per person
IT System
Mac: $1800
XCode: $99
Technology Training
$1,000
Paid Benefits
$37,497
Overhead (25% of Salary)
$31,680
Total
$203,415
Cost Of Outsourcing
Variable
Total For 700 Hours
Remote iOS Developer
$28,000
Collaboration Tool
$50
Software License
$250
IT System
$0
Total
$28,300
Analyzing these two tables, we can easily deduce how outsourcing saves your money over in-house development. In-house development includes a number of other fees and charges like overhead, increased salary, retention, benefits, and even the cost of the hardware and software. Outsourcing, on the other hand, only requires you to pay for the salary of the remote developer or the bid if you are hiring an outsourcing agency and optional charges for the software licenses if and when required.
Apart from the differential cost, you can also include the opportunity and incremental costs to deduce how outsourcing actually reduces your cost. Here’s a break-up of the analysis that we did on the two tables around outsourcing cost and in-house cost:
- You Save The Hiring Cost: The cost of hiring an in-house employee can drain you of money & efforts but selecting a remote developer is done mostly only and saves your money and time.
- You Can Find Better Skills At Low Wages: When outsourcing IT services to India, there are very high chances that you might find developers with better skill sets at a much lower wage.
- You Can Improve Your In-House Operations: When you outsource the tasks some of your tasks, you get the time to focus on improving your in-house operations, increasing sales & client satisfaction in turn.
- You Do Not Need To Train Your Employees: Another cost that you save when you outsource IT operations is that you need not worry about training the employee and you can hire only the expert remote developers.
- You Can Work On Your Idea & Next Step In Business Plan: You need to worry about your development or IT operations, you can easily work on your next idea to improve your clients’ lives.
- You Get The Latest Technology Stack: You need not pay an extra sum to train your employees; you will be spoilt for choices when finding a remote developer working on the latest technology stack.
- You Need No Commitments: No retention cost and no paid benefits to retain employees as you are not committed to them in any way. Your project is complete, you can pay the fee and say goodbye unless you have another project in mind for them.
3.2 Is Cost Reduction Only For The Services You Outsource?
This is one question that has been asked time and again by many entrepreneurs and we’re sure you must be pondering on the same by now! One thing has been established by now:
If you are stuck on the crossroads between choosing to outsource or setting up an in-house team for the same, reducing cost being a constant requirement, outsourcing should be the path to choose.
But would just the cost of that service be saved and nothing else?
Let’s understand this with a case study published in MIS Quarterly by Kunsoo Han and Sunil Mithas.
The study focused on determining if outsourcing IT operations would reduce the non-IT operating cost or not. In this study, it has been revealed that by outsourcing IT services to India or any other country, the cost of non-IT operations was also reduced. The study concluded,
“On average, a one-unit increase in IT outsourcing as a percentage of revenue was associated with a 1.26-unit decrease in non-IT operating costs as a percentage of revenue.”
How is it done? Let’s see how they explain it.
- Outsourcing IT operations would increase the operational efficiency of the existing team and the processes, it would free you up and let you focus more on your core competencies.
- The existing business processes that are supported by would become more efficient, thus, reducing the overall operational cost of that process. NASCO, a service provider for the health insurance industry, outsourced its data operation to IBM to see a reduction in its cost in claim processing.
- The existing technology nerds in your startup team could be directed to focus more on the strategic activities that can be useful in enabling the firm to gain a competitive edge.
Research by IBM T.J. Watson Research Lab was also quoted by the study to prove its point that IT outsourcing leads to a reduction in non-IT operations. It was conducted on 244 companies and concluded that the companies that outsourced IT operations have a competitive edge over their industry peers in the sense that they could better realize improvements in their business performances for the long-term.
https://terpconnect.umd.edu/~smithas/papers/hanmithas2013misqcost.pdf
3.3 Now You Know
- Outsourcing eliminates several costs like employee training, retention, technology training, etc.
- Outsourcing not just reduces the cost of the operation or process outsourced but the overall company’s cost
Chapter 4: Outsourcing: Tips & Strategies To Reduce Cost
Calculating your outsourcing cost is the biggest hurdle and now that we have crossed it, everything seems like a walk in the park. But what if we add more flowers to blossom your way and tell you that you can save further with outsourcing?
Surprised, right?
Not only is outsourcing itself cost-effective, but it can also help you further cut down costs through a variety of practices, tips, and approaches. All you need to do is avoid the common outsourcing mistakes and adopt the best practices while keeping the tips for successful outsourcing in mind.
Let’s explore further!
4.1 Mistakes to Avoid When Outsourcing
Outsourcing is a cost-effective way to get your operations handled by experts to increase efficiency and outcome. But as with any other venture, there will be some hitches and glitches that might dissuade you. But while these hitches and glitches would only be stepping stones to your success, there could be certain mistakes that could put you in the list of outsourcing failures. Let’s throw light on some of them:
- Going For The Most Expensive Or Cheapest Developer
You might be enticed by the low cost of the remote developer!
You might choose the highest bidder or the costliest developer!
These could be two big mistakes.
While going cheap with outsourcing could lead to poor quality of work, paying the highest sum also wouldn’t guarantee quality. You need to screen the developers properly before making any commitment. This brings us to our next mistake.
- Not Interviewing The Remote Developers Properly
Hiring the remote developers without screening them as you would for any in-house candidate could be a big problem in the coming time. The developer or team would be working on your idea and would you like to compromise on it?
- Unclear Or Undefined Project Idea
There could be thousands of ideas cropping up if I vaguely say ‘Develop software that stores employee information’. But not all of them would meet your expectations. In order to get what you want, you need to tell what you want. Be clear in specifying your project scope and goals.
- Having Unsaid Assumptions
Assumptions in outsourcing could lead to blunders. State and document everything, even if you feel it is obvious. Do not make any assumptions. Do you think your developer would complete this task? State it! Do you think they would provide this access? State it! State the obvious and leave no room for assumptions.
- Not Forming The Right Contract
Related to the above mistake is this one! You are not just expected to say everything; you are expected to put it all in the contract that both of you are going to sign. This would give you the assurance that everything documented there would be delivered. Hence, it should be created with complete due diligence.
- Not Securing Your IP
Another mistake that most organizations, especially startups, make is to not protect their IP through legal means. As a startup, your idea, your intellectual property is your main treasure. Hold on to it tight and secure it through all means possible.
4.2 Outsourcing Costs: Tips To Save More
Just knowing the cost of outsourcing is not something that a company should be satisfied with. You should always look for more!
Now that we know what is our outsourcing cost and how we can calculate it, let’s throw light on some tips that can help us in reducing cost using outsourcing. While outsourcing can help you save costs, these tips would help you cut down even those costs.
- Adopt Agile Approach
A study has concluded that agile projects have a 28% higher chance of being successful in managing projects. If you are also planning to outsource your operations, it is important that you go with the agile approach.
- The multiple short iterations in agile methodology pave way for a more effective and better-developed product.
- It has the creation, testing, and release of the project in many iterations
- It ensures that if any changes are required, they would be implemented during the project completion and full and final product would be released on the committed date.
- There is more transparency and increased collaboration in agile development
- Follow The Approach Smartly
The best advantage of the agile approach is that it works effectively with mini-deliverables. As a startup, you do not have the resources to separately assign an individual for looking into the project management closely nor do you have the extra funds to afford a completely failed or different end-product. So, the best way out in this case is to create mini-deliverables. These could be aligned with the sprints that the outsourcing company formulates. It could help you keep a tab on the outsourced product without having to indulge completely and also eliminating any chances of totally different delivery.
- Leverage Technology
The next tip revolves around technology. When outsourcing your product development, you need to be on the technology forefront. There are a number of digital tools out there that could help you minimize and even eliminate a number of costs. These could include collaboration tools, project management tools, automation tools, Robotic Process Automation, etc., which could be very helpful in cutting down the total cost of outsourcing.
- Select The Skill Not The Price
As discussed, going for the price of the remote developer for your project would be a big mistake. An effective tip would be to sort and filter the outsourcing service provider based on the skill that he/she has. You can even select the outsourcing agency by going through the technology stack. A good tip would be to find a developer and see their portfolio. It should always have more projects on the tech stack that you are looking for. They should not just showcase the skill on the resume but also have actually worked on it.
- Don’t Leap Into It
Many companies tend to outsource all their operations in one go. You need to avoid doing that and take the outsourcing venture a bit slower. Take one step at a time only. Start by outsourcing any one operation other than your core competency. If you like what you are getting and it is turning out to be efficient and cost-effective, then only should you go further with the outsourcing venture.
4.3 Best Strategies For Outsourcing Cost Reduction
While we have certainly talked about some great tips that could be effective in reducing your outsourcing cost, there are a few practices that might also be helpful in outsourcing cost reduction. These practices have been adopted by many companies and are emerging out to cut short the outsourcing cost, especially for startups.
- Opt Out-Tasking Wherever Possible
It could be great for entrepreneurs. They can simply out-task different tasks of their product development or any other IT service to experts and complete the rest of it in-house.
Out-tasking is the approach where you only hire a developer or agency for a certain task while getting all other processes done in-house.
For example, suppose you are building an iOS app and have the developer with you but do one to test the app’s quality. You can out-task this aspect of your operation only to save money.
- Go For The Hybrid Approach
Another cost-effective practice for outsourcing is to adopt a hybrid approach. This is where you bring together two approaches for outsourcing and transform them into one.
Hybrid development is the process where you get an Account Manager who would be in touch with you in your location while getting the development outsourced in an offshore location.
The best hybrid approach for outsourcing is to have the outsourcing company’s personnel in your location who would take care of all the operations in the offshore location. This way you would make the most of both on-site and offshore development.
- High-Priority Tasks First
When it comes to outsourcing your tasks, it is always advisable to prioritize your outsourcing tasks. Also, ensure that only the high-priority tasks or features are developed first.
High-priority tasks could be anything that would create the foundation of your product or project.
This way, even if your shoestring budget exhausts or you run out of time, you can easily cut down the outsourcing relationship then and there while still having an MVP or something that does only require few modifications. Do not join hands with outsourcing vendors that want to take care of the easier tasks first and later work on important tasks.
- Multi-Sourcing Makes An Intelligent Option
Another effective and intelligent practice in outsourcing is multisourcing. While many companies still follow the traditional approach of outsourcing the entire project to outsourcing vendors, this new intelligent approach could help you cut costs.
Multi-sourcing is the process where you outsource different aspects of your project from different vendors.
You might find it easier to find different vendors with different services instead of finding one company that lives up to your expectations.
- Adopt Benchmarking Approach
The best practice for outsourcing is the benchmarking approach where you like the payments with the deliverables. You set benchmarks about the delivery of different aspects of the operation and make part payments when the tasks are checked off the list.
Benchmarking is the practice where you align your mini-goals of the project with payments so that the company would be motivated to reach each milestone on time.
- Choose An Outcome-Based Approach
Need value-driven outsourcing? The best approach so far is the outcome-based approach for outsourcing. Here, you not only save money but also mitigate most of the risks in outsourcing owing to the fact that the outsourcing vendor would also be benefitting from the outcome of the outsourcing venture.
Outcome-based approach is where both the parties join hands for the outsourcing venture and agree to share the profits from the product or project completed.
4.4 Finding The Right Company: Key to Unlock Savings
What is the key to unlocking cost savings in outsourcing you ask? A simple answer would be to find the right vendor. Choosing a remote developer from a trusted outsourcing company mitigates your risks and can offer added flexibility, scalability, experience, etc., to the venture. If you have found the right outsourcing company, 90% of your risks are eliminated and the chances of outsourcing success scale up. Keep reading below to know how you can find the perfect company for your outsourcing venture.
Things To Check:
- Expertise: The first thing you should check is their expertise, and not just the general experience, check their expertise in your industry. You would want them to have worked on other projects in your industry too so that they would easily understand your industry requirements and deliver accordingly.
Pro Tip: Look for the experience of the company along with their portfolio to know what kind of projects and industries they have worked for. Ask for their Github profile to know their expertise.
- Developers With Them: As a startup, your goal is to grow with time and would always want to outsource to a company that can allow you to scale. Whether you want to add more developers to your extended team or want to find developers with new tech stacks, the company should be able to provide you with one.
Pro Tip: Ask the company about the teams working with them and the number of developers they have. Know if they could be onboard with your scaling strategy or not.
- Communication Channels: The communication channels and collaboration tools they utilize are also important. Talk to them about their communication channels and ensure they make use of the best channels for seamless communication.
Pro Tip: Go for a company that does not make a fuss and promises to get onboard with your preferred communication channels and tools itself.
- Developer Choice Freedom: Know if the company is offering you the freedom to choose the developer of your choice. They should offer you the freedom to screen developers and choose the one you like. And in case, you don’t like any existing developer, they should also offer you the ease to replace him/her.
Pro Tip: Do not choose a company if it does not let you screen or analyze the developer. Always find a company that gives you the freedom to work with the developer of your choice.
- Time Zone Flexibility: Being in different time zones can pose a big challenge. You need to know if the company is offering you time-zone flexibility or not. If required, it should offer the flexibility of working according to your time zone on certain occasions as well.
Pro Tip: Go for a company that offers complete flexibility for time zone gap and ook for the experience of the company along with their portfolio to know what kind of projects and industries they have worked for.
- Pricing Method: Many companies might try to loot you by changing the pricing model of their developers once they are aboard your project. Find a company that sticks to a particular cost and lets you find developers on a fixed cost only.
Pro Tip: Look for the experience of the company along with their portfolio to know what kind of projects and industries they have worked for.
- Consultation: For a startup, outsourcing is not simply about development, it is also about brainstorming and consultation to help them grow. You need to find a company that would offer a free consultation to help you improve and scale with your operations.
Pro Tip: It is important that you look for a company like Classic Informatics which is eager and willing to offer you FREE consultation regarding your product or product idea.
- Technology Stack: The technology stack that the company has, also plays a crucial role in its expertise. You need to be sure that that company has access to new-age and emerging technologies to help you gain a competitive edge.
Pro Tip: Check out their technology stack before joining hands. They should have all the latest technology stack to make your product/software state-of-the-art.
Also Read: What Technology Stack suits Your Startup?
4.5 Now You Know
- There are various mistakes that you should avoid to ensure you are not among the companies that fail at outsourcing
- There are many tips that you can follow as well to cut down your overall outsourcing cost
- Apart from that, you can adopt the best outsourcing practices that have been proven to save money
- In the end, it all boils down to the developer or outsourcing company that you select and you need to take care of certain things to find the right company as well.
Start Outsourcing, Start Saving
When your budget is on a shoestring and you can find an in-house team with the latest skills and technology stack, shift gears to the outsourcing route!
But costs should never be the sole reason you start your outsourcing venture!
We believe that outsourcing can reduce costs. But along with reducing costs, it also enables you to improve your operations while keeping your undiverted attention on scaling your startup.
As your outsourcing partner, we can help you gain a competitive edge while reducing your costs! We have even helped a number of clients in doing the same. One of our clients, Mr. Francisco, founder of a healthcare portal, has been very satisfied with outsourcing is development operations to us. Quoting Francisco,
“I gave the remote developers, at Classic Informatics, a detailed description of what I needed and they started the development process. Weekly iterations with the team on Friday made it easier to connect and see the progress. They dealt with everything on a dedicated project management application and made it very very quick. They have offered assistance in each front of the development. ”
So, why wait?
Start outsourcing and start saving costs!
Resource:
https://codeit.us/how-to-calculate-it-outsourcing-cost/
http://ankara.lti.cs.cmu.edu/11780/sites/default/files/Outsourcing-Survey.pdf
https://sloanreview.mit.edu/article/the-real-savings-from-it-outsourcing/
https://openprairie.sdstate.edu/cgi/viewcontent.cgi?article=2012&context=etd
https://terpconnect.umd.edu/~smithas/papers/hanmithas2013misqcost.pdf
https://www.osf-global.com/library/media/pdfs/outsourcing-costs-OSF-white-paper.pdf
https://itonews.eu/files/f1213794631.pdf
http://itamchannel.com/outsourcing-increase-software-licensing-cost/
http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.457.8317&rep=rep1&type=pdf
https://lifehacker.com/this-graphic-explains-how-much-time-and-money-it-takes-1735164869
