Every company aims to reduce costs wherever possible. While some businesses gain from the strategic technological expertise that may not be available inside the in-house team, others can profit from selecting IT services from an outsourced service provider to significantly cut costs and time for huge goods.
There are times when companies search outside for help when their internal IT teams need more help. For any reason, consulting with outside experts has several advantages for businesses. For this reason, it is essential to evaluate the expenses of IT outsourcing in advance.
The blog gives important information about evaluating IT outsourcing service costs and many other related insights. Keep reading to know more.
Let’s first understand what is IT Outsourcing?
IT outsourcing is when a company hires an outsourced software development company to handle various tasks. These tasks can include activities like developing a software program, managing a computer system or keeping data safe or giving technical support or help.
But choosing the right IT outsourcing partner can have a number of factors affecting the decision, one of them is IT outsourcing costs. Moreover, these external companies might be located nearby or far away in another country.
Some statistics show that:
The global IT outsourcing market was valued at approximately $342.9 billion in 2020 and is projected to reach $410.2 billion by 2027 growing at a CAGR of 4.5% from 2021 to 2027. This statistic talks about the significant growth and size of the IT outsourcing industry.
Significant cost savings can result from outsourcing customer service to nations with cheaper labor expenses. For example, a Deloitte study discovered that outsourcing customer support to nations with relatively lower labor costs, such as India or the Philippines, can result in cost savings for businesses of between 40% and 60%.
Through increased productivity and speedier problem solving, outsourcing customer support to specialist service providers can save money. A McKinsey study found that organizations who outsourced their customer support saw considerable cost reductions, with handling times reduced by 10% to 30% and first-call resolution rates rising by 20% to 40%.
Now, let us understand what are the current trends in IT outsourcing?
Cost Efficiency and Quality:Businesses focus on reducing costs while enhancing service quality.
Access to Global Talent: Companies are hiring professionals from across the globe for specialized skills and innovations.
Cloud Services Dominance: More organizations are moving to cloud services for greater flexibility and scalability.
Cybersecurity Focus: There's a significant uptick in the demand for strong security measures within outsourcing deals.
Data Analytics Integration: Using analytics to enhance decision-making and refine service offerings.
Shift Towards Partnerships: Shifting from traditional client-vendor relationships to more collaborative partnerships.
Rise of Nearshoring: Companies are choosing outsourcing partners in closer proximity to minimize cultural and logistical differences.
Now further let us quickly understand the benefits and drawbacks of IT outsourcing.
IT Outsourcing has a number of benefits available for organizations, few of them are mentioned below:
Companies like to outsource IT work because that helps them save money. Hiring an IT staff and buying equipment would cost a lot of money as compared to paying the money to an outsourced software development company.
It helps you gain access to technical expertise and these experts possess some specialized skills and this might cost them lesser as compared to hiring them locally.
Outsourcing lets your business quickly change its IT support. If you need more, they provide you more. If you need less, they provide you less, thus allowing you to achieve scalability.
IT Outsourcing has a number of drawbacks available for organizations, few of them are mentioned below:
When you outsource IT tasks, there are instances where you might lose some control over the operations, i.e. you might rely on the outsourcing company’s schedule and policies which might not always align with your project needs, especially incase of an urgency.
Sharing sensitive data with an external IT outsourcing software development company can increase the risk of security breaches. It's crucial to ensure that the outsourcing company has strong security measures in place, but monitoring this can be challenging.
Working with an outsourced IT team, particularly if they are overseas, can lead to communication difficulties. Time zone differences, language barriers, and cultural discrepancies can cause misunderstandings and delays, impacting the effectiveness and timeliness of the IT services you receive.
Now, moving ahead let us understand what are the functions that can be outsourced using IT outsourcing?
IT outsourcing enables organizations to delegate a number of technical tasks to external experts, thus allowing them to focus on their core business while tapping into the advanced skills and technologies.
Below we’ve mentioned some common IT functions which can be outsourced using IT outsourcing services.
By outsourcing software development organizations can gain access to global talent and provide cutting-edge technical expertise, thus enabling them to minimize the cost incurred on hiring a full-time software development team. This can range from developing mobile apps to crafting bespoke software solutions.
Many organizations delegate their website development and ongoing management to an outsourced IT service provider to ensure their online presence is professional and secure, without stretching their internal resources thin.
By outsourcing technical support, companies can offer round-the-clock help to their customers or staff, without the need for a large, dedicated in-house team. This function covers everything from help desk services to complex troubleshooting.
Using an IT outsourcing method you can manage and delegate IT infrastructure like data centers, cloud services and network maintenance can allow you to reduce costs and improve operational flexibility and scalability.
With cybersecurity being complex and critical, many businesses prefer outsourcing this function to benefit from top-notch security expertise and defenses against the latest cyber threats.
Outsourcing database management means having experts organize, store, and manage your data, ensuring high data integrity and optimal system performance.
By outsourcing software development can help organizations keep their apps up-to-date and thus allows them to run smoothly, without diverting focus from their primary operations.
Handling network management externally ensures efficient network connectivity and health, covering everything from telecommunications to internet infrastructure.
Having disaster recovery and backup services managed by an outsourced provider ensures that a company’s data is securely backed up and that systems can be quickly restored after any disruption.
Outsourcing IT consulting services allows businesses to draw on external expertise for technology strategy planning, which can include conducting IT audits, implementing new systems, and aligning technology with business objectives.
Outsourcing these IT functions helps companies not only manage costs but also harness specialized skills that might be too expensive or impractical to develop in-house. This approach can lead to better productivity, smarter technology implementation, and access to innovation.
Further, let us understand if IT outsourcing is really cost effective?
Confused where to look? Worry not, our developers & professionals can help you cover every facet with full efficiency and effectiveness and at an affordable rates and flexibility.
Before moving to IT Outsourcing costs and other crucial factors, the most simplest question to consider is whether IT outsourcing really a cost effective strategy?
Yes, it is definitely a cost-effective strategy. Implementing Outsourcing services would bring a significant cost saving when you collaborate with a reliable service provider.
"Purchasing IT services from outside service providers to deliver web application services, infrastructure solutions, and IT-enabled business processes for profitable business outcomes is known as IT outsourcing."
Thus, it is termed as one of the primary reasons why organizations are opting to outsource its IT services.
Not only this:
But, IT outsourcing also helps
In achieving a significant reduction in the overall development costs which typically ranges from 40% to 70%, thus enabling a business to have better control over their expenses and budgets in an effective way.
The ability to quickly change the size of the workforce through staff augmentation or managed project outsourcing, as well as the availability of specialist talents necessary for technology initiatives.
Finding affordable technology talent to support ongoing initiatives for digital transformation.
Now, let us understand the Factors responsible for Outsourcing Costs in 2024
When you get in touch with your potential partner, the three main factors that determine the software development hourly rates are location, experience, project scope, and complexity.
Let us understand all the three in detail:
Because different regions have different costs of living, the pricing might vary significantly, which has an impact on how much coders make per hour. The $80-$110 average pricing in the US will be used as a starting point for comparing hourly rates for software development. I want to look at three primary outsourcing locations:
Developers from Eastern Europe are highly sought after in the industry due to their reputation for having exceptional professional abilities and knowledge. Numerous sources state that the hourly fee for software development in Eastern Europe ranges from $30 to $80.
This region includes the Balkan countries, Poland, Ukraine, Romania, and Bulgaria. For example, reputable media sources such as the Wall Street Journal and Reuters refer to Belarus as “the Silicon Valley of Eastern Europe.”
Over time, European developers established an unquestionable reputation. Nonetheless, there is a significant shortage of developers due to the high cost of living (when compared to Eastern Europe or Asia) and the enormous demand, which has driven software development hourly prices for IT services to an average of between $60 and $80 per hour.
IT outsourcing has been playing a crucial role in the economy of many Asian nations like India and China. Therefore, the commonly known quality of services isn’t good but the average rate to hire remote developers from this region ranges from $15 to $30, which is the least on the list.
In North America, particularly the U.S. and Canada, developers are known for being at the cutting edge of technology, often setting trends in the tech world. Due to the high cost of living and advanced technological infrastructure, hourly rates for developers can range from $70 to $150.
This region is a hub for innovation, hosting major tech centers like Silicon Valley. North American developers are highly valued for their strong adherence to intellectual property laws and expertise in latest technologies.
South America's tech scene is booming, with countries like Brazil, Argentina, and Colombia leading the way. Thanks to a growing number of tech graduates and supportive government policies, the region offers skilled developers at rates ranging from $25 to $50 per hour. It's becoming a favored nearshore option for North American companies, thanks to cultural similarities and overlapping time zones that ease collaboration.
Africa is emerging as a key player in the global tech outsourcing market, driven by a young, tech-savvy population. Countries like Nigeria, Kenya, and South Africa have become hotspots for developers, who offer services ranging from $20 to $40 per hour. African developers are particularly innovative in mobile and fintech arenas, responding to unique local needs and opportunities.
Australia is recognized for its robust tech industry and high standards of software development, with hourly rates typically between $50 and $100. Australian developers are well-versed in sectors such as mining technology, environmental software, and financial services. The country's stable business environment makes it a reliable choice for outsourcing, with the added benefit of proximity to Asian markets.
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By expertise we refer to the set of skills, knowledge and experience which the outsourcing team possesses. It can vary depending on:
The programming language knowledge
The expert skills in working with some industry-specific softwares and the number of years of experience
Knowledge about different legislative regulations
Industry know-how
Specialized kills
Certifications and qualifications
The total cost of outsourcing and the hourly rate for a software developer are determined by the level of competence needed. The efficiency, speed, and output quality were all determined by the amount of competence. These are some examples of the average yearly wages of several American specialists.
You can determine the software developer's hourly fee by examining them:
Expertise | Salary |
MEAN Stack Developer | $120,699 |
MERN Stack Developer | $121,569 |
Laravel Developer | $170,386 |
Big Data Scientist | $121,417 |
Backend Engineer | $133,072 |
Machine Learning Engineer | $133,407 |
Android/iOS developer | $123,982 |
Embedded System Engineer | $125,924 |
Cloud computing engineer | $153,235 |
Game Developer | $79,750 |
QA Engineer | $82,793 |
Project scope, in layman's word, comprises all the work activities which are necessary to develop a software.
If we say it in a more formal definition, the project scope is a set of features a project should have in order to get released in the market. This can include the development of functionalities, user interface design, integrations with other systems and data migrations.
Whereas, project complexity in turn is an abstract estimation of a number of aspects like technology, budget, desired timeline, etc. which makes the project challenging to execute and deliver.
Let us break down both factors into some elements which make up the total software development cost.
Technical complexity describes the degree of sophistication and cutting-edge technologies used in a project. This may consist of:
Advanced Technologies: Using cutting-edge technologies like machine learning, artificial intelligence, blockchain and large-scale infrastructure can possess a higher degree of complexity. Each of this technology needs specialized knowledge and skill.
For example, integrating AI services can involve aspects like data preparation, algorithm selection and tuning, while blockchain projects would need understanding decentralized networks and smart contract coding.
Resource Intensiveness: Technologies with high computational needs or those requiring large amounts of data processing power might raise hardware and infrastructure requirements, which can affect the final project cost and schedule.
Specialized Skills: The requirement of developers with specialized skills can help you navigate advanced technologies which can lead to an increased cost as finding these expertise can be expensive and harder to find.
See How IT Outsourcing can impact the skill gaps positively
Integration Challenges: Integrating these technologies into existing systems or ensuring they work harmoniously with other technologies increases the risk of compatibility issues and bugs, which can extend debugging and development time.
The breadth and depth of features that the software should provide is referred to as functionality complexity. This has multiple dimensions.
Business logic: The amount of time it takes to design software can be greatly increased by the complex business rules, minute computations, and diverse processes that it must oversee. More intricate programming logic and rigorous testing are necessary for software that manages intricate workflows or decision trees, for example, in order to guarantee accuracy.
Complexity of User Interaction: The design and functionality of the user interface are also quite important. More design and development effort is required for applications with complex, dynamic interfaces, several user roles with different degrees of permission, and a wide range of customization possibilities than for layouts that are more straightforward and static.
Integration with Other Systems: Whether through specially designed APIs or the integration of already-existing third-party services, the capability to interact with other systems in an easy-to-use manner introduces a further degree of complexity. Intricate data mapping, knowledge of external systems, trustworthy data transfer, and security procedures are frequently needed for this.
Advanced Security Features: Protecting sensitive data requires the implementation of strong security measures like encryption, multi-factor authentication, compliance with legal requirements (like GDPR or HIPAA), and safe data storage and transfer protocols. However, these measures also increase the development challenge.
Real-Time Operations: This adds further complexity if the program needs to synchronize data between platforms or process it in real-time. Advanced architecture and testing are necessary for systems that must respond or update instantly, such as trading platforms or real-time analytics tools, to guarantee performance and reliability.
A project's scale and complexity affect not only the original development expenses but also a number of other financial factors, including:
Testing Costs: To make sure all components work correctly and interact as intended, more complex projects typically require more extensive and lengthy testing.
Costs associated with maintenance and scalability: As system complexity rises, so does the work necessary to keep it updated and maintained. Scaling effectively may also provide more of a difficulty for more sophisticated systems.
Costs associated with User Training and Support: Increasing feature complexity frequently results in end users requiring more in-depth training and the support staff dealing with more complicated problems, both of which can raise costs.
Now, further let us understand various cost models for IT Outsourcing
Outsourcing pricing models are critical for defining the financial relationship between a company and its outsourcing service provider. The choice of pricing model affects project management, transparency, budgeting, and the overall success of the outsourcing engagement. Here’s a detailed look at each common pricing model, including examples and considerations:
Description: In the fixed price model, the service provider and the client agree on a predetermined price for the project, which is paid upon project completion or in scheduled installments based on predefined milestones. This model is typically used when the project scope, schedules, and deliverables are clear from the outset.
Example: A company wants to develop a new landing page for its marketing campaign. The requirements are clear, and the project is relatively small, so the company agrees to pay the outsourcing firm $5,000 for the completed page.
Considerations: While this model offers budget certainty and minimal financial risk for the client, it can be inflexible. Changes in scope or additional features can lead to renegotiations and potential conflicts. It’s best used for short, well-defined projects where little change is expected.
Description: Clients pay based on the actual time spent by resources and the materials used in the project. This model is favored in projects where the scope is not clear at the beginning or is expected to evolve over time.
Example: An enterprise software upgrade where the full scope of changes will not be known until the initial phase is researched and planned. The outsourcing firm charges $100 per hour for a software developer and $150 per hour for a project manager.
Considerations: This model offers flexibility but requires rigorous project management to keep track of costs and prevent budget overruns. Clients should regularly review time logs and progress reports to ensure that the project stays on track.
Description: This model involves payment of the actual costs incurred by the provider plus an agreed-upon profit margin. It’s typically used for long-term projects with variable scopes.
Example: A tech startup outsources the development of a new product feature that is experimental in nature. The outsourcing firm charges for the cost of labor and other expenses, plus 15% as a profit margin.
Considerations: Transparency is critical in the cost-plus model, as the client needs visibility into actual costs to prevent mark-up inflation. It’s suitable for projects where new ideas and iterative testing are expected, as it allows for flexibility in scope adjustment.
Description: The client pays a regular fee, often monthly, which covers a set amount of work. This model is used for ongoing support or when continuous service is required.
Example: A company retains an IT service provider to manage its network and server operations. The contract stipulates a monthly payment of $3,000, which covers 50 hours of support each month.
Considerations: This model ensures the service provider has a steady income and the client benefits from predictable billing and assured resource availability. It’s essential to define clearly what services are included in the retainer to avoid misunderstandings.
Description: Payments are tied to achieving certain performance metrics or outcomes. This model motivates the provider to focus on results but requires clear, measurable, and achievable goals.
Example: An e-commerce company outsources SEO services with payments linked to increases in site traffic and sales conversions. The agreement includes a base payment, with bonuses for each milestone reached in traffic and conversion increases.
Considerations: Both parties must agree on how performance will be measured and verified. This model is powerful for aligning provider incentives with client goals but can be complex to administer.
Choosing the right outsourcing pricing model is vital for aligning business objectives with the operational goals of the outsourcing partnership.
Companies should consider the scope, complexity, and duration of their projects, alongside their need for flexibility and cost control, to select the most appropriate pricing model. Properly structured, the pricing model will not only ensure financial fairness but also foster a strong, productive relationship between the company and its outsourcing provider.
Now, further let us understand what are the different costs involved in IT Outsourcing.
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Engaging in IT outsourcing has both direct and indirect costs involved. Below we’ve mentioned some expenses that are typically linked with IT outsourcing
These costs are related to establishing an outsourcing agreement that may cover expenses for infrastructure setup, service transition and all other transferring processes or data to the outsourcing partner.
The infrastructure costs associated with IT outsourcing include cloud services, software licensing, hardware, backup and disaster recovery plans, and many other items.
Businesses can make more informed decisions about IT outsourcing by having a strategic understanding of and control over infrastructure expenditures, which eventually improves operational performance and cost-effectiveness.
These types of expenses are related to some specific IT service undergoing outsourcing. These expenses include software development, application maintenance, system administration, etc. Usually these also include some core expenses like fixed cost, per-user, per-device or per-service models.
These types of costs are a continuous expense involved in upkeep of the outsourced IT services. Moreover, this type of costs includes expenditures for system upgrades, software licensing fees and technical support.
The costs associated with drafting, negotiating, and reviewing the outsourcing contract are included in legal and consulting fees. In order to guarantee that the business complies with relevant rules and regulations, this category may also include ongoing legal and consulting expenditures.
Management costs include expenses that are associated with overseeing outsourced services and outsourcing providers. It also includes salaries of internal staff dedicated to provider communication, the time and resources spent over supervision and governance and an expense incurred towards coordinating and integrating the provider’s services with an overall business operation.
The costs incurred in ending the outsourcing relationship are referred to as exit costs. This includes any contract termination fees as well as the cost of moving the service back in-house or to a different supplier.
Change management expenses are related to modifications made to the outsourcing contract, such adding new features, scaling services, or switching to a new supplier. If the change needs training for your team on new systems or processes, then this category can also include such costs.
But, are these the only costs involved in IT outsourcing? No, there are a few more hidden costs that can impact the overall costs of IT Outsourcing.
There are a number of hidden costs which can fluctuate your IT outsourcing costing. We’ve mentioned a few of them below:
Keeping up an outdated outsourcing approach
Overseeing and arranging service suppliers
A poor approach to sales and operations
Guarantees and other benefits
Unexpected and unforeseen dangers
Low and inadequate quality
Unexpected arrangements and first-rate freight
Based on the above costs you can hire remote developers, but before making the decision of hiring you should know the cost to hire remote developers.
Moreover, you should also know the costs of IT outsourcing services based on the factors given in the above sections of the article to make an informed decision.
Now, further let us understand what are the future trends in IT outsourcing to watch out for.
Integration of Automation and AI: Outsourcing services are increasingly incorporating automation and AI to streamline operations.
Developing Strategic Partnerships: Outsourcing firms are moving towards working more closely with clients to create tailored solutions.
Focus on Sustainability and Ethics: Ethical practices and sustainability are becoming crucial factors in choosing outsourcing partners.
Blockchain’s Role: Blockchain technology is expected to bring greater transparency and trust to outsourcing agreements.
Expanding Remote Capabilities: The trend towards remote work is expected to grow, facilitated by advances in technology and global connectivity.
Now, further let us understand how we at Acquaint Softtech can help you in fulfilling your IT Outsourcing needs.
Acquaint Softtech is an IT outsourcing provider of software development and IT staff augmentation services. We are pleased to be an official Laravel partner and specialize in developing unique software utilizing the Laravel framework.
Acquaint Softtech is the best option if you need to hire remote developers for your company. Within 48 hours, developers can join your current team thanks to our quick onboarding procedure.
Furthermore, we are the greatest option for any outsourced software development job due to our affordable hourly charge of only $15. To fulfill your needs for custom development, we can help you hire MEAN developers and hire MERN developers in addition to remote developers and outsourced services.
IT outsourcing provides significant advantages, including cost savings, access to specialized skills, and flexible resource management. However, it's crucial to navigate the potential drawbacks such as loss of control, security risks, and communication barriers.
By carefully selecting the right outsourcing partner and understanding the associated costs and pricing models, companies can effectively leverage IT outsourcing to enhance their operational efficiency and innovation. Acquaint Softtech stands ready as your reliable partner, offering expert Laravel development and a quick, cost-effective service that adjusts to your unique needs.
Yes, you’re right, whether you’re having a headache or not being able to hire a skilled in-house IT professional or any other pain point, then IT outsourcing from Acquaint can be your medicine.
IT outsourcing helps reduce costs, provides access to specialized expertise not available in-house, and offers scalability in IT support.
Consider factors such as the provider's expertise, security measures, communication standards, and their understanding of your business needs.
Yes, IT outsourcing can significantly reduce operational costs by eliminating the need for in-house IT staff and infrastructure and by leveraging the outsourcing partner's economies of scale.
Potential risks include losing control over IT functions, encountering security and confidentiality issues, and facing communication challenges with the outsourcing provider.
Acquaint Softtech ensures quality by using experienced developers, following rigorous testing protocols, and maintaining close communication with clients to fully understand their requirements and feedback.
I love to make a difference. Thus, I started Acquaint Softtech with the vision of making developers easily accessible and affordable to all. Me and my beloved team have been fulfilling this vision for over 15 years now and will continue to get even bigger and better.
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