The Real Cost of Outsourcing Software Development Overseas

Technical Articles
Oleg Mykhaylovych
8 September 2016

Many IT companies can’t resist the temptation to hire the overseas programmers who offer their services at much lower prices than the in-house developers. Those companies that choose to outsource their projects to the cheapest programmers often end up regretting their decision. In most cases, the product they receive isn’t up to the mark. After that unsuccessful experience, they don’t want to deal with outsourcing anymore.

Their main mistake is that they failed to set their priorities. They wanted to get the best result but didn’t want to pay accordingly. In order not to repeat the same mistake, you need to realize that the principle “the cheaper the better” doesn’t work here. So, what are the optimal costs for hiring in-house and offshore programmers?

A few decades ago there was only one way to create new software – recruit the team of programmers, find a corner for them in your office, and provide them with all the necessary equipment. While it was a necessity in the past, it’s just an option today because you can also outsource software development to the team of developers both within your country and overseas.

The cost of domestic outsourcing

Let’s take the USA for example. It’s clear that salaries and cost of living vary from state to state and from city to city. It means that the programmers’ salaries will be different too. The range of salaries is depicted in the table below.

costs outsourcing

It’s not a secret that employee’s salary itself is just a part of the whole compensation that also includes taxes, healthcare, and paid vacation. Looking at the third and the fourth columns of the table you might notice that outsourcing hourly rate is two times higher than employee hourly cost. It can be explained by the fact that the firms providing outsourcing services have to pay their employees too. As a result, when you turn to one of those companies, you pay double. Taking this into account, why do people outsource to the domestic software development companies? The main reason for that is their strong belief that a smaller distance will facilitate successful cooperation and lead to a quality result. Committing your project to another team you expect that:

  • You’ll get a regular control over the development process
  • Your requirements for software design will be met
  • You’ll get recommendation as to architecture and technology
  • Your project will be professionally managed
  • The product will be tested and maintained
  • You’ll get flexible ramp-up and ramp-down

The main reason why you outsource is that you want to concentrate on the major tasks of your company but at the same time, to be sure that the software development process is in the right hands. A 10-member team of programmers that you recruit separately can cost you a million dollars per year, while for the same domestic outsourced team you should be ready to pay two million dollars. That’s why more and more companies start to consider outsourcing software development overseas. Lower costs make them endure even long distances and cultural differences.

The cost of offshore outsourcing

In comparison with the USA, salaries for programmers are much lower in many other countries. Usually, the lowest salaries have junior programmers with little or no experience. And this is reasonable because their lack of experience makes them not the best candidates to outsource your project to. Good news is that salaries of senior developers with min experience of 3 years are still lower than in the states. However, every trustworthy offshore outsourcing company, just like any domestic outsourcing service provider, has additional expenses (apart from salaries).



As you can see, it’s possible to get a foreign senior developer for less than $30 but the optimal pricing is $35. It’s not recommended to deal with the programmers who charge less for their services because you take the risk of not getting the desired result due to poor communication and high TCE (Total Cost of Engagement). What is TCE? This is the cost of your additional management, communication, and travel costs besides the salaries for programmers. It’s difficult to estimate those additional costs but generally, they account for over 20% of your outsourcing budget.


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