IT Outsourcing Costs: How Much Does it Cost to Outsource Software Development
As businesses across industries look for ways to accelerate their growth, many wonder if they should develop software in-house or turn to a software development outsourcing provider? This decision is often influenced by the need to balance operational costs, access specialized skills and expertise, and trying to release new features faster than competition. This article explores the costs of outsourcing software development and provides a cost comparison of hiring in house vs outsourcing.
Outsourcing vs. In-House Development: Cost Comparison
In-house development can be significantly more expensive than outsourcing due to high operational costs such as office space, employee benefits, overhead, and technology expenses. An in-house team requires sustained investment in salaries, benefits, and potentially additional training. An outsourced team, on the other hand, provides scalability and flexibility to meet the demands of several projects without long-term commitments.
By outsourcing, companies can gain access to a global talent pool and specific technical expertise while avoiding the costs and administrative hassle of hiring full-time employees. This is particularly beneficial to companies in locations where hiring senior software developers is expensive, for example the USA.
Hiring in House in the USA vs Outsourcing in Poland
Here we break down the actual costs of hiring and employing a senior backend software developer in New York and Poland, respectively.
New York
Using the most probable figures and market averages, we calculated the total costs of employment for a backend developer (e.g. Java or Kotlin backend developer in New York) with a base gross annual salary of $120,000 for three years (an average time to work continuously in the USA for one company). Keep in mind that these figures are estimates and may vary depending on the firm, the method of recruiting remote software workers, or the type of engagement.
1.Base Salary: $120,000/year
2. Payroll Taxes (assume New York state average SUTA tax rate of 2.5%):
- Social Security Tax: $7,440 (6.2% of $120,000)
- Medicare Tax: $1,740 (1.45% of $120,000)
- FUTA: $42 (0.6% of the first $7,000)
- SUTA: $3,000 (2.5% of $120,000)
- NY State Disability Insurance: $65.61
3. Total Payroll Taxes: $12,287.61/year
4. Health Insurance (employer’s contribution, assume $6,000/year)
5. Dental and Vision Insurance (employer’s contribution, assume $1,000/year)
6. 401(k) or Retirement Plan (employer’s match of 3% of salary): $3,600/year
7. Bonuses (performance-based, 10% of salary): $12,000/year
8. Stock Options or Equity Grants (assume $5,000/year)
9. Annual Training and Professional Development Budget (assume $2,000/year)
10. Recruitment Costs (one-time cost, assume 15% of the first-year salary): $18,000
11. Onboarding and Orientation Costs (one-time cost, assume $2,000)
12. Office Space and Equipment (assume $5,000/year)
13. Employee Perks and Benefits (assume $3,000/year)
Annual Costs (excluding one-time costs):
$120,000 (Salary) + $12,287.61 (Payroll Taxes) + $6,000 (Health Insurance) + $1,000 (Dental and Vision Insurance) + $3,600 (401k) + $12,000 (Bonuses) + $5,000 (Stock Options or Equity Grants) + $2,000 (Training) + $5,000 (Office Space) + $3,000 (Perks) = $170,887.61
One-time Costs:
$18,000 (Recruitment Costs) + $2,000 (Onboarding and Orientation Costs) = $20,000
Three-Year Costs:
($170,887.61 * 3) + $20,000 = $532,662.83
Poland
In order to calculate the total cost of employing a backend software developer in Poland on a B2B contract (the most popular form of employment in Poland in the software industry), we’ll need to consider the base monthly salary, tax rate, and any additional costs related to employment. I’ll assume that the additional costs are similar to the ones in the previous example, adjusted for the Polish context. The exchange rate used in this calculation is 1 USD = 4.35 PLN.
1.Base Monthly Salary: 27,000 PLN net (tax included)
2. Health Insurance: included in the base monthly salary, paid by a developer
3. Bonuses (performance-based, 10% of salary): 2,700 PLN/month
4. Annual Training and Professional Development Budget (assume 2,000 PLN/year or 166.67 PLN/month)
5. Office Space and Equipment (assume 1,000 PLN/month)
6. Employee Perks and Benefits (assume 1,000 PLN/month)
7. Additional Company Operational Costs (assume 15% of the monthly salary): 4,050 PLN/month
Monthly Costs:
27,000 (Net Salary) + 2,700 (Bonuses) + 166.67 (Training) + 1,000 (Office Space) + 1,000 (Perks) + 4,050 (Additional Company Operational Costs) = 35,916.67 PLN
Three-Year Costs:
35,916.67 (Monthly Costs) * 12 (Months) * 3 (Years) = 1,293,000.04 PLN
Adding a 25% company margin:
1,293,000.04 * 1.25 = 1,616,250.05 PLN
Total Cost Differences Hiring vs Outsourcing
Let’s compare the total costs of employing a backend developer in the USA (New York) and having an outsourced technology partner Poland based on the calculations we’ve made.
USA (New York) costs:
- Annual: 170,887.61 USD
- Monthly: 170,887.61 USD / 12 = 14,240.63 USD
- Hourly: 14,240.63 USD / 160 hours = 89.004 USD/hour
Poland Costs (in USD using the exchange rate 4.35):
- Annual: 371,609.21 USD / 3 years = 123,869.74 USD
- Monthly: 123,869.74 USD / 12 = 10,322.48 USD
- Hourly: 10,322.48 USD / 160 hours = 64.515 USD/hour
The Difference:
- Annual: 170,887.61 – 123,869.74 = 47,017.87 USD
- Monthly: 14,240.63 – 10,322.48 = 3,918.15 USD
- Hourly: 89.004 – 64.515 = 24.489 USD
Percentage Difference:
- Annual: (47,017.87 / 170,887.61) * 100 = 27.51%
- Monthly: (3,918.15 / 14,240.63) * 100 = 27.51%
- Hourly: (24.489 / 89.004) * 100 = 27.51%
The total costs of a backend developer in Poland hired in a dedicated team model with a technology partner behind are approximately 27.51% lower than in the USA (New York).
Wondering if Outsourcing is the Right Choice For Your Business?
Key Factors Influencing IT Outsourcing Costs
1. Location of outsourced developers
- Nearshore vs. offshore: nearshore development is characterized by geographical proximity and similar time zones. This can facilitate direct communication and project management but comes at a higher per-hour cost than offshore development. Offshore outsourcing in Eastern Europe provides more cost savings, and although some adjustments to communication methods might be needed due to time zone differences, a reliable outsourcing partner can handle that with no issues.
- Wages at the global labor market: the cost of labor varies significantly worldwide so companies looking to reduce costs should opt for offshore developers whose wages tend to be lower.
2. Type of outsourcing collaboration models
- Dedicated team model: the dedicated team model provides a full team of software developers, project managers, and potentially other roles like business analysts or user interface specialists. This approach involves the client having a complete team built specifically to work on their project and is suitable for long-term, complex projects where continuous collaboration with an outsourced provider is needed.
- Project-based model: the project-based outsourcing model involves the outsourced team working exclusively on a single project with defined goals and deadlines, which can help save costs on operational overhead.
- Staff augmentation: this model is a great choice for companies that have a capable in-house development team but require extra resources or specialized expertise to complete certain projects. Team augmentation allows companies to temporarily hire developers to supplement their team.
4. Type and Scale of Development Needs
- Custom software development: those looking for custom software development must be ready to incur higher costs because these projects are tailored to their specific business goals and require unique functionality, customization, and integration into existing systems.
- MVP development: outsourcing the development of an MVP can be cost-effective as the minimum viable product focuses on just essential features. It allows companies to validate their ideas in the market with limited investment, potentially avoiding higher development costs later on.
5. Project management
- Dedicated project managers: when outsourcing software development, effective project management is essential to ensure that the project stays within budget and meets the established timeline. Choosing an outsourcing agency who provides experienced project managers reduces project risk but can also drive the costs up.
FAQs About IT Outsourcing Costs
How much can I save with outsourcing compared to in-house development?
According to our estimates, outsourcing can save up to 30% of the costs compared to hiring an in-house development team, depending on the outsourcing location, as well as scale and complexity of your project.
What hidden costs should I expect when outsourcing?
Potential hidden costs include communication overhead, time-zone management, additional project management fees, and possible rework if quality standards are not met. However, these can be avoided by choosing a trusted and reliable outsourcing partner such as DAC.digital. With us, full cost transparency is guaranteed.
How do I choose the right outsourcing service provider?
To select the right outsourcing partner you should evaluate their expertise, technology stack, and previously completed projects. A good practice is to look for outsourcing providers with a proven track record in your industry. At DAC.digital, we have worked with clients across numerous industries, so you can rest assured that we will align our services with your unique requirements.
What’s the difference between offshore and nearshore outsourcing?
Offshore outsourcing refers to hiring developers from remote countries, which might have lower labor costs but are also often in different time zones. Nearshore outsourcing, on the other hand, involves countries located closer that might have similar time zones.
Can outsourcing help with scaling business operations?
Yes, a great benefit of outsourcing is that it provides companies with flexibility, allowing them to scale up or down based as project demands change. By gaining access to a global talent pool, businesses can quickly onboard skilled professionals without the costs that come with hiring and training full-time employees.