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In this article, Fireart team shares some insights about why outsourcing may appear a more cost-effective solution than product development with an internal team. Here we also consider the main benefits and costs of outsourcing. 

Today, hundreds if not thousands of companies worldwide choose to outsource their software projects due to a range of reasons. Building a digital product with an outsourcing team may appear significantly less expensive than with an in-house team. If you’re wondering why outsourcing is a more cost-effective option, just keep on reading to learn the answers to some of your questions about software outsourcing

In this article, we will discuss the concept of IT outsourcing, the primary reasons why to outsource software development. Also, we will talk about how to estimate the cost of outsourcing IT services, the most popular types of outsourcing, and the most widely used collaboration models. Moreover, here we provide several suggestions of how and how much do companies save by outsourcing. 

Do you want to know the next: how does outsourcing save money? Is outsourcing cost effective, indeed? Or what are the costs and benefits of outsourcing? We will try to answer these questions in this article. 

Do You Know What Is IT Outsourcing?

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IT outsourcing is an approach that implies using IT services provided by an external provider for completing specific tasks and activities on the IT project. According to recent research, around 59% of enterprises outsource their product engineering. When you want to involve more experts in the project, you don’t need to look for an in-house employee. Everything can be way easier if you just outsource the necessary service to professionals and hire a remote team. They can complete IT work on one project while your internal team can focus on other projects or tasks.

Outsourcing offers plenty of benefits to companies. First of all, it’s more extensive expertise. Outsource partners may have more comprehensive experience in a particular niche than our in-house team. Moreover, your employees may not have knowledge of some very specific IT areas. In this case, outsourcing works like a magic wand since you can find and hire professionals with many-year experience in these fields. 

Another advantage of outsourcing is staffing flexibility. It means that you can hire outsourced talents for tasks and work that have a seasonal or cyclical nature, without the need to look for full-time in-house employees. The last but not least of the IT outsourcing benefits is the reduced cost of IT services. Many companies outsource their projects to companies based in countries with lower living standards that offer significantly cheaper IT services. 

IT Outsourcing Types and Categories

Usually, we differentiate four outsourcing types considering the service provider’s location: offshore, nearshore, and local. Offshore outsourcing refers to the collaboration with IT service providers based overseas. Nearshore outsourcing means cooperating with companies located out of the country but still nearby. Finally, local outsourcing (or onshore outsourcing) is trusting IT tasks to the company located in the same country or even city.

By the cooperation type, outsourcing can be divided into three other categories: project outsourcing, dedicated team, and extended team. Project outsourcing is a popular method, according to which the entire project management and product development from A to Z is trusted by an external team. Commonly, it includes UI/UX design, code development, testing, full product development, and sometimes even ongoing maintenance. 

The dedicated team is a cooperation model applied on projects that imply long-term collaboration, a significant amount of work to be done, and many frequent changes in product requirements. According to this model, the outsourcing service provider supplies the client with all the staff required to manage the project. 

An extended team is an outsourcing approach that means that clients manage the entire team on their own, select and interview every professional separately, and all the teammates are mostly located in different countries. In this case, the whole team works remotely. Let’s say you can hire a designer from Argentina, a developer from India, and a QA engineer from Lithuania.  

All these kinds of outsourcing have pros and cons. Hopefully, this brief explanation of every type will help you choose the one that suits your project best.

IT Outsourcing Cost Calculation: Step by Step 

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Before you start partnering with an outsourcing company, you need to do some preparations and cost calculations, in particular. Here we consider how businesses of different sizes and industries can estimate their outsourcing cost. We find it an easy and effective way of cost calculation and hope it will be useful for you too.

What Is Differential Cost Analysis and How to Use It?

There are various methods to the IT outsourcing cost estimation. However, there is one that most companies rely on. It’s a Differential Cost Analysis. This approach clearly shows the impact of outsourcing services on the cost of your company. If you’re wondering why it’s better to estimate the cost of outsourcing by the Differential Cost Analysis, it’s because this method calculates the comparison of the total cost, including all the fixed expenses as well. This approach implies four main stages of the IT outsourcing cost estimation. 

Research various aspects of your IT challenge you need to solve

First, figure out the quality and the number of features your digital product should cover. It allows you to understand what tasks or features should be outsourced to an external team and make a more precise cost estimation. It’s highly recommended for companies to clearly define their business preferences to figure out whether they benefit from outsourcing or it’s better to develop the product with an in-house team.  

Estimate in-house expenses that you could avoid

The next step is to estimate the complete in-hose expenses that can be avoidable. Don’t forget to include the costs, like salaries, administration fees, equipment, etc. Keep also in mind that you shouldn’t take incurred costs into count. Once you know the expected in-house spendings that are possible to avoid, you can move forward to the next stage. 

Calculate the total cost of outsourcing

Now, it’s time to measure the total outsourcing cost. It may include additional expenses like the cost of administrative services, the price of the contractor’s services itself, transition costs, etc. The so-called administrative costs are the virtual agent’s fee or HR professional’s rate for researching the software development market and finding an appropriate software outsourcing firm.

The total outsourcing cost may also span unexpected additional project costs. Many outsourcing companies try to avoid them and provide cost estimation based on a fixed price. However, you need to discuss it with your outsourcing service provider in-person.

Define the cost of savings by deducing the expenses on outsourcing 

At the last stage of outsourcing cost estimation, you should calculate the difference between the saved cost and the incurred cost of outsourcing. If the final result shows a considerable cost reduction and benefits for your budget, then you just confirmed that hiring an outsourcing team was a good business decision.

Primary Savings from IT Outsourcing

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IT outsourcing attracts so many companies worldwide because it offers a lot of opportunities to save money and develop a high-quality product for a considerably lower cost. Let’s consider how this approach to digital product development can help you save costs in detail.

How to estimate savings that you can make outsourcing

Many companies choose this approach because it allows them to make outsourcing cost savings. However, before making a decision, you need to estimate how much you can save by turning to an outsourcing partner instead of building the product with an in-house team. 

To make the correct estimation, you should use an outsourcing cost calculator based on the calculation and comparison of the total possible cost of software development with outsourcing and in-house teams. It usually uses the cost of software services in your country, average salaries, and hidden costs such as equipment leasing or extra costs for the additional office space for full-time employees. 

How you can decrease the product development cost using outsourcing 

Are you still wondering how does outsourcing reduce costs? It allows you to save time and money on hiring new employers, paying for insurance for them, renting a bigger office to provide the necessary workplaces for them, and so on. Also, this approach freed you up from many employers’ responsibilities. Furthermore, when you can save even more by choosing offshore software outsourcing, that means hiring a team based in the country with lower living standards and, consequently, with the lower cost of software development services.      

Conclusion

Software outsourcing is a very popular IT approach that means hiring an external team to build an entire product from scratch or develop just some of its features. Many companies around the world are using it successfully and have already got positive results. In this article, we have considered what outsourcing is, what are the main financial benefits of outsourcing, and what are the primary IT outsourcing cost savings. Also, we have provided some considerations and estimations of how much money do companies save by outsourcing. We hope that this guide to outsourcing cost evaluation will help you navigate this process more efficiently and make the right business decision.

Do you have more questions about outsourcing? Don’t hesitate to contact us and get answers to your questions. We’re here to help you!


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