IT outsourcing costs: factors and ways to optimize
How to strike a balance between investing in technology and keeping your budget under control? Hiring IT outsourcing services is considered cost-effective, but how effective are they? There are concerns that the benefits do not offset the costs due to inadequate cost estimation. To employ IT service providers with a well-planned budget, consider two key factors affecting cost estimation for common IT outsourcing services: pricing models, staffing capability, and the types of IT services.
If your IT department operates on a rigid budget with well-known needs, this model may be for you. It works for short-term projects with a clearly defined scope of work, or long-term projects with distinct phases. The outsourcing vendor bears full responsibility for the project’s success. You pay a fixed amount once the result is delivered at an agreed time.
The outsourcing team is managed by the service provider. While some IT managers may not like the lack of control over the project, this model carries the least risk of runaway costs thanks to specific service pricing. Because of the relative certainty in the outcome, the vendors are often confident in achieving success, even if it means some extra hours for the team. So try not to restrict the conditions too much because that may incur additional costs of risk management.
Extended Dtaff Model
If your IT department must meet tight deadlines or temporarily relieve skill shortages without a clear idea about the long term, you may want to consider this model. The service provider adds a handful of staff to your IT department to extend your current capability. The outsourced team may provide on-site support or collaborate remotely. The service pricing includes a deposit, salaries or hourly rates, overtime, travel & related fees (if on-site).
This model suits projects that need in-house managerial control. It may sound similar to working with freelancers, but it saves you more business resources since the outsourcing vendor does the hiring for you. This works especially well for non-tech companies because the service providers are savvy IT recruiters – having the capacity to hire and train a wide range of tech talent is part of their competitive edge. You can rest assured that their staff has the best people for the project. If not, background checks are possible upon request.
Dedicated Team Model
If you have a sizable project, a fully custom solution, changing requirements, and a long-term goal, this model allows you the most commitment and resources from the outsourcing vendor. In exchange, it commands premium prices, covering full teams with project managers, business analysts, software engineers, QA testers, and other specialists if needed.
The service pricing depends on your project scope. Because of the many variables involved, it’s necessary to negotiate with the outsourcing provider at least several months before the project begins. During this time, it’s essential to develop a good working relationship with the vendor. This has several benefits. You’ll be able to establish transparent, trustworthy communication and build effective cost-optimization mechanisms into the service-level agreement. You’ll understand how they work and whether it’s a good match for your existing business operations.
There are also other pricing models; each outsourcing company offers a combination of these. Which one is right for you? It depends on your project scope, business goals, timeline, and the service provider’s capacity (such as tech stacks, staffing, etc.). Once you decide on outsourcing, it’s best to get in touch with them for a quote and go from there.
While pricing models specify the scale of the outsourcing services, the location and the experience of an outsourced team determine the price range.
Experience refers to the skills of the staff necessary for your project. A junior coder works for a lower salary than a senior software engineer, but they also need more guidance and make more mistakes that take time to fix. Most projects require at least a pair of senior or middle engineer and a junior engineer, reaching up to a team of technical and business specialists.
Moreover, it pays to be mindful of the vendor’s employee experience. Do they have regular upskilling training, work-life balance, extra benefits to retain key talent? Personnel is one of the most important assets an outsourcing company possesses, which in turn may bear unintended consequences on your projects. So make sure you’re aware of their workplace experience, even when they’re not under your direct employment.
Where in the world is the outsourced team located? Geographical location has a significant bearing on prices because of the differences in living costs between emerging economies and developed economies, and between metropolitan cities and small towns. Latin America, Eastern Europe, and Asia-Pacific are three global outsourcing hubs known for affordable prices, serving clients in more developed economies. There is also diversity within these regions: tech workers in Singapore and Australia earn salaries two or three times higher than their regional counterparts such as Vietnam and Indonesia. This article has a more detailed account of their salaries and how you can leverage the differences in living costs to keep IT services under budget.
If your company is in a more developed economy, offshore outsourcing may promise attractive affordability, but also consider the trade-off: time zone difference. Can your in-house staff work well with asynchronous communication where responses can be delayed for several hours? Do you have software for remote teamwork? Is your workflow set up in a way that enables smooth online collaboration? How much transparency do you expect from your service provider?
This trade-off can be managed well if your service provider is experienced in dealing with it. Can they help you set up remote workflow and communication channels that allow space for questions, feedback, and updates? You may want to favor the service provider who is competent at managing these communication barriers, even if their pricing may be on the higher side. As a crucial part of their expertise in outsourcing IT services, good communication is worth the extra charge because it helps you get prepared for surprises (read: extra charges) down the line.
Potential problems that may lead to delays, thus raising costs, could also be natural disasters, location-specific firewalls, and connection problems. Your IT service provider should be able to provide you with an overview of their local infrastructure and be experienced in anticipating and navigating these common issues.
How to Optimize The Costs of Common IT Outsourcing Services
The costs of IT outsourcing services include your project scale and the technology involved. Emerging technologies such as artificial intelligence and Blockchain likely command higher prices than more traditional technologies because there is less supply of the relevant skilled labor compared to demand.
Choose Quality Software Development Rather Than Low-cost
A software development project may take 3 to 6 months, costing from dozen thousands to a hundred thousand dollars. To optimize the costs, choose a service provider who implements Agile and DevOps practices to allow timely feedback and efficient collaboration between developers, designers, and stakeholders.
If the software product contributes to your competitive edge, do consider opting for high quality rather than cost-cutting. Quality software saves money on later testing and maintenance. This is a value judgment on whether you would rather pay for quality now or pay for testing and upgrades later.
Taking advantage of templates, existing solutions, or open-source software may save you time and money, especially if the project doesn’t require groundbreaking technology. This works particularly well for the solutions that have been on the market for a while, such as ERP or eCommerce. Improving, updating, or adding customized features takes less time to ideate and explore. Want to build a piece of software that responds to the latest market research, without having to bear the risks of innovation? Upgrading outdated software rather than brand-new development may relieve the burden on your outsourcing budget.
The value of a piece of software is more than just clean codes that work. For larger projects, have clear priorities, documentation, and market research to make sure the software product fulfills your business goals. It is worth hiring a business analyst to deal with these issues, if you don’t have anyone in-house. Business analysts and project managers manage the relationships between you - the client - and technical staff to align mismatched expectations and handle the biggest challenge in software development - adapting to changing requirements.
Quality Assurance and Software Testing Costs: The Earlier The Better
Implementing testing from the beginning of the project optimizes the man-hour of each developer and get a higher ROI in the long run. Hiring at least a QA tester for every 6 to 10 engineers, depending on the scale, is a necessity, not an extra cost. Treating quality assurance as an afterthought risks higher costs caused by the delays when the staff have to go back to previous versions to fix bugs that prevent timely progress.
Ask your outsourcing providers about how they strike the right balance between manual and automated testing tools. Make sure the testers use various tests to review the codes for functionality, performance, compatibility, responsiveness, security, and user experience.
Prolong The Life of Your Software With Technical Support and Maintenance
Software maintenance may cost you more than software development without smart planning because of its open-ended nature. Like a vehicle or a house, if a software product is old or poorly developed, it requires more costly maintenance. Common managed services include software support and software maintenance.
Software support is reactive and ad-hoc. It identifies issues and solves them as they arise, such as bugs, system errors, log-in failures, etc. Support is quite similar to corrective maintenance - it’s maintenance at a minimal level.
Software maintenance is proactive and routine. These services monitor and update the product to respond to feedback or potential external changes. Here are the types of maintenance in order of complexity:
Adaptive maintenance: updates the software to adapt to changing IT environment. This is to keep up with new development and technologies.
Perfective maintenance: incorporates user feedback to improve performance and maintainability. This doesn’t mean adding a new feature, but to re-prioritize some existing features to enhance the user experience.
Preventive maintenance: upgrades the software in anticipation of potential problems or requirements as the product evolves.
These types of maintenance can be implemented for parts of your software product, such as database, configuration, cloud events, etc. Because of the needs-based nature of maintenance, it is hard to estimate the costs. To save money, invest in quality software development and testing to keep maintenance costs controllable, then implement regular updates and set clear maintenance priorities to avoid incurring revenue losses caused by low-performing software.
Cost of IT Outsourcing: Is It Worth It?
Project outsourcing isn’t just about cost savings, but a strategic advantage. For small businesses with limited resources, the quick access to cutting-edge tools, systems, processes, and talent of established outsourcing companies can fasten their speed in responding to the fast-evolving IT environment. Mid-sized companies have been adopting advanced technology to improve operational efficiency, manage digital risks, among others. So, the question for your own company is not if you should outsource, but how much. How much of your business operations should be delegated to outsourced teams, so that the in-house team can focus on your core competencies?
Ultimately, IT outsourcing may save resources not just in IT but also in other non-IT business operations. No two outsourcing services are the same. Factors such as pricing models, industry experience, and location all influence the costs of your initial engagement with an outsourcing company. Your particular IT needs then determine the ongoing expenses throughout the software development life cycle. To optimize the costs of outsourcing services, get in touch early, choose vendors with a transparent pricing guide and relevant industry experience, prioritize cutting-edge technology, and budget for regular maintenance.