The true cost of software development: outsourcing vs. in-house
Thu, Aug 11, 2022 •8 min read
The everlasting dilemma of outsourcing vs. hiring is particularly mind-boggling when it comes to software development. Various different factors come into play and cause the decision-making process to be a daunting task. Wanting to make it a little bit easier, we studied the available data and prepared a comprehensive analysis of the true cost of in-house vs. outsourced software development. No sugar coating!
While there are tons of articles and blog posts related to the topic of in-house development vs. hiring your own team, we decided to take a more analytical approach, and study the available data to see what is the true cost of software development.
Three approaches to the software development process
There are three main approaches to the software development process:
Hiring own developers
Outsourcing to an external IT company
Doing a mix of the above - enhancing own team with outsourced experts
There is no one right answer to the question “which is best?” - it all depends on your project, budget, roadmap, etc. The total cost of software development consists of much more than just the salary itself. There are aspects like the recruitment process, talent availability, flexibility, or legal issues that can sway the total project cost one way or another.
The recruitment costs
Let’s start with the obvious - no matter if you outsource or hire, people need to get paid. And salary is just one aspect of hiring costs. First off, you need a great HR team able to handle technical recruitment - that’s a huge expense already as IT recruiters' average salary in the US is almost $55k base pay per year (1). Another $27k comes in the form of additional pay and benefits. Then we have all the other fees that come with hiring own devs; sometimes it requires a relocation fee as the talent pool is undeniably smaller than the demand for great IT workers and hiring from abroad is a necessity. Travel expenses, employer branding costs, the time of your experienced staff to handle the technical interview and coding task - all of those must be included in the budget. According to devskiller.com, it costs $50k to hire a software engineer (2). Another aspect is time, and we all know time is money, right? There are various reports and studies that state that the time to recruit an engineer is somewhere between 39 and 95 (!) days. And each of those days loses you money, according to Inside HR in IT projects is something around $500 (3). So, being optimistic and assuming our time to hire would be closer to 40 days than 100, we would still waste $20 000 in lost productivity.
If you decide not to use an internal HR team and go with the recruitment agency instead, the cost to hire might be lower - a typical agency fee is 20% of the yearly salary of the recruited person, but the time to recruit might likely be the same. Assuming an average software developer in the US makes $108k a year (4), the agency fee would be around $21,600. The drawback of that solution is that those recruitment agencies do not always understand your company’s technical requirements and may have trouble getting the essence of your project. After all, they are HR experts, not necessarily technologically savvy.
Now, let’s take a look at the average outsourcing recruitment cost. You don’t really pay anything besides your/your employees’ time to interview candidates and negotiate rates and contracts. What is more, there is a really good chance that the software house you hire will already have a talented team ready to join your project in a short time. As opposed to a recruitment agency, using a software development company will almost certainly guarantee that they understand your technical requirements and may be able to advise you on what skills will enhance your product development. They are experts in what they do so depending on your project scope, be sure to look for a company with a portfolio relevant to your needs. Additionally, when going with a trusted and reputable software house, along with a highly skilled team you get the guarantee of top-notch performance. You don’t just get a developer and then worry about their time management and onboarding yourself - a solid and professional IT partner, like Rumble Fish, will take care of supervising and managing their developers after they join your team. The entire operation is transparent so that you always know what’s going on in the development process - depending on your needs you can arrange for the team to meet daily, weekly, or whenever necessary. You just sit back, relax, and enjoy how the project is progressing while focusing on your business.
When it comes to recruitment costs, outsourcing your project might be the way to go if time is of the essence. If you need a solid and trusted team fast, don’t hesitate to reach out to an external partner.
Here’s where things get a bit more complicated. IT professionals' salary varies greatly depending on their skills, seniority level, but most importantly - their location. It is no secret that developers located in North America are usually the most expensive ones (see Image 2 below for reference). Other parts of the world are definitely more competitive in that regard, with European devs’ salaries being perceived as the best value for money.
Naturally, the salary is just the starting point, as there are other costs to add on top of it - insurance, health care, 401k, taxes, employee training, hardware, office space, etc. Additionally, software houses take really good care of their employees' qualifications and usually have additional budgets for courses, conferences, and other types of training, which in the IT world tend to be really expensive. That’s another cost that you don’t have to worry about when outsourcing.
It is estimated that in the US the real cost that employer pays for a worker is 1.25 to 1.4 times the salary (5). So, if a lead developer makes $145,000 a year (6), the total cost for the employer would be between $181,250 and $203,000. Of course, the more benefits your company offer, the higher the total cost is.
Image 1: Typical cost of US employee benefits. Based on: How much does an employee really cost?
When outsourcing your team, the cost is plain and simple - you agree on the hourly rate for each developer with the software house you partner with, and that is the total amount you’ll pay. You don’t need to worry about the hardware, the office space, benefits, and other expenses you have when you hire in-house. The hourly rate of, for example, Polish engineers is usually 30-50% lower than the US ones, which makes Europe worth considering when outsourcing your IT team. According to HackerRank, Polish developers are in the top 3 of the best developers in the world leaving countries like Israel, Singapore, India, or the US far behind.
Image 2: Yearly US salary range. Based on Glassdoor reports
The winner here is clear - when looking at the salary expenses it is much cheaper to outsource than to hire in-house.
Which software development approach suits your project the best?
When we look at the cost taking into account all of the add-ons and unexpected expenses, it is clear that going with the outsourced team is a better approach. There are of course other benefits of using an external partner, like their curated expertise, shorter time to hire, or ability to self-organize. If you pick the right partner for your project, you’ll gain a lot more than budget savings.
Contact us for your software development needs, let’s see if we’re a good match! → https://bit.ly/rf-contact
1) Technical Recruiter Salary, July 2022, Glassdoor
2) True cost of recruiting a developer, last updated on January 10, 2022, Devskiller.com
3) 3 critical steps to speeding up the time to hire, July 2015, Inside HR
4) Software Engineer Salary, July 2022, Glassdoor
5) How Much Does an Employee Cost You, August, 2019, U.S. Small Business Administration