A Detailed Breakdown of IT Outsourcing Costs in 2024

Key Factors Influencing Software Development Outsourcing Costs

The budget is the cornerstone that underpins every aspect of a business operation. As the cost of IT outsourcing is a very subjective metric, there is no fixed or one-size-fits-all estimation. The difference in company needs and project requirements has created real price diversity for such a business practice. Below are some undeniable key factors that have an important impact on your outsourcing costs.

Pricing Models

A pricing model defines your access to the service provider’s expertise and resources. There are three common types: fixed-cost model, extended staff, and dedicated team. Each of them offers distinct considerations that impact the overall cost structure of outsourcing arrangements.

Fixed-cost Model

If your IT department operates on a rigid budget with well-known needs, this model may be for you. Under a fixed-cost model, you pay a fixed amount for short-term projects with a clearly defined scope of work or long-term projects with distinct phases once the result is delivered at an agreed time. As the outsourcing team is entirely managed by the services providers, the third-party vendors bear full responsibility for the project’s success.

However, the Managed Services Provider (MSP) is only responsible for completing the tasks agreed upon in the contract. Any changes or additional requirements that arise during the cooperation process may result in extra charges, potentially affecting the overall project cost.

Extended Staff Model (Staff Augmentation)

If your IT department must meet tight deadlines or temporarily relieve skill shortages without a clear idea about the long term, consider an extended staff model. The service provider adds a handful of staff to your existing 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. While the staff augmentation model allows for cost efficiency and adaptability, its overall cost can fluctuate based on the duration and resource utilization intensity.

Dedicated Team Model

If you have a sizable project requiring a fully customized solution and a long-term goal, opting for a dedicated team model is the best choice. With this model, you have a specialized team of professionals exclusively working on your projects for a specified period without the hassle of hiring and training. In exchange, it commands higher initial costs compared to other models to cover full teams with project managers, business analysts, software engineers, QA testers, and other specialists if needed. However, you receive cost-saving benefits over the long term through enhanced productivity and efficiency.

The service-specific pricing depends on your project scope. Because of the many variables involved, it’s necessary to negotiate with the outsourcing provider at least months before the project begins. During this time, it’s essential to develop a good working relationship with the vendor to understand how they work and whether it’s a good match for your existing business operations.

Staffing Capability

While pricing models specify the scale of the outsourcing services, the outsourced team’s staffing capability determines the specific price range.

Experience

Developers’ experience plays an important role in determining IT outsourcing costs due to its direct impact on project quality, efficiency, and overall delivery. While highly experienced coders with a wealth of knowledge have the ability to navigate complex tasks efficiently and deliver high-quality results that meet or exceed client expectations, they often require higher rates upfront. In contrast, less experienced ones, although lacking the depth of understanding or problem-solving skills, offer much more competitive rates.

As seniors were once juniors, juniors need time to become seniors through practice and cultivation. Choosing employees with whatever level of experience depends mainly on the vacancy requirements and the company’s budget. However, most projects require at least a pair of senior or middle engineers and a junior engineer to form a team of technical and business specialists, reducing the total cost of ownership and enhancing the return on investment.

Personnel is one of the most critical 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.

Geographical Location

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 and developed economies, as well as between metropolitan cities and small towns. Most often, countries that are positioned in Latin America, Eastern Europe, and Asia-Pacific are three global outsourcing hubs known for affordable prices, serving clients in more developed economies. In particular, each country under the offer hourly rates is different, creating diversity in labor hiring prices in each of the above regions.

If your company is in a more developed economy, offshore outsourcing may promise attractive affordability but also consider the trade-off: time zone difference. However, this trade-off is not a problem if your IT service provider is able to handle it well. Can they help you set up remote workflow and communication channels that allow space for questions, feedback, and updates? You may 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.

Project-related Factors

These are factors that depend mainly on your specific needs when seeking help from customer service operations to generate business growth.

Project Complexity

The complexity of the project deeply affects IT outsourcing costs. Unlike simple business ideas that only require basic features, complex projects often involve multifaceted functionalities, integration challenges, and considerable customizations. As a result, outsourcing such projects requires a higher level of expertise and specialized skills to successfully meet the project objectives.

Complex IT projects not only lead to higher labor costs used for recruiting skilled development team members with niche skills and experience but also affect the project duration, involving multiple iterations to ensure that the final deliverables meet the quality standards. All of them, when combined together, further contribute to increased outsourcing expenses over time.

Timeline and Urgency

The urgency to deliver results within an accelerated timeline can result in higher IT outsourcing costs. In order to speed up product completion and meet accelerated client expectations, third-party vendors need to reallocate all resources used for the project. This process may require assigning more developers, testers, and other specialists to expedite tasks and ensure timely delivery. Instead of working at a normal pace, they are forced to work overtime or prioritize tasks to accelerate the business processes. More team members lead to higher labor costs, and overtime work leads to overtime pay rates or additional compensation for expedited services, which are all factors that incur increased project expenses.

The requirement of strict timelines causes businesses to have many opportunities to face quality issues if they do not manage projects effectively. Once the risks of cybersecurity and errors appear, outsourcing vendors have no choice but to implement risk management measures and thorough testing to ensure on-time delivery, which can increase project costs to account for risk mitigation strategies.

How to Optimize the Costs of IT Outsourcing Services

There are some solutions that may help you to optimize IT outsourcing costs.

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 and 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 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. If you are seeking a reliable outsourcing partner, look no further than Orient Software. As a customer-centric organization, we prioritize transparency and collaboration to ensure a successful and rewarding outsourcing engagement. Leave us a message to get a free quote and see how we can leverage your business ideas from better to best.