Putting the Cost of Software Developer Outsourcing Into Perspective

One of the most important activities for managers is the pursuit of efficiency within their production systems. In the post-pandemic context, the pressure to achieve more with fewer resources has become almost a mantra. Whether for resource optimization or strategic gain, there is a growing trend in the adoption of outsourcing models—especially in the field of technology.

In this article, we’ll explore the drivers and characteristics of this trend, key differentiators among suppliers, and how to benchmark and evaluate costs. This information will help managers make more informed and assertive decisions when selecting a software development partner.

Using Outsourcing to Unlock Business Agility

The upward trend in technology services outsourcing has accelerated in recent years. Even amid a more cautious economic landscape, research points to a 6% growth in demand for technology services and consultancies. According to Deloitte’s Global Outsourcing Survey 2022, 76% of executives report outsourcing technology functions in their companies.

The main drivers behind this trend include:

• The overall need for cost reduction

• Pressure to accelerate digital transformation initiatives

• The necessity of accessing specialized skills

Another compelling insight from the same study is the shift toward outsourcing models that offer strategic cooperation over the long term. This reflects a movement away from traditional models—focused mostly on cost-cutting and task execution—toward managed and operational service models. These new models not only deliver on cost-efficiency but also support complex business functions, foster long-term partnerships, and deliver innovation and business value. In our previous article, we delved into how outsourcing software development can offer strategic advantages.

Five Critical Factors That Influence Outsourcing Costs

Choosing the right partner with the appropriate pricing model significantly reduces the risks of your outsourcing strategy. Let’s break down some key aspects that can impact costs:

• In-demand skills: Highly sought-after specialties like architecture, DevOps, AI, and data science command higher prices regardless of geography.

• English proficiency: Language barriers can lead to miscommunication, errors, and rework—driving up costs. While fluent professionals may cost more, a smart approach is to ensure fluent English speakers are distributed across both technical and managerial levels.

• Location: Some regions are known for specific tech expertise, which raises demand and pricing. Proximity to first-world economies often results in slightly higher rates. LATAM has emerged as a region that offers a balanced mix of cost-efficiency, cultural affinity, and time zone alignment.

• Expertise: Senior professionals with deeper expertise tend to be more expensive. It’s important to match the level of experience to your project’s needs.

• Engagement size: Outsourcing companies often provide better pricing for larger or longer-term engagements. If your project spans multiple years, mention this upfront to potentially secure volume-based discounts.

Analyzing Outsourcing Costs in Detail

To make a solid decision about outsourcing, start by calculating the Total Cost of Engagement (TCE) for both internal and outsourced operations, and compare them transparently.

Be cautious not to label outsourcing as “too expensive” based on a limited comparison against internal labor costs. Hiring in-house developers, for instance, involves more than just salaries. The TCE for an internal team typically includes:

• Employee taxes and benefits (e.g., health insurance, paid time off)

• Hardware and software costs (initial setup and ongoing maintenance)

• Supervision time for management, one-on-ones, and performance reviews

Here’s a simplified breakdown comparing in-house hiring and outsourcing:

We now understand how strategic outsourcing can be, what factors influence costs, and how to analyze cost components for an accurate comparison. Next, let’s explore market benchmarks to better understand pricing expectations.

Cost Analysis and Quality Factors

As mentioned, software development outsourcing rates vary depending on location, skills, experience, technologies, and engagement duration.

Still, market studies provide helpful benchmarks. According to 2023 Software Outsourcing Trending Rates, a report by Accelerance, the average hourly rate for a software engineer globally is $64.

While price matters, it should not be the sole deciding factor. Quality, expertise, team culture, client references, communication practices, cultural fit, and time zone alignment all heavily influence the success of your project. A well-balanced view leads to better decisions.

The Accelerance study also identifies an ideal pricing “sweet spot” based on value and delivery capabilities, which can guide your partner selection.

Novatics, for example, is a tech consultancy specializing in system design and software development. The company strikes a strong balance among all key factors mentioned above. More than just allocating professionals, Novatics focuses on delivering value. It has robust processes to ensure effective communication and high-quality deliverables. With over five years of experience serving innovative scale-ups in the U.S. and Canadian markets, Novatics is equipped to support your business goals.

Want to learn more about Novatics and how we work? Send us a DM here.