IT Outsourcing Costs

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IT Outsourcing Costs
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Every company wants to save money in any way they can. IT outsourcing services to a Managed Service Provider (MSP) can significantly reduce the cost and time required for a large project for some. Others benefit from strategic technology expertise that their in-house team does not have access to.

In some cases, it is simply because the internal IT team is overburdened and requires additional assistance. However, you should be aware that many factors influence IT outsourcing costs, which you should consider before deciding whether or not to outsource.

Today, hundreds, if not thousands, of businesses around the world outsource software development projects for a variety of reasons. According to Gartner, global IT outsourcing for remote work will reach $456 billion in 2022, a 6.8 percent increase from 2020.

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The cost of developing a digital product with an outsourced team may appear to be much lower than the cost of developing a digital product with an in-house team. If you’re wondering why outsourcing is the most cost-effective option, keep reading to get some answers to your software outsourcing questions.

What Is IT Outsourcing?

IT outsourcing is a strategy that entails using third-party IT services to complete specific tasks and activities associated with an IT project. According to recent data, approximately 59 percent of businesses outsource their product engineering. You do not need to hire an in-house employee to include other experts in a project.

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Everything could be a lot easier if you outsource the necessary services and hire a remote workforce. They can complete IT work on a single project while your staff focuses on other responsibilities or projects.

Why Would You Outsource Your IT?

IT Outsourcing

Outsourcing has numerous benefits for businesses. To begin with, it necessitates a greater breadth of experience. Our outsourcing partners may have more experience than our in-house staff in a given area.

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Additionally, your workforce may be lacking in some highly specialized areas of information technology. Outsourcing acts as a magic wand in this scenario because it allows you to find and hire people with years of experience in these industries.

Accordingly Groove Technology – Software Outsourcing Company, another advantage of outsourcing is the ability to scale your workforce as needed. This means you can hire outsourced labor for seasonal or cyclical activities without hiring full-time in-house employees. The last but not least advantage of IT outsourcing is lower IT service costs. Many businesses outsource their projects to companies in lower-cost countries that provide much lower-cost IT services.

The Costs of IT Outsourcing

IT outsourcing partners typically bill on an hourly basis. Specific off-shore software development organizations may charge between $20 and $40 per hour. Engineers in Western markets may become even more expensive, with hourly rates of up to $50 or more.

Before we get into pricing, there are two basic IT outsourcing models to consider:

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Fully Outsourced IT

IT Outsourcing Cost

Your company does not have an in-house IT department, or your employees are already overworked and you do not want them to burn out. In this case, the MSP (Managed Service Provider) is in charge of, among other things, troubleshooting, security management, backups, and software upgrades. The MSP may keep and maintain servers in a data center located off-site. The MSP or outsourcing firm should be regarded as a strategic solution provider.

Consider the following scenario: you own a healthcare company and want to develop a telemedicine app but don’t have any developers on staff. You don’t see the point in creating new jobs just for the duration of the project, or you may have an in-house team capable of developing an Android app but not an iOS version. As a result, you can delegate your project (or part of it) to a third party.

IT Co-Management

The company currently has an in-house IT staff but requires assistance. To free up internal resources, this may entail outsourcing common computer system tasks such as upgrades, backups, threat detection, and even help desk support. Alternatively, the core workforce is in place to manage day-to-day operations, but specialized talent is not available within the organization.

Assume you want to create a business application to manage manufacturing processes. What if your team is capable of creating this app but lacks an iOS developer? Outsourcing is the best solution because it makes no sense to hire a new developer when the developer is only needed for a short project.

You can go to an IT Outsourcing Firm and hire a developer who will continue to work for the software company, but you will only be charged for the hours worked on your assignment.

What Factors Impact the Cost of Outsourcing IT Services?

When a company’s non-core business functions become a source of distraction, the cost of outsourcing becomes a pressing concern. This is especially true when it comes to information technology.

Companies also outsource services and farm out projects due to the high cost or scarcity of local professionals. A domestic service provider, on the other hand, bears the same costs as the client.

Include the provider’s operational, marketing, and management costs as well as the markup. It’s no surprise that the cost of outsourcing IT services domestically may be 1.5 times that of an in-house team.

Offshoring is a viable option for significantly lowering costs. The savings are achieved due to the significant difference in salaries and IT service pricing between the United States and other countries.

However, the lower cost of offshore software development, maintenance, and so on does not always imply high quality and smooth collaboration. It is critical to understand what determines costs in order to achieve the best price-quality ratio. Let’s take a look at some of the most important factors and components.

How Geography Affects the Cost of Outsourcing IT Services

Latin America is appealing because it is in the same time zone as the United States and Canada. Costa Rican IT professionals are particularly appealing in terms of outsourcing costs. In general, they have a strong command of both written and spoken English. The rates of $25–50 are slightly lower than in other countries. Furthermore, because Puerto Rico follows US laws, American companies are more likely to outsource projects there.

South Asia, particularly India, has the most affordable rates. However, the savings often come at the expense of poor quality. Other problems include differences in culture and time zones, which can make it hard to talk to the outsourcing provider.

Eastern European countries provide a higher quality than Asian countries. Communication is not a problem because the programmers speak English well and there is only a 1-3 hour time difference with Western Europe. The 7–12-hour time difference with North America can also be beneficial; some of Onix’s U.S.-based customers prefer to assign a task, go to sleep, and wake up to see the job completed.

After deciding on a suitable location for near-or offshore software development, investigate the local market for IT outsourcing service providers. You may save even more because rates vary across the country (e.g., capital vs. province).

Cooperation and Pricing Strategies

The cooperation and service pricing models used by offshore vendors also influence the cost of IT outsourcing. The choice of a model is primarily determined by the client’s business objectives. Take your time communicating with a potential outsourcing services provider in order to learn about and negotiate the specifics.

Project Outsourcing

This popular approach implies that the outsourcing provider is responsible for all aspects of software development from start to finish. preparing a project specification, if necessary; software UI/UX design, project management and development, quality assurance, and so on.

A fixed-price contract is appropriate for short-term projects with specific requirements that are unlikely to change. Simple WordPress sites and landing pages are good examples. A contract specifies the project’s scope and deadlines.

If it takes longer to complete, the extra work done by the developers is free of charge to the customer. However, keep in mind that outsourcing providers add 20–30% to the project’s estimated cost to cover that risk. If you want to change the requirements after signing the contract, expect to pay extra fees.

The time and materials model provides more flexibility. At any time, the client can change the requirements, change the goals, or even pause the development. This is because they pay for each hour that the developers work on their project. This adaptability may lead to a budget overrun. Working in iterations based on business/product priorities, on the other hand, makes budgeting for releases/milestones easier.

Dedicated Team

This model is ideal for long-term collaborations and projects that require a significant amount of work, particularly when the requirements change frequently. The outsourcing provider provides all of the personnel needed to complete a project. They will all be working on that project full-time under one roof. The customer may communicate with team members directly, but the PM is usually the only point of contact they require.

The customer is usually given a list of rates for all personnel involved and is billed on a monthly basis. Effective communication is critical for cost-cutting. If the developers are unable to code because they are awaiting client feedback, the client will be charged for their ‘down time.’

Extended Team

Consider this model if you want to manage the development team on your own and don’t mind it being geographically dispersed. You have the option of personally interviewing and selecting each member of your extended team.

Assume you have a Brazilian designer, a Ukrainian junior developer, and an Indian software tester. Despite working for an offshore software development company, each of them will report to your senior developer. All of them will be overseen by your tech lead, CTO, external PM, or you personally.

You pay each team member’s monthly salary plus a fee for the services of their foreign employer. (This fee covers payroll, taxes, office space, developer workstations, and support staff.) You are free to change the requirements because you pay for the employees’ time. It’s simple to budget because you know the rates and the vendor’s fee are fixed.

Outsourcing IT services and software development does not only involve fixed fees or hourly rates. Because some providers offer discounts and affiliate programs to customers who stick with them, consistent offshore software development may become cheaper in the long run.

Managed IT Services Pricing

A managed service provider (MSP) manages a company’s services on a regular basis. In the case of IT outsourcing services, the MSP’s network operations center (NOC) remotely monitors and maintains the client’s IT environment network. Its technicians not only receive alerts but also respond quickly to any issues that arise. NOC services may include:

  • Infrastructure services (supervision of its health, security, and capacity);
  • Evaluation of network organization and processes effectiveness;
  • Handling support issues with the client’s technology service providers
  • Proactive problem-prevention strategies;
  • Suggesting necessary upgrades or adjustments;
  • System troubleshooting, software, routers, and domain names, and so on

The value of managed IT services is proportional to their quantity (e.g., the number of users) and quality (e.g., of the monitoring and expertise the MSP can deliver). Clients typically pay all-in fixed fees, such as a set amount per user per month. In exchange, the MSP ensures that the results promised in the scope of work and service level agreement are consistent.

Prices may be scalable depending on the size of the company, the makeup of the client’s IT infrastructure, or seasonal changes. If you’re looking to hire an offshore MSP, you’re likely to come across the same IT support pricing models that are common in your country. For example, you can select services a la carte to address specific needs, such as managed backup, patch management, disaster recovery, and so on.

Basic monitoring is usually inexpensive. However, all work discovered through monitoring will incur a fee. A per-device pricing model means that MSPs charge per device type, such as a server. A tiered pricing model provides different levels of IT support. Prices rise from tier to tier to account for new services and more comprehensive support. Choose the IT services pricing model that best meets your business objectives.

The cost of IT services is always proportional to the level of operational maturity of the service provider. A provider who advertises a lower fee is most likely providing low-level services.

Outsourcing Extra Factors and Hidden Costs

Outsourcing costs are not limited to project development or a monthly fee for managed IT services. Prior to establishing an outsourcing relationship, the client incurs some expenses associated with the search and selection of the outsourcing provider.

They include subscription fees, wages for a virtual assistant to evaluate bids, and funding the account for those who search on freelancer platforms. Larger projects must review and evaluate the request for proposals, write and negotiate the contract, monitor and evaluate the contractor’s performance, deal with disputes, process contractor payments, and so on.

Marketing assistance, legal assistance, and engineering assistance are examples of common hidden costs in an outsourcing arrangement.

What is included and what to expect must be made clear by the vendor.

Also, double-check the tax lines.

There may also be unanticipated costs.

Consider the potential need for travel, public holidays, and the required annual leave in the country you are considering.

These and other country specific factors may add up to 30% to the planned IT outsourcing cost.

How to estimate IT Outsourcing Cost

When it comes to IT outsourcing, cost-cutting has always been a top priority for businesses. However, when broken down into smaller categories, different approaches for different outsourcing models exist. Check out our guides for fixed-price projects and time & material projects to accurately estimate the IT Outsourcing cost for your next project.

For Fixed-priced Project

The project-based IT outsourcing model is the working model for small to medium-sized projects. The name is self-explanatory. It means that the model is tailored to each project.

These projects have very specific requirements for the outputs. A project-based outsourcing model is best suited for projects with fixed budgets because you already know what to expect from this project.

To estimate the cost of a fixed-priced project, go through the following steps:

  • Divide the project into smaller parts.
  • Estimate the time required for each task.
  • Determine the price unit for each task.
  • Calculate the cost of infrastructure.
  • Calculate any additional costs.

Divide the Project into Smaller Parts

To estimate the project thoroughly, you must divide it into small parts. Because an IT outsourcing project contains many features and tasks, knowing about them and considering their prices can give you a clearer vision of what you should include in the detailed estimation.

For example, an outsourced testing project may have varying requirements in terms of functions, modules, platforms, operating systems, and so on, each with its own pricing. When you estimate the project, you can see what you’re going to outsource by making a list of these.

Estimate the time required for each task

The man-month is the most commonly used calculation unit in IT outsourcing (or man-day in some cases). Typically, vendors will provide you with an estimate of how many man-months will be required.

By investigating this number, you can determine whether it is correct. If not, you contact the vendors to learn more about what they do during this time period and whether they can guarantee the product’s delivery to your company.

Determine the price unit for each task

This is how clients and vendors approach the price unit for each task. First, you state the anticipated cost of the service. Before arriving at these figures, you must conduct research on the average price range in various locations and with various companies. Second, you ask the vendors for rate cards.

They will inform you about their talent pool, what they can offer, and how much it will cost for these talents to work on your project. After considering the rates from various sources, you can decide on the base rates you want to use and research which vendors can provide them to you.

Calculate the cost of infrastructure

IT outsourcing does not simply imply hiring personnel from your vendors. In many cases, the infrastructure must also be outsourced. IT Outsourcing Costs, maintenance requirements, and hardware replacements can all add up to significant infrastructure costs.

To keep the outsourced team running smoothly, you must upgrade and update the utilities on a regular basis. So, if you want to avoid budget deficits in the future, you need to make sure you budget for IT infrastructure costs.

Calculate any additional costs

Additional IT Outsourcing Cost is a very common situation. These costs can include management fees, the cost of unplanned and unforeseen risks, allowances, annual benefits, bonuses, and so on.

These additional costs are not disclosed in full, and they are not the same for each project. Indeed, it is dependent on how the vendors interact with the talent pool.

In many cases, vendors will cover annual bonuses and management costs, leaving you to pay only for the overall service price. Remember to include all costs for your service level agreement so that you don’t have to pay additional fees in the future.

For Time and material Project

Estimate additional costs

The situation of additional IT outsourcing costs is very common. These costs can include things like the cost of management, the cost of risks that were not planned or expected, allowances, annual benefits, bonuses, and so on.

These extra costs are not disclosed in full, and they are not the same for each project. In fact, it is dependent on how the vendors interact with the talent pool. In many cases, the vendors will cover annual bonuses and management costs, leaving you to pay only for the overall service price. So, remember to include all of the costs for your service level agreement so that you don’t have to pay additional costs in the future.

Check the rate card for each position

There are significant price differences between hiring a software developer and a software tester. Even the pay scales for the same position with the same experience differ across countries. Consider the following example table:

IT Outsourcing Costs by Country

As you can see, different destinations have varying price ranges, and you must know what you want to prioritize in order to select a suitable market for further research. It is also recommended that you compare rate cards from various vendors before deciding on the one who can provide you with the best service within your budget.

Estimate cost for infrastructure

The infrastructure for time and material projects may vary and change over time as your business changes the project requirements and trajectory. So, how do you calculate the cost of infrastructure?

The answer is that you must delve deeper into these factors to determine whether you want them covered by the vendor or not.

  • Datacenters
  • Networking and storage
  • Physical servers
  • Virtualization
  • Operating systems
  • Databases
  • Application development

Because data infrastructure is tangible, you can easily define what you expect from the outsourced team. If there are any changes in the future, you should include a clause in your service level agreement that specifies the range of change that is permitted.

Check for payment policy

The payment policy is critical for time and materials contracts. Typically, the client will pay the vendor on a monthly basis, covering all costs associated with the outsourcing services. However, because of the competitive market, the client now has the option of selecting from vendors who have payment policies.

Last but not least,

Having trouble estimating your outsourced project? Do you have no idea where to go with your IT functions?

Groove Technology is proud to be certified as a Great Place to Work with an employee satisfaction score of 95% and has personnel with many years of experience who can provide you with the consultation you require.

For more information, contact Groove Technology expert.!

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Paschal Okafor is NaijaTechGuide Team Lead. The article IT Outsourcing Costs was written by NaijaTechGuide Team. The article was last modified: July 13th, 2022
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