IT Projects Outsourcing 101 : IT Outsourcing Costs

Companies are on the lookout for various cost cutting approaches to expand, build, and gain profits in businesses. Hence, outsourcing is a preferred over an in-house team as this helps to save tremendous money.

But what are the IT outsourcing costs? How much can you save by outsourcing your IT project over hiring an in-house team? And what factors affect the outsourced IT costs? We will talk about all this and more to help you decide how you can put your best foot forward when outsourcing your project.

As per a report by Deloitte, the top reasons for outsourcing is reducing costs, followed by flexibility, speed to market, and agility. While selecting a model for IT outsourcing, one of the key factors to consider is IT outsourcing costs, this article provides a direction to think about outsourcing costs, aspects to consider, and outsourced IT models.

Outsourced IT Models to Consider Before Pricing

Two basic models to consider before divulging in pricing are –

1. Co-Managed IT

In a co-managed IT service model, companies work in partnership with a third-party IT service. The existing IT department of a company works with outsourced IT experts and responsibilities are divided as per resources and skills. Co-managed IT model is considered before determining costs due to the following reasons –

1. To fill in the knowledge gap with the existing IT team.

2. The in-house team is focused on strategic problems, but needs someone to handle vital day-to-day processes.

3. Need for extra support to manage workload and new projects.

4. To save money on finding and recruiting new in-house employees.

5. To secure cybersecurity aspect and to experience rapid growth in business.

With co-managed IT services, companies ensure that IT services are provided continuously without interruption of a sick employee or if any team member has quit the job. Co-managed IT enhances productivity by decreasing downtime and reducing interruptions in IT procedures.

This model assures fixed monthly expenses and eliminates the need for hiring own staff. Furthermore, co-managed IT services provide robust security system by staying up-to-date with the latest security software and cyber threats.

2. Fully Outsourced IT

In a fully outsourced IT model, companies handover the charge of IT projects to external provides. IT outsourcing exposes companies to a large talent pool which may not be available locally.

By outsourcing IT projects, companies can focus and give time to other essential aspects of businesses such as social media campaigns, advertisement of products, brainstorming new ideas, and more. A fully outsourced IT model helps to gain access to experts in specific field which can provide real-time support and minimize security threats.

Outsourced IT services manages hardware and covers all unexpected expenses as well. This model is useful for gaining strategic consultations and recurring planning of product development. The above described reasons are why fully outsourced model can be considered before pricing.

Aspects Impacting IT Outsourcing Costs

1. Location of IT Outsourcing Services

Leverage IT outsourcing services through three options – onshore, nearshore, and offshore, each of these come with benefits and drawbacks.

a. Onshore IT Outsourcing

Benefit of onshore outsourcing is that local teams are easily available, speak the same language, have same mentality, and live in the same time zone. Local teams aren’t far when a problem arise.

However, despite of these perks, the cost of hiring an onshore IT team is high due to expensive cost of living in the USA. To keep in mind, high rates need not give high quality results.

b. Offshore IT Outsourcing

Offshore IT outsourcing catches attention due to low costs as cost of living is low. Companies save money on offshore outsourcing because developing companies have low labor costs, and can avert social security taxes, employment costs, and healthcare insurance in other countries.

With offshore outsourcing, one can hire skilled software developers and IT specialists. Further, this type of outsourcing enhances customer experience by providing 24/7 customer services. By investing in offshore provides that are available in various time zones, round-the-clock customer support is offered.

c. Nearshore IT Outsourcing

By adopting to nearshore outsourcing, companies handover work to neighboring countries for better operational expenses; for the USA, neighboring countries include Mexico or Argentina.

Nearshore IT outsourcing offers geographical proximity and few or no time-zone difference, thus maximizing the time spent on efficient communication and productivity.

Further, nearshore saves money spent on travelling and helps to augment team in case of shortage of staff. Nearshore ensures little or no cultural and language barriers, hence eliminating misunderstandings during interactions.

d. Mix Model IT Outsourcing

You can also choose to partner with a mix model IT staffing company such as Arkenea where the project management team comprising of business analysts and project managers are onshore while the development team are offshore, minimizing the delay in communication, and ensuring real time collaboration at competitive development costs.

2. Added Costs of IT Outsourcing

With outsourcing, majority of the in-house money disappear and the expenditure structure becomes more visible and simple. Along with out staffing or project outsourcing, bear in mind additional expenses such as communication, recruitment expenses, legal documentation, management and travel, and more. The top additional IT outsourcing costs for companies that need to be accounted for are –

1. Cost of choosing a vendor

2. Employee turnover

3. Local and property taxes

4. Insurance expenses

5. Maintenance, upgrades, and repairs of office equipment

6. Cost of transitioning after outsourcing

7. Determining expense of managing vendors

3. Team Expansion

Companies can manage a geographically dispersed IT development team on their own by personally interviewing and selecting each of the team members. Every team member is under the company’s senior developer – CTO (Chief Technology Officer), tech lead, external PM (Project Manager), or the company manager can oversee all of it.

In IT outsourcing costs, companies cover monthly salary of every team member along with a fee that includes taxes, payroll, support staff, developers’ workstation, and office space.

Furthermore, companies can plan out their spending as vendor’s fees are fixed and market rates are known, also they can change requirements of employees’ time as well.

The expenditure of IT outsourcing is not compromised on hourly fees or fixed rates; some vendors offer discounts and affiliate programs to loyal customers, therefore making outsourcing cheaper in the long run.

4. Project Management Outsourcing

Project management outsourcing makes use of tools, skills, and techniques to provide value to people. IT project management outsourcing consists of five distinct phases – initiation, planning, execution, project monitoring, and closing.

Outsourcing project management for IT can result in generation of additional costs as a project manage may not be as important as a software developer, especially if there’s an in-house PM (Project Manager); thus an outsourced PM is unreasonable.

In addition to this, project management outsourcing may not know all the details of clients and customers, as compared to in-house PMs, hence making them irrelevant for IT projects and increasing unnecessary expenses. However, project management outsourcing is beneficial when it comes to knowing every team member’s strength and weakness, and their skills to deliver project on time.

An outsourced PM is likely to be experienced and possess high level of skills in both software development and management. Hiring from outside provides a fresh perspective on IT projects which are unbiased, thus helping in making apt decisions and analyzing business risks.

5. Managed IT Services

Managed IT services, also referred to as MSPs (Managed Service Providers), is the process of outsourcing IT management and infrastructure to a third party provider. MSP includes maintenance, software installation, hardware monitoring, troubleshooting, and more.

Managed IT service’s NOC (Network Operations Center) maintains and monitors client’s IT network remotely. The value of MSP corelates with the number of users and quality (expertise in MSP). Clients pay fixed fees monthly, and in return MSP assures continuous work and IT services. Prices are scalable as per company size, seasonal shifts, and infrastructure.

IT Outsourcing Costs: What to Consider?

1. Compare Rates of Outsourcing Providers

Compare outsourcing providers with a checklist which consists of every criteria that is crucial for an IT project and company. Consider comparing costs of varied providers by scrutinizing their regulatory and legal compliance, time in operation, reputation, and financial stability.

In addition to this, distinguish number of people working for the provider, employee benefits offered, personal retention activities, and attrition rates. Determine rates of providers by checking the technologies used, platforms worked on, domain knowledge, process expertise, business analysis, and whether cost match with the quality offered.

Infrastructure requires money, hence get a clarity of the equipment and space needed by the outsourcing provider. In a nutshell, consider comparing the following points while comparing rates of outsourcing provider –

1. Location – Onshore, offshore, or nearshore

2. Monthly rates of a development team

3. Quality and quantity

4. Risk management expenses

5. Infrastructure costs

6. Any other additional considerations

Ensure that the selected IT outsource vendor is serious about the project and is ready to give long-term commitment, because this helps to share confidential data, setup rapport, and daily routine for the entire team (and upcoming projects if need be).

2. Select the Right Engagement Model

The engagement model determines the cost of outsourcing. Decide the types of engagement model on the basis of of whether company has an in-house team or needs a few specialists for the whole team. Further, IT projects outsourcing vs staff augmentation is a crucial decision that needs to be taken after gauging the internal strengths and project requirements in detail.

Selection of an engagement model determines success of a company. There are three major engagement models to choose from –

a. Dedicated Team

As the name indicates, the dedicated team engagement model means recruiting a development team who’ll work exclusively for a project. Companies can request for program managers, project managers, allied services, and QA testers under dedicated team model. Costs depend on the manhours spent by every team. Consider opting for the dedicated team model if –

1. Project time span is more than a year i.e long-term.

2. Want access to a certain tech stack which can be offered by a handpicked team.

3. Have a definite timeline for a project and want to assure that the process flows from one team to the next seamlessly.

The dedicated team model is cost-effective as compared to recruiting a team and managing them on a payroll. This team is focused on the defined outcomes and objectives of the project, and aims at directing all energy towards project completion. A dedicated team model brings together a team of experts, thus quickening the pace of project deployments.

This model has its share of challenges, for instance, the dedicated team works flawlessly with only certain type of projects – long-term projects, projects with vague requirements, and early-stage startups.

The dedicated team model has its internal collaborations, processes, and working style that isn’t easy to change, hence its recommended to set expectations regarding reporting time, working style, and quality before the IT project kicks off.

b. Time and Material

Companies have to pay as per the materials used and time invested in the software development process. This is one of the conventional techniques used to deploy IT products. Time and material model provides flexibility to the development team as per the changing requirements. Its recommended to use time and material model under the following circumstances –

1. Long-term projects that take shape with time.

2. When project is estimated to change throughout the course of the development process.

3. The project needs flexibility in timeline and resources.

Flexible nature of the time and material model helps to get the IT projects done as per the changing business requirements. A development team using time and material model can make use of the latest tech stack that gives them an upper hand in the market and years to come.

Furthermore, consider using time and material model when project deliveries are time-sensitive and short in nature. This helps to achieve business goals through nimble project deployments.

Apart from this, one of the major challenges of this model is that budget cannot be estimates at the start of the project, however this can be overcome by fixing a budget threshold or arriving at a ballpark number.

c. Fixed-Price

The fixed-price engagement model helps to achieve the objective of keeping costs within the budget and covering bare minimum essentials. Under the fixed price model, the project value to agreed and determined before signing the documents. The fixed-price model is ideal during the following scenarios –

1. When a project has certain outcomes which aren’t going to change with time.

2. Project costs are ascertained and aren’t expected to change.

3. Deliverables are mentioned to the last details before commencing the project.

The fixed-price model assures that the outsourcing company and the client are in sync with the workflow and the progress across the timeline. This model ensures a well-defined scope of work and no change until the project is wrapped up.

The agreement states penalties in case of late deliveries, just to safeguard the client’s interests. the fixed-price model charge for extra work and for any changes made, as it involves use of more resources and manpower if need be.

3. Distinguish Between Outsourced and In-House Services

Assure that outsourcing will create cost savings for the company’s IT department by distinguishing between an outsourcing solution and current software development expenses.

By taking into consideration the average costs of IT outsourcing services and in-house expenses, determine company’s stand in terms of software development expenditures.

Amongst the two, IT outsourcing develops long-term savings for the company by cutting down overhead costs such as taxes, recruitment, technical expenses, office, and employee perks.

IT outsourcing costs depends on all of the above said factors, and budgeting for the same is done on the basis of needs and challenges faced in IT setup.

If you’re considering an IT outsourcing model or need more information on engagement models, budgeting, and pricing, get in touch with Arkenea – experts in the field of software development, and we will provide you with an IT outsourcing solution that fits your needs.