Software Development Outsourcing Hub

Chapter 3: Outsourcing Costs and Pricing Strategies

Paavo Pauklin
November 1, 2023

Outsourcing your software project can trim your expenses by up to 53%. However, you’ll have to stay strategic to get these cost savings. 

We’ve recently discussed the best use cases for outsourcing in Chapter 2. Now, let’s go into the nitty-gritty of your IT outsourcing costs. This way, you can plan an effective and realistic budget.

In this chapter, we’ll analyze numerous factors that go into your budget. We'll also look at cost-cutting measures, pricing models and more. Our hope is that you build a solid IT outsourcing budget that meets your needs without breaking the bank.

In-House Development Costs vs. Outsourcing

In-House Costs

  • Competitive salary and benefits packages
  • Recruitment, hiring and onboarding costs
  • Training and career development
  • Software licenses and expenses
  • Workstations and equipment
  • Project management
  • Turnover and replacement costs
  • Overhead (office space, collaboration tools, etc.)

Outsourcing Costs

  • “Time” (team salary costs)
  • “Materials” (IT licenses, tools, equipment, etc.)
  • Contract negotiation
  • Knowledge transfer and transition
  • Recruiting your IT partner

Outsourcing enables huge cost savings compared to in-house budgets. Just focusing on salary costs, globally outsourced developers offer significantly reduced rates. Competitive salaries in these regions tend to be up to 50% lower compared to the U.S.

What’s more, outsourcing completely eliminates certain cost categories compared to in-house. When you build your own internal team, you’ll be responsible for high-cost areas such as:

  • Recruitment costs, which can be especially elevated for senior tech roles. Recruitment may involve lengthy time-to-fill periods that cost your team, too.
  • Office overhead and IT equipment. This can average thousands of dollars per month depending on your set-up.
  • Turnover expenses when your best tech talent leaves, reaching up to $30,000 per IT employee.

Finally, outsourcing also has indirect cost benefits compared to in-house. By placing your product in expert hands, you can minimize expensive risks. These may include data breaches, cybersecurity attacks, IP theft, scope creep, etc. 

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Factors Impacting Software Development Costs

Calculating the final price of your software development project depends on several factors. To get an accurate estimate, keep in mind the following cost areas:

  • Type of Software Development. New, custom software will cost more than updates/modernization. Your required technologies will also impact the price. That's because some programming languages involve higher developer salaries. Choosing cross-platform projects can also save you from undergoing duplicate work.
  • Size & Scope of Development. Larger, more complex projects will incur more developer hours. In contrast, minor modernization or MVP projects will involve a more reasonable budget. 
  • Team Size & Expertise Required. Small-to-medium projects will require at least five tech pros. (A typical team includes two developers, a UX designer, a QA engineer and a project manager.) Larger projects will need 10+ professionals to cover all tech specializations.
  • Time Required & Complexity of Software. If your project demands top technical expertise, you’ll pay a higher per-hour rate. Complex software also entails covering more involved monitoring and debugging. 
  • Your Partner’s Location & Reputation. The price will also fluctuate based on your IT partner’s location. You’ll find both top skills and affordable rates in Eastern Europe, Asia and Latin America. Your partner’s reputation will also determine cost. Overall, smaller boutique agencies offer more reasonable rates.

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How to Cut Costs With Outsourcing Software Development

Choosing outsourcing gives your business plenty of opportunities for cost savings. Yet, you can get an even better price by keeping in mind these cost-saving measures: 

  • Choose the right engagement model and pricing. Your software strategy must fit your project needs. Take your time to determine your outsourcing engagement model and pricing. Doing so will save you from making expense investments or incurring extra fees.
  • Define your KPIs from the onset. When your project vision is aligned with your goals, you’ll make fewer changes and additions. Know your KPIs early to streamline development costs.
  • Leverage the right technologies. Project efficiency starts with having the right tools and technologies on hand. Equip your teams with the tech they need to stay productive and achieve a top product.
  • Undergo regular progress monitoring. Communication is crucial to avoid costly misunderstandings and delays. Keep up agile collaboration with regular meetings and progress monitoring. 
  • Use scalability to your advantage. Scalability is your greatest ally when trying to save costs. Dividing your project into phases can help cash flow and ensure you’re ready to take on new areas/features.

Besides cost savings, outsourcing lets you unlock a quicker time-to-market and top-caliber product. In turn, this can lead to a more successful product launch that generates higher profit.

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Fixed Price vs. Time and Material Contracts

Best Uses for Fixed Price

  • Your project is small, such as an MVP. 
  • You have a clear vision and known requirements. 
  • You don’t anticipate any changes or pivots to the project. 
  • You feel comfortable handing over the project control to your provider. 
  • You’re not too concerned about the product’s time-to-market.  
  • You’re keen to lower your financial risk with a flat fee. 

Best Uses for Time and Materials

  • Your project is long-term and large in scope. 
  • You have dynamic, complex project requirements.
  • You require full flexibility to make changes and update priorities. 
  • You want to maintain a level of oversight of the project. 
  • You’re not certain of the project’s duration, as you may scale up new phases. 
  • You’re interested in gaining cost savings from paying for actual completed work.

The type of contract you sign will also affect your budget. For this reason, it’s vital to choose the pricing model that meets your project needs. Overall, there are two main pricing models: fixed price vs. time and materials. 

Fixed Price Contracts

As the name suggests, fixed price contracts involve a flat fee that's set by a thorough project scope. This model is ideal for smaller projects with clear requirements. Keep in mind that you won’t be able to make changes or additions without re-negotiating your contract.

Time and Material Contracts

In contrast, time and materials contracts are charged by developer hours (i.e. time). You’ll define hourly rates upfront and then pay as you go as the team completes work. You’ll also foot the bill for the cost of tools and equipment (i.e. materials).

This hourly pricing gives you 100% flexibility to revise your scope, make additions and so on. That’s why it’s best for larger projects with dynamic requirements and/or multiple phases. Under this model, you’ll be involved in giving feedback and guidance during the project.

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Keep Your Costs in Check With Netcorp

Ready to get a good price on your next software outsourcing project? Leverage our strategies on key expense factors, cost-cutting measures and pricing models. In this way, you’ll create a precise budget that maximizes your company resources.

At Netcorp, we’re committed to providing transparent pricing that fits your goals. Contact our team today to get a project quote and learn how we achieve top products. No matter your project size, we undergo highly efficient development that gets results.

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Unlock the secrets to successful software development outsourcing with our comprehensive guide on effective team management strategies.
Hiring a Software Development Outsourcing Partner
Learn how to choose a software development outsourcing partner, and how to make an informed decision.
How To Prepare Your Organization For Outsourcing
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Learn how to make your software outsourcing investments work for you with expert costs and pricing strategies.
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Determine if outsourcing will meet your company's key IT objectives.
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Introduction to the Basics of outsourcing software development
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Paavo Pauklin
Executive Board Member

Paavo Pauklin is a renowned consultant and thought leader in software development outsourcing with a decade of experience. Authoring dozens of insightful blog posts and the guidebook "How to Succeed with Software Development Outsourcing," he is a frequent speaker at industry conferences. Paavo hosts two influential video podcasts: “Everybody needs developers” and “Tech explained to managers in 3 minutes.” Through his extensive training sessions with organizations such as the Finnish Association of Software Companies and Estonian IT Companies Association, he's helped numerous businesses strategize, train internal teams, and find dependable outsourcing partners. His expertise offers a reliable compass for anyone navigating the world of software outsourcing.

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