IT Outsourcing Cost: A Complete Guide To Budgeting And Saving

In this digital age, businesses often need new IT systems, requiring additional personnel. However, hiring new employees for a single project isn’t practical. This is where IT outsourcing becomes beneficial. In this blog, Newwave Solutions, a top-tier IT Outsourcing provider, provides readers a complete guide to IT outsourcing costs, offering valuable insights for users.

1. What Is IT Outsourcing?

Many people are interested in the question of whether to choose outsourcing or offshoring. Before diving into the main topic, let’s take a look at an overview of IT outsourcing. IT outsourcing involves utilizing external service providers to efficiently deliver IT-enabled business processes, application services, and infrastructure solutions to achieve business outcomes. Outsourcing encompasses various services, including utility services, software as a service, and cloud-enabled outsourcing. 

This approach assists clients in developing effective sourcing strategies, choosing the right IT service providers, structuring optimal contracts, and managing agreements to ensure sustainable, mutually beneficial relationships with external providers. The concept is straightforward: engage an external service provider to address your IT requirements rather than recruiting in-house talent. 

2. Understanding IT Outsourcing Costs

2.1. Overview Of IT Outsourcing Costs

If you closely examine the reasons for hiring a development team, you will gain a deep understanding of how this approach to technology development can empower your business. Outsourcing cost can make IT outsourcing a cost-effective strategy for businesses besides offering benefits such as cost savings, access to specialized skills, and enhanced flexibility. However, it’s crucial to understand the factors influencing the overall outsourcing cost.

By understanding IT outsourcing costs, clients can better develop effective sourcing strategies, select the right IT service providers, structure optimal contracts, and manage agreements to ensure sustainable, mutually beneficial relationships with external providers. With this foundation in place, clients can explore the various types of IT outsourcing costs available to suit their specific needs:

• Managed Services: A proactive method in which an IT service provider assumes responsibility for ongoing management and maintenance. 
• On-Demand or Break-Fix Services: IT support is given as needed, with clients paying for services on an individual basis.
• Cloud Services: Involves outsourcing computing and storage resources to a third-party cloud provider, hence minimizing the requirement for on-premises infrastructure.
• Staff Augmentation: Adding outside experts to internal IT teams to cover project-specific tasks or cover skill gaps. 
• Project-Based Outsourcing: Hiring external professionals for a specific IT project or initiative, frequently with a predetermined timeframe and scope.
• Offshore Outsourcing: Engaging IT services from providers in other countries to save money and gain access to a global talent pool is known as offshore outsourcing.

2.2. Beyond The Surface: Outsourcing Costs

One of the biggest mistakes firms make regarding outsourcing cost for their IT and software needs is failing to consider the full cost of the engagement, including any hidden outsourcing charges. Here are some potential hidden outsourcing costs that Newwave Solutions uncovers for readers, enabling your business to identify and manage these additional charges actively.

• Refactoring: The company may not initially discuss it, but later on, they might need to enhance the final product or service. In simple terms, refactoring involves revisiting the design, code, structure, or user interface to consistently deliver the best possible results.
• Scaling team and role changing: Imagine a scenario where you need to expand your software development team by bringing in more professionals. If you find midway through the project that the right task was assigned to the wrong person, it could cause delays and additional costs. To avoid this, discuss potential issues and agree on solutions in advance.
• Regional taxes and commissions: A company providing outsourcing IT services may not initially disclose specific taxes applicable in their region, which can later emerge as hidden outsourcing costs.
• Third-Party tools and subscriptions: Another hidden cost of IT outsourcing services is the potential expense of integrating third-party tools and subscription fees. While many of these tools are free, you should be prepared to spend extra on paid frameworks and libraries, as well as subscriptions like those for the Play Store and App Store.
• Bills for software licensing: The IT outsourcing company should either cover these costs or outline them in the contract to avoid unexpected charges and ensure financial transparency. Clear communication about expense responsibility prevents misunderstandings and maintains a smooth working relationship.

5 Convincing Reasons to Hire a Skilled IT Outsourced Development Team

2.3.  Key Factors Influencing Outsourcing Costs

Pricing Models

The pricing model affects the access to the service provider’s expertise and resources. Common models include:

• Fixed-Cost Model: Suitable for projects with well-defined requirements and rigid budgets. You pay a set amount for the completed project, but additional requirements can lead to extra charges.
• Extended Staff Model: Ideal for short-term needs or skill shortages. The service provider supplements your existing team, and costs include salaries, hourly rates, overtime, and travel fees.
• Dedicated Team Model: Best for long-term projects needing customized solutions. You hire a dedicated team, which may have higher initial costs but offers long-term savings through increased productivity.

Staffing Capability

The skills and experience of the outsourced team significantly impact costs.

• Experience: Highly experienced developers deliver high-quality results but at higher rates. A mix of senior, middle, and junior engineers can balance costs and expertise.
• Geographical Location: The location of the outsourced team affects pricing due to differences in living costs. Regions like Latin America, Eastern Europe, and Asia-Pacific offer competitive rates but may involve trade-offs like time zone differences.

Project-Related Factors

Specific project needs also influence outsourcing costs.

• Project Complexity: Complex projects require more expertise and specialized skills, leading to higher costs due to the need for extensive customizations and multiple iterations.
• Timeline and Urgency: Accelerated timelines increase costs due to the need for more resources, overtime work, and risk management measures to ensure timely delivery and quality.

2.4. How To Optimize The Costs Of It Outsourcing Services

To maximize the benefits of IT outsourcing, it is crucial to categorize IT outsourcing services. You need to identify and select the types of programming services that are truly essential for your business. And then follow the steps below to create an efficient plan for hiring outsourced developers. 

Prioritize Quality Over Low Cost: To optimize costs, choose a provider using Agile and DevOps practices for efficient collaboration. Prioritize quality to reduce future testing and maintenance expenses. Upgrading outdated software. Clear priorities, documentation, and market research are essential for larger projects. Hiring a business analyst ensures the software meets your business goals.

Focus On Quality Assurance And Software Testing: Start testing early to optimize developer hours and increase ROI. Hire at least one QA tester for every 6 to 10 engineers. Ensure your provider balances manual and automated testing for functionality, performance, compatibility, security, and user experience.

Prolong Software Life With Technical Support And Maintenance: Maintenance can be costly without planning. These services monitor and update products based on feedback and external changes. Investing in quality development and testing controls maintenance costs. Regular updates and clear priorities prevent revenue losses from low-performing software. Two types of managed services are:

▶ Software Support: Reactive and ad-hoc, addressing issues like bugs and system errors as they arise.

▶ Software Maintenance: Proactive and routine, including:

• Adaptive Maintenance: Updates to adapt to new technologies.
• Perfective Maintenance: Improvements based on user feedback.
• Preventive Maintenance: Upgrades anticipating future issues.

3. Strategies For Reducing IT Outsourcing Cost

3.1. Clearly define objectives and scope

Begin by thoroughly outlining the project’s objectives and scope. This involves establishing detailed project requirements, expected outcomes, timelines, and budget limits to ensure clear direction and prevent any ambiguity.

 For instance, if you’re developing software, specify the desired functions and features, aim to complete the project within six months, and ensure the total expenditure does not exceed $100,000 to avoid “scope creep.” By doing so, you create a structured framework that guides the project from inception to completion, minimizing the risk of deviation from the original plan.

3.2. Choose the right outsourcing model

Selecting the appropriate outsourcing model is crucial for the success of your project.

• Project-Based Outsourcing: This model is ideal for projects with well-defined requirements and expected outcomes. It ensures that the project is delivered according to the predefined specifications within the agreed timeline and budget.
• Offshore Development Center (ODC): Best suited for long-term, complex projects, this model offers cost-effectiveness and a dedicated team working on your project. It’s beneficial when you need continuous development and support over an extended period.
• Time and Material Outsourcing: This model is flexible and caters to projects with evolving requirements. Costs are based on the time and resources used, making it ideal for projects where the scope is not fully defined from the start.

3.3. Select and negotiate with the right provider

Carefully choose providers with a proven track record and transparent pricing models. Enter into negotiations to determine the most suitable pricing arrangement:

• Fixed Pricing: This is appropriate for projects with clear, unchanging requirements. For example, you might agree to pay $10,000 for the development of an e-commerce website.
• Cost-Plus Pricing: In this model, you pay the actual costs incurred during the project plus a fixed profit margin. This can provide flexibility while ensuring the provider covers their costs and earns a profit.
• Incentive-Based Pricing: To motivate the provider, consider financial bonuses for meeting or exceeding targets. For instance, you might offer a $3,000 bonus for completing the project ahead of schedule.

3.4. Implement robust contract management

Effective contract management is essential to ensure all parties adhere to their commitments. Ensure your contracts include:

• Service Level Agreements (SLAs): These are commitments on the quality of service, such as a 24-hour response time for critical issues. SLAs define the expected performance levels and the penalties for failing to meet these standards.
• Escalation Procedures: Clearly outline the steps for resolving disputes, such as direct contact with the project manager if issues persist. This ensures that any problems are addressed promptly and efficiently.
• Termination Clauses: Define the conditions under which the contract can be terminated without penalties, such as if the provider breaches the agreement three times within six months. This protects your interests and ensures you have a clear exit strategy if the provider fails to meet their obligations.

4. In conclusion

Effectively managing software outsourcing costs is essential for businesses aiming to boost their IT capabilities without the burden of hiring in-house teams. By gaining a clear understanding of the different aspects of IT outsourcing, such as service types, pricing models, and cost factors, businesses can make smarter decisions that fit their goals and budgets. 

Besides, if you are looking for a Software Development company providing IT outsourcing services, don’t hesitate to contact Newwave Solutions, our unwavering dedication to delivering high-quality IT outsourcing services and creating value-driven solutions that consistently surpass our clients’ expectations.

Contact Information:

• Head Office (Hanoi): 1F, 4F, 10F, Mitec Building, Duong Dinh Nghe Street, Yen Hoa Ward, Cau Giay District, Hanoi City, Vietnam
• Branch Office (Tokyo): 1chōme118 Yushima, Bunkyo City, Tokyo 1130034, Japan
• Hotline: +84 985310203
• Website: https://newwavesolution.com
• Email: [email protected]