Outsourcing vs. In-House Development: Real Cost Comparison

This classic question with a sense of uncertainty behind it can easily be applied to our today’s topic. Just to paraphrase – to outsource, or not to outsource?

When it comes to a dilemma of having in-house developers or outsourcing IT resources, the answer is never black or white. And it’s usually a tricky question forcing you to take into account many factors — cost being the primary one.

Indeed, how to understand which practice is more cost-effective? 

Imagine you need a Scrum team comprising 8 US professionals for your 6-month project. Considering all the additional costs, we get the following numbers for comparison [per team, per hour]: $1,050.26 (in-house) vs. $300 (outsourcing to Europe), i.e. building a software solution in-house will cost 3.5 times more.

To assist you with an estimate of your future venture, we analyzed the rates of US in-house software developers and European outsourcing firms.

Is Outsourcing a Better Option?

Outsourcing enables you to hire a professional for a limited time, according to the requirements of your project or specific business operations.

The hiring process takes time for in-house. A specialized vendor can provide you new seasoned professionals faster and delivering the product on time lies with the outsourcing firm.

A seasoned professional that can’t be productive all the time costs a lot of money. Outsourcing can get you a high level of productivity at reduced costs. For example, studies show that with outsourcing the savings on overhead costs can be up to 60%.

‍Hidden Costs of In-House Development

The mere comparison of hourly wages of local and offshore professionals will not give an accurate picture. It’s vital to factor in all the hidden costs that in-house development includes (payroll taxes, health insurance, paid time off, traveling, vacations and sick leaves, pension contributions, and more). 

Be ready to add up equipment purchase and operating costs, as your new hire will need a decent workplace and advanced tools to bring your business idea alive. Recruiting, on-boarding, and retention expenses that tend to be very high should come as no surprise, either.

How Much Does a Typical Scrum Team Cost?

Let’s break it down with a real-world example. Suppose you need an 8-person Scrum team for a six-month project.

Hidden Cost Per Employee:

U.S. businesses spend an average of $700 per employee per month on overhead expenses, which translates to $4.38 per hour.

Hiring alone costs around $4.10 per hour per person for a six-month project.

When you add up all hidden costs—benefits, taxes, and operational expenses—the true cost per team member rises to $79.24 per hour.

Fully Burdened Cost Per Employee (including all the compensations):

Many businesses mistakenly compare only the base hourly wages of in-house and offshore developers. But once you factor in the hidden costs, the real numbers are shocking:

‍Total in-house team cost (per hour): $1,050.26

Total outsourced team cost (per hour): $300

That’s more than 3x the cost for the same work

Now, I'm not saying in-house development is always a bad idea. Sometimes it's the right fit. But you must be aware of the true costs involved. Otherwise, you might end up with a beautiful product… and an empty bank account.

Trends in Outsourcing

According to Deloitte’s 2016 Global Outsourcing Survey, outsourcing is expected to grow, particularly in Finance, HR, and IT.

The same survey reveals that the primary reasons for outsourcing are cost cutting (59%), focusing on core business (57%) and solving capacity issues (47%).

Did you know that Skype, Github, MYSQL and Slack were built with outsourced development?

Which side your scale outweighs in the dilemma: in-house or outsourcing?

Hire assistance of Starshot Software that has a dedicated software developers who are always innovating. We can help in building software outsourcing services that are quick, efficient, reliable, safe and easy to use from your smartphones and other gadgets.

Discover our software outsourcing projects that we made and learn more about how we made a significant difference in our client's business.