In outsourcing, there is a difference between cost vs price. Real cost is tied to the productivity or value you get for your money.
By Imran Aftab
I’m often asked my opinion regarding the relative merits and fully loaded cost of software development in various technology centers around the world. My response draws upon 15 years running a software development firm with teams on 3 continents and prior experience managing a $150 million outsourcing budget for a Fortune 100 Company. Here, summarized below, is what I usually say, and I want to share it with you now.
Fifteen years ago, I founded 10Pearls which has grown from nothing to a leading software development provider with over 500 employees and offices in the United States (DC, SF), Pakistan (Karachi), Colombia (Medellin), United Kingdom (London) and UAE (Dubai).
Prior to founding 10Pearls, I lead the global outsourcing initiatives at companies like AOL-Time Warner and Sprint, managing $150 million budgets. Roughly 30% of that budget went to India and the rest was distributed across other continents.
That individual experience, followed by many years of corporate experience as a provider of blended-shore product development, has resulted in a deep understanding of the industry and many helpful lessons about achieving the best value.
Here’s what you need to know
Cheaper is not better: In outsourcing, there is a difference between cost vs price. Real cost is tied to the productivity or value you get for your money. Cheap, Fast, Good…that is what Gartner recommends these days (they actually put up that slide at a recent conference).
However, the more intangible components like “quality” are key (more on that shortly). It’s also important to consider what additional skill sets a development partner brings – technical know-how, cybersecurity practices, design, etc.
Productivity is key: The biggest and most nebulous issue in outsourcing is productivity. This is not just tied to hiring good tech talent but also, and most importantly, retaining them (Churn puts the brakes on productivity). Yet, retention comes at a priceand requires sincere commitment.
Most development services providers including the largest firms do not take that into consideration, as evidenced by a lack investment back in their employees, operations, processes, training, etc.
Additionally, productivity is a measure of the number of “productive” hours a contributor is available for. It is important to take into consideration in-country holiday schedules, cultural norms and work ethic. Productivity is something that can definitely be measured and improved in terms of development velocity.
Leverage outsourcing for knowledge: There is a trade-off in innovation, efficiency, and productivity between outsourced offshore vs captive offshore. The latter can be effective when you reach a certain size, but the former allows you to achieve the necessary critical mass, or “mindshare,” of a larger and more diverse pool of talent efficiently.
Therefore, unless you can afford enough developers to justify your own “captive” shop, the partner you choose is absolutely the most important decision you can make when it comes to the real cost per person (as mentioned in the previous point with respect to productivity).
Location, location, location: Optimizing between location and talent can be tricky. Unless you are spending more than $5 million per year, your dilemma is often: [Top tier location + Lower tier developers] versus [Lower tier location + Top tier developers].
- Top Tier Locations: Factors that make a given location “top tier” include the availability of technology skills, population size, English language skills, political stability, currency arbitrage, IP protection laws, and ease of doing business among other things.
However, most top tier locations are saturated, so it’s hard to compete with big brands/businesses who are hiring there by the thousands. These locations are also producing great start-ups of their own. For example, Microsoft Teams (a killer product) wasn’t built in Redmond. India, Costa Rica, Philippines, Mexico, and Poland are among the conventional top tier locations.
- Lower Tier & Emerging Locations: New offshore development destinations are popping up everywhere in the world, thanks to the spread of education and internet connectivity. Some may be suitable, and some may not. For example:
- Tunisia is coming up fast, but only for mostly French speaking clients.
- Similarly, Eastern Europe (Ukraine, Romania, Baltics, Czech) has plethora of options, but only good if you have relatively small teams. These are smaller populations. Developers are also known to be interested in more R&D focused work.
- Colombia is rising fast and is taking spillover from Costa Rica (which is now saturated). However, cost and communication may be an issue.
- Vietnam, Bulgaria and Pakistan are emerging. They all have their challenges and benefits. Vietnam has communication issues, but very cheap rates.
Bulgaria is attracting some very big names but has scalability issues. Pakistan has political perceptionissues, but a very big pool of quality developers – and is currently the 3rd largest English-speaking country in the world, courtesy of the Queen.
All these factors are responsible for the variation in cost from region to region. The development partner you choose will represent some cross-section of the factors mentioned above, good or bad, and that is why it’s important to choose wisely.
Is the company investing back in its employees adequately? Is the company running a small sweat shop? Are you paying a premium for a blue-chip brand? (I won’t name any names here 🤭) Remember to ask these questions.
Sample Rates by Region
- India rates vary from $15/hr to $65/hr
- Eastern Europe rates vary from $25/hr to $75/hr
- Latin America rates vary from $28/hr to $75/hr
As you can see, there are many factors that go into real productivity and outcomes. I will be the first to tell you that not all functions should be outsourced. For example, user experience is contextually and culturally sensitive, and probably not a good area to outsource. Having a “right source” strategy that’s aligned with your culture and business goals is essential.
I’ll throw this in here as well…we could see a comeback of so-called “rural sourcing” post-COVID-19 now that we’re all used to working remotely. The challenge with that is that now, more than ever, the demand for digital transformation is likely to gobble up all the developers.
The author is Founder and CEO at 10Pearls, a seasoned entrepreneur and investor, who is helping businesses transformation, scaling and digitalization, and passionate about opportunity creation.