Analyzing hidden costs in outsourcing of software development

What is the real price of project outsourcing?

When considering outsourcing a company should, apart from comparing the hourly rates of different vendors, estimate for itself additional costs related to the process that are not obvious at the first glance.

Let’s examine some of the most common cases.

1. The cost of selecting a vendor

Firstly, the company would need to dedicate time and personnel to the evaluation process. Secondly, investment into analysis of the various outsourcing models from different vendors would be needed. Moreover, it might be a good idea to organize face-to-face meetings with short-listed vendors, thus travel expenses must be budgeted.

One of the solutions is to hire an experienced consultant in the area, who would help the company to choose the best outsourcing partner for its business.

2. The cost of transition

The transition period is usually the most expensive and the least productive stage in outsourcing process. During this period the offshore partner gets everything and everyone ready for the collaboration.

The one can minimize those costs by selecting a vendor with a responsive outsourcing model and experienced staff that needs less time for acknowledgement and preparations. 

3. The cultural cost

The cultural costs arise, if the vendor has a) uncomfortable for the company level of difference in mentality, b) high turnover rate; c) communication issues.

The company can avoid those costs by carefully selecting its future outsourcing partner. It is preferable to select an outsourcing location based on its cultural proximity to minimize miscommunication issues. Onsite visits are always beneficial for the outsourcing project success, but the newest videoconferencing technologies serve the purpose without additional costs.

4. Unpreparedness of the company’s internal team cost

The company’s in-house team may simply be unprepared for the work with outsourcing providers, which leads to loss of productivity.

Therefore, it’s important to make all the needed preparations to ensure that the in-house team knows why the company opted for outsourcing and accepts it. It’s vital to talk to the internal employees about outsourcing before and during the venture, and explain how they should cooperate with the new team, as well as what they can learn from the process. The company can also discuss with the vendor knowledge transfer option to make sure that the company’s internal staff can continue managing the established processes when outsourcing venture is completed.

5. The cost of managing an offshore contract

For example, some of them include cost of resources needed for managing the processes of accounting, auditing and project management.

The most effective solution is to assign a dedicated project manager who would manage invoice/ contracts/ time sheets and make sure the projects are progressing as scheduled. 

6. Security cost

Reliable security measures may be needed to protect company’s sensitive information, employees and systems.

The company must choose an outsourcing partner that is able to comply with existing company’s security regulations and to maintain control over customer’s IP during the project run.

7. The cost originated from outsourcing of unsuitable for outsourcing activities

The company should outsource only those tasks that can be outsourced without affecting company’s competitive advantages. It’s very important to retain control over aspects that make the company unique and not to change those parts that are appreciated by the company’s customers the most.

In this case the company’s decision makers need to find the balance and not to trade their business processes in favor of the newest technology trends or similar.

So, the company should do the homework and get prepared in order to experience the true advantages of outsourcing.  Its processes, personnel, budget and clients should not be damaged by improper planning and negligent approach towards outsourcing vendor selection. The company should save money though outsourcing, not otherwise.

Talking about minimization of costs of outsourcing in the software development industry, I would like to say that it all comes down to two important points:

  1. Know your market very well and understand what they want and what they are ready for (retaining competitive advantage) and outsource the right activities.
  2. If the outsourcing decision is made, the most important thing is to carefully select the vendor. Meticulous and careful process of selecting a vendor always brings long-term benefits in the form of quality and profit respectively.

If you have any questions – let me know ( We will be happy to help!


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