Hidden costs of outsourcing: Beware financial pitfalls

Hidden costs of outsourcing: Beware financial pitfalls

If you follow our blog, you have already read experts’ opinion on web app development costs and web development pricing models. In this article, we are going to dwell upon some specific issue of financing of outsourcing software projects.

The cost of software development is one of the most frequently discussed questions. On a daily basis, the OCSICO team deals with customer companies, individual customers, and startup owners who send inquiries, such as “How much will this cost me?” or “This is what I need, but can you develop it within my budget?”

The position of our customers is clear: they make every effort to decrease any financial risks. But the task isn’t so easily solved. Over the last two years, the outsourcing rates in Eastern Europe have steadily increased, according to the compelling statistics from The Guide to Global Software Outsourcing Rates.

Stats for 2017 disclose the following rates:

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Stats for 2018 indicate growing rates:

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Owing to the growth of software developer hourly rates, the budget of a large-scale, long-term project can evolve through several revisions.

Outsourcing is a proven approach when it comes to custom software development within strict budget limits. As a matter of practice, it results in decreased ongoing costs and the lower total cost. But be wary of the common pitfalls of outsourcing as a quite complex and dynamic service structure.

 
Fixed price trap

A practically risk-free software development strategy is a fixed-price contract with a software development services provider. This model implies that a provider company is responsible for a product delivery within a specified time frame and budget limits. For a customer, the cooperation model is completely transparent. As for a development team, it raises concerns as to what should be the result after the latest iteration. A customer is expected to initially provide explicit information about user requirements, system requirements, UI design, use characteristics, delivery terms, etc. And on top of that, all functional and system requirements should remain unchanged, since it is needed to calculate costs before the project’s kick off.

 
Problem #1: Lack of documentation

Сustomers are rarely able to provide sufficient documentation for a provider to accurately assess a project. In view of the lack of documentation, a fixed-price contract can be signed only for short-term projects when an experienced business analyst is able to assess app functionality, point out some issues and inconsistencies. Large-scale projects require the involvement of high-qualified team members to gather user requirements and draw up business and system specifications, which might take up to several weeks. To follow such an approach, software providers often propose signing a short-term contact triggering the paradox: to get know a fixed price and sign a fixed-price contract, it’s first necessary to sign another contract.

There is a way around this paradox. At OCSICO, we offer a special startup package significantly increasing customer’s chances of signing a fixed-price contract regardless of the project scale.

 
Problem #2: Unscheduled changes

As is too often the case with customers, they become able to define the project outcome long after the assessment made and the contract signed. The prototype of a project can embarrass a customer, or competitor’s products may influence a customer’s decision. But either way, a customer asks for changes in the development plan, which a fixed-price development model generally does not welcome as it might lead to new risks.

There is a solution: Time and Materials (T&M) business model that allows customers to repeatedly change the concept of a project throughout the development cycle. However, such an approach makes it difficult to predict the final cost of a project as each change takes a significant portion of a customer’s budget. T&M contract is best when a customer has an experienced project manager able to assume the responsibility for planning, implementation, and financing of the project.

 
Provider-customer miscommunication

It is another risk to consider before outsourcing a new project. A customer discusses a business plan with people from other countries who mentally and culturally can greatly differ from a customer. Misunderstanding is highly possible! Communication difficulties may affect key points of a development process.

It is worth giving preference to reliable software developers with the proven expertise in the industry to avoid problems and financial losses. OCSICO is always ready to bring in project managers with excellent communication skills. Good management guarantees accurate documentation, reduces the risk of miscommunication and ensures addressing any project issues as quickly and effectively as possible.

 
On a final note

The discussed problems may lead to certain financial risks. To be ready to face the challenges and even anticipate the situation, it’s worth applying for professional assistance. If you have a stake in a software outsourcing project and seek to know related financial pitfalls beforehand, you can get in touch with our qualified consultant to discuss in detail the project plan.

 

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Ready to outsource your software development project?

 

 

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Katrine Spirina

Marketing Analyst

Email: Katrine.Spirina@ocsico.com

Phone: +375 (29) 298-36-28

Please submit a short project request, and our account managers will get back to you within 24 hours to discuss our future cooperation.
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