The Costs of Software Development Outsourcing

‍‍Introduction

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If you are a company or an individual looking to outsource your software development, you may want to budget your project properly so that your software can produce value when it's put to use. But whenever you ask "how much does it cost" to software development firms, the answer is almost always: it depends. That is because the price is personalized to fit your project precisely, so a definitive answer does not exist. This article will break down the average cost of software development outsourcing, which factors influence the cost, and which contract types are available for outsourcing your project.

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How does outsourcing save costs?

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Lower labor costs: Outsourcing allows you to access skilled workers from countries with lower wages and living standards, such as India, China, or the Philippines. You can pay them a fraction of what you would pay a local employee, while still getting high-quality work done. For example: hourly rates for Vietnam developers range from $20 to $40, while those from developed countries work for a $100 hourly rate.

Reduced overheads: Outsourcing eliminates the need to invest in office space, equipment, utilities, and other fixed costs associated with hiring in-house staff. You only pay for the services you use, when you use them.

Increased efficiency: Outsourcing enables you to focus on your core competencies and strategic goals while leaving the routine and non-essential tasks to the experts. You can also benefit from the best practices and innovations of the outsourcing industry, which can improve your processes and performance.

Enhanced flexibility: Outsourcing gives you the ability to scale up or down your operations according to your changing needs and market conditions. You can easily adjust the size and scope of your outsourced team, without having to worry about hiring, training, or firing employees.

Improved quality: Outsourcing can improve the quality of your products or services, by allowing you to leverage the skills and experience of specialized professionals who have access to the latest technologies and tools. You can also ensure that your outsourced work meets your standards and expectations, by setting clear guidelines and monitoring the results.

Outsourcing is not only a cost-saving strategy, but also a way to enhance your competitive advantage and customer satisfaction. By outsourcing, you can free up your time and resources, and focus on what you do best: growing your business and delivering value to your customers.

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Average cost of software development

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There is also no one average cost, and it again depends on the type and size of the project. What is it that you want to build? Is it a content management system (CMS), eCommerce, or something else? Let's look at the average prices used to create these platforms.

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Content management system (CMS): Some companies build CMS to meet the specific needs of their users. This tool allows users to create and update content like blogs, videos, press releases, and so on. While many can use the popular available CMS like WordPress or Magento, having a custom one is much more expandable and profitable. The average cost to build CMS software is $20,000 to $50,000 for a basic platform.

Customer relationship management system (CRM): This platform is important for businesses to keep track of their existing customers, win over potential customers, and manage vendor and partner relationships. There are already many popular CRM platforms like Salesforce, Freshsales, etc. The average cost falls around $100,000 for a basic platform and can go up to $600,000+ if you're looking to build a large-scale one like Hubspot.

Enterprise resource planning system (ERP): The ERP system helps businesses manage their daily operations, such as accounting, supply chain tasks, project management, and more. This is a scalable solution tailored specifically for your business to handle all the in-betweens so that you can focus on the product itself. The average cost for this type of software is usually over $ 100,000 depending on the size of the company. A larger project will fall between $150,000 to $500,000+ if more advanced features are required.

Mobile app: You know them enough! They're the life & party of our cherished smartphones. But how much does it actually cost to develop a mobile app? Well, simple apps developed in the West should start around $20,000 - $30,000, while the most complex ones easily multiply these number by a factor of 10. However, when outsourcing your app development in a country like Vietnam, you could divide your budget by 2!

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Relationship-Based Outsourcing Models

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Once you understand the relationship basis of outsourcing models, you can make smart choices that suit your diverse business needs.  

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IT Staff Augmentation

IT staff augmentation involves temporarily hiring external IT professionals to supplement an in-house team. This model is particularly suitable for organizations experiencing short-term fluctuations in workload, requiring specialized skills for specific projects, or facing skill shortages within their internal team.  

Key Benefits:

• Scalability: Easily adjust staffing levels based on project requirements.
• Flexibility: Access specialized skills without the overhead of full-time employment.  
• Rapid Deployment: Quickly fill skill gaps to meet urgent deadlines.

Cost: The cost of IT staff augmentation typically varies based on the skillset, experience, and location of the external professionals. Hourly rates are commonly used, providing flexibility and transparency.  

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Dedicated Team Outsourcing

Dedicated team outsourcing involves forming a dedicated team of external professionals who work exclusively on your project or projects. This model is ideal for organizations with long-term needs, requiring consistent support, and seeking a collaborative partnership with a trusted outsourcing provider.  

Key Benefits:

• Customization: Tailor the team's composition and skills to meet specific project requirements.  
• Continuity: Ensure consistent support and knowledge transfer over time.
• Cost Efficiency: Achieve long-term cost savings through economies of scale and optimized resource allocation.  

Cost: Dedicated team outsourcing typically involves a monthly retainer fee. While the upfront cost may be higher compared to staff augmentation, the long-term cost efficiency and benefits often outweigh the initial investment.

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Project-Based Outsourcing

Project-based outsourcing involves fixed-price contracts for clearly defined projects with predictable costs. This model is suitable for organizations with well-defined project scopes, requiring a fixed budget, and seeking to mitigate risk.  

Key Benefits:

• Predictability: Ensure a fixed budget and timeline for the project.
• Risk Mitigation: Reduce the risk of cost overruns and delays.
• Clear Scope: Establish a well-defined project scope with clear deliverables.

Cost: The cost of project-based outsourcing is typically fixed, but it's essential to ensure that the project scope is accurately defined to avoid potential cost implications.

By carefully evaluating these costs and benefits and considering the unique needs of their business, organizations can effectively leverage relationship-based outsourcing models to achieve their strategic objectives.

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Factors influencing the cost of software development

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Now that you get a feel for the bigger picture let's break it down further and look at which factors influence the cost of software development. 

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Platform

If you're looking to build a cross-platform application that can run on different platforms using the same code base, you can save a remarkable amount of money. 

Developers can reuse and repurpose 80% of existing code to adapt to various devices. At the same time, more QA testing is required due to their being prone to more bugs and other compatibility concerns. Also, building a cross-platform app requires a more experienced team, thus, a higher cost.

Native apps, on the other hand, can only run on one platform but it guarantees more reliability and security with a separate code base for each platform. For Android, it will be Java or Kotlin with its JDK and for iOS, Obj-C or Swift on iOS SDK.

The necessary tools  and even the specific developers required to complete these tasks will be different across operating systems. The total cost is usually 30-40% more expensive than cross-platform development, so choose wisely.

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Type of project

Software development is a broad term that covers every type of software project, so which one is your type?

The most common outsourced project is website development, followed by software integration, modification, or custom brand-new software development.

If you want to add a custom code that expands your software's existing capabilities, that is called software integration.

If you need a large-scale enhancement to an existing software, you're looking for software modification.

And building custom software from scratch, from applications to management systems, will definitely cost differently.

The best way to figure out the exact price for your project is by contacting a trusty software development firm. Our expert consultants at Dirox are waiting for your call!

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Size of project

The size of your project is classified into four categories: small, medium, large, and enterprise.

Small software projects usually involve making changes or fixing bugs in software.

Medium projects are often mobile applications, web interfaces, or anything that is built on a single source of data. These types of projects include changes and fixes, but also solutions and integration.

Large software projects include almost everything: system integration, databases, security, logging features, and frameworks. They ease maintainability and scalability while creating multi-party applications across all platforms.

Enterprise software projects are ten times large ones. The security, error handling, and logging are much stricter. A great example of this is the Uber mobile app. 

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Size of the development team

The more requirements you have, the bigger the team will be.

Each developer will be in charge of a part of the project, and the project manager is there to oversee the progress and ensure your project gets done creatively and promptly.

If you already have a team and want to add developers with specific skills, please contact Dirox to get a rate for developers proficient in the talent you need! 

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Location 

One of the most significant factors influencing software development costs is the location of the development team. Labor costs vary widely across different regions, with developers from certain areas offering more affordable rates than others.  

Eastern Europe: Countries in Eastern Europe, such as Poland, Ukraine, and Russia, offer a good balance between quality and cost. Developers in these regions typically charge between $25 and $50 per hour, making them a popular choice for businesses seeking to optimize their development budgets.  

South/Southeast Asia (India, Vietnam): India and Vietnam are renowned for their large pool of skilled software developers and competitive pricing. Developers from these regions often charge between $15 and $40 per hour, providing significant cost savings without compromising on quality.  

Latin America: Latin American countries like Brazil, Argentina, and Mexico offer a blend of proximity to North America and competitive pricing. Developers in these regions typically charge between $30 and $55 per hour, making them an attractive option for businesses seeking to balance cost and collaboration.  

North America/Western Europe: Developers in North America and Western Europe generally command the highest hourly rates, often exceeding $100 per hour. While these regions offer the highest quality of work, the associated costs can be prohibitive for many businesses.

It's important for decision makers to note that while location plays a crucial role in determining development costs, other factors such as time zone differences, cultural barriers, and communication challenges should also be considered when working with offshore teams.  

Dirox mixes Western values with the polished talents of Vietnamese developers who will deliver you the perfect project for your business. Contact us for a free expert consultation to learn more!

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Technology Stack

The specific technologies used in a software development project can significantly influence its cost. Advanced technologies, such as artificial intelligence, machine learning, and blockchain, often require specialized skills and expertise, which can drive up development costs.  

For example, a project that utilizes complex frameworks, programming languages, or cloud platforms may require developers with specialized knowledge, leading to higher hourly rates.

Additionally, the time and effort involved in learning and adapting to new technologies can also contribute to increased development costs.

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Duration

While hourly rates may vary across different projects, the overall cost of software development can also be influenced by the project's duration.

Longer projects, even with reduced hourly rates, may incur higher total costs over time. Factors associated with long projects such as scope changes, and unforeseen challenges can extend the development timeline, leading to increased costs.

Therefore, it's essential to carefully estimate the project's duration and budget accordingly to avoid unexpected expenses.

Additional Considerations: Pricing Models and Contractual Terms

In addition to the factors discussed above, the pricing model used for software development projects can also impact the overall cost. Common pricing models include:  

Fixed-Price: This model involves a fixed fee for the entire project, providing predictability and risk mitigation.

Time-and-Material: This model is based on the actual time spent on the project and the agreed-upon hourly rates, offering flexibility but potentially higher costs if the project scope changes.  

BOT (Build-Operate-Transfer): The offshore provider in thís model will build a department, operate the team remotely for a predefined time, and then transfer all of it to you.

Milestone-Based: This model involves payments at specific milestones throughout the project, providing a structured approach to managing costs.

It's also important to consider contractual terms, such as intellectual property rights, maintenance obligations, and dispute resolution mechanisms, which can influence the overall cost and risk associated with a software development project.

Hiring options

Finally, looking at what options you have will, again, determine how much your software project will cost. There are three ways to hire software developers: freelance, in-house, and outsourced.

If you're reading this article, you might be highly considering outsourcing your project. Still, let's look through what other hiring options are available.

Freelance developers can fill in the gap for your existing team. Dirox offers individual developers to coordinate with your team and add value to the development as well. 

In-house developers are your employees, but the downside is that it can turn costly and ineffective, especially if your project is a one-time thing.

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How To Choose An IT Outsourcing Country?

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There are many factors to consider, such as the cost of labor and living in the country, the availability and skill level of IT professionals, the time zone difference and cultural compatibility, the legal and regulatory environment and data protection laws, and the infrastructure and internet connectivity.

To help you make an informed decision, here are some tips on how to choose an IT outsourcing country:

1. Cost & Quality:

• Research and compare: Use online platforms like Clutch or GoodFirms to find and compare IT service providers from various countries.
• Evaluate factors: Consider ratings, reviews, portfolios, and prices.
• Analyze costs: Use online calculators like PayScale or Numbeo to compare the cost of living and labor in different countries.

2. Time Zone & Language:

• Align time zones: Choose a country with a similar time zone for effective communication.
• Ensure language proficiency: Select a partner with a team proficient in English or your own language for smooth collaboration.

3. Legal & Regulatory Aspects:

• Assess legal framework: Evaluate the country's intellectual property and data protection laws.
• Mitigate risks: Consult legal experts to ensure compliance with relevant regulations.

4. Infrastructure & Connectivity:

• Evaluate infrastructure: Ensure the country has a stable internet connection, reliable electricity, and well-developed transportation systems.

5. Portfolio:

• Examine past projects: Assess the outsourcing provider's capabilities, experience, and project success.
• Look for alignment: Find a partner with a proven track record in delivering high-quality IT services that match your business goals.

6. References and Reputation:

• Gather feedback: Request references from past clients, especially those with the similar business backgrounds as yours, to understand if the oursource destination will match with your business goals.
• Research reputation: Investigate the company's reputation in the industry to identify potential red flags or concerns.

7. IT Consulting Services:

• Consider consulting: Partner with a provider offering IT consulting services for guidance and expertise. Insightful consulting expertise can benefit you greatly before, during and even after the development process. For example, Dirox Insights offer guidance and counseling from our Technology Experts to help you make informed decisions.

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Choosing an IT outsourcing country is not an easy task, but it can be rewarding if you do your research and find the best fit for your project. By following these tips, you can narrow down your options and select the country that offers the best value, quality, and compatibility for your IT needs.

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Summary

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So there you go! Hopefully, this article has given you a rough picture of how much software development outsourcing costs. If you're looking to outsource to an offshore firm in Vietnam to save costs, Dirox is the perfect partner to help make your dreams come true! Please don't hesitate to contact our expert consultants to get a quote for your project!

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