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How to Successfully Outsource Development

An Insourcing Vs. Outsourcing Case Study

By: Prem Khatri July 31, 2018

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Why Outsource Software Development?

Outsourcing widens profit potential, maximizes growth, and nurtures opportunities your internal architecture cannot support.

Every hour an outsourced developer works, they make tangible progress, but the same cannot be said for internal workforces. In a labor study polling nearly 2,000 office-based employees, researchers found in an 8-hour work day, employees are only productive for 3 out of those 8 hours. We do not pay plumbers full-time to fix a leaky faucet or onboard in-house doctors for yearly check-ups. So, why are doing this for software development?

In December of 2017, we had a client (let's call them XYZ Inc.) come to us with a fairly complex application request that was tied to a series of tight deadlines. The client had just acquired a large, e-Learning platform, and they were hoping to spearhead the acquisition with a mathematics testing app they could bring to market by mid-summer.

In this case (which is not always the case for Chetu clients) the client knew exactly what they needed when they met one of our Director of Sales at a tradeshow, and immediately began inquiring about specifics, rather than generalities. XYZ Inc. had already calculated the number of developers they would need (spoiler alert: he needed 20 resources total), the amount of time it would take that number of developers to program over 2,000 math problems, and the programming language that would best juxtapose their project.

The client carefully considered the context, the deadlines, and the costs, and knew he was better suited outsourcing development, rather than trying to onboard 20 developers for a project that wasn't ongoing. In deciding to move forward with outsourcing, the client went through the process of forging a symbiosis between operational structure and business aspirations to determine whether their business was best served filling positions in-house or with a third-party like Chetu. They approached the age old insourcing vs. outsourcing debate with logic and extensive, cost-benefit analysis.

The thing about outsourcing, it's ubiquitous. It's a topic all business owners find themselves mulling over at one point or another in their career, and applying to a diverse spectrum of processes: sales processes, marketing, e-commerce, operations, admin, and whatever other process don't require hands-on intervention or physical labor.

Outsourcing goes beyond sub-contracting; it's sustainable and scalable, leveraging resources that might not be available locally through telework and remote positions. Through outsourcing, Chetu clients are widening profit potential, maximizing growth, and nurturing opportunities their internal architecture cannot support.

We're going to walk you through the conscious outsourcing ideology. To start, let's go back to December 2017.

And then this is where we're going if you want to jump ahead:

Before you read on, understand each project comes with its own unique set of obstacles, cost barriers, and expectations. The formula we cite in this article is contextualized to a specific client, and the formula should be refocused according to each individual need.

The Case of XYZ Inc.: A Reminder That Numbers Don't Lie

Step 1: Set Some Parameters

What parameters are we talking about? We're talking about hard parameters and soft parameters, items you cannot budge on and items with a little room to move fluidly as the project progresses.

Overhead. Deadlines. Design.

Conscious sourcing is a means of zeroing in on the right task, the right cost, and the right resource, and if you can't quite define the task, describe what qualities the perfect resource would possess, or map out your budget, it may be time to put the brakes on until your vision crystalizes.

When we met XYZ Inc., they had intricate, mental blueprints of their project parameters, and were able to fully verbalize their needs.

pile of soil used with soil mapping sensors

In a condensed version, XYZ Inc. told us that they needed a new mathematics app, and the development of that application was central to their current business strategy. They intended to drive sales, gain visibility, and ignite growth by introducing this application to their preexisting, e-Learning suite.

For XYZ Inc., the math application would represent their first triumph after a rebranding period. Therefore, they acknowledged that they needed to put their best foot forward, delivering a product that would establish them amongst competitors and embody the brand-specific qualities they would later streamline.

pile of soil used with soil mapping sensors

Our sales team member left the conversation with a list that looked a little like this. XYZ Inc. wanted 18 Java developers and 2 resources to do QA for an application programmed with over 2,000 algorithms, and they needed it stat.

The different check marks establish the parameters for XYZ's project. When sourcing your project, you should make a similar list. Setting parameters helps you address the next debacle: insourcing vs. outsourcing.

Step 2: Insourcing vs. outsourcing: how much to hire a Java developer? 18 of them?

Parameters help set project boundaries, and for most, there's one parameter that always gets highlighted, underlined, and bolded in the project plan: budget.

A lot of the time, the sourcing debate finds its resolution right here, in a conversation about financial limitations and cost/benefit analysis.

It is no secret that outsourcing minimizes development costs by 25-75%, but I think there is a misunderstanding of how much money is actually saved in practice.

XYZ's project needed 18 Java developers, onboarding 18 resources internally is an arduous commitment for any company, but especially to complete a one-off project with a static stop-start date.

Chetu researches aggregated salary statistics from three, different employment databases to substantiate the insourcing/outsourcing cost divide:

22,302

Salaries

3

Career Entry Points

3

Employment Databases

Glassdoor
Indeed
Payscale
pile of soil used with soil mapping sensors

Between Glassdoor, Indeed, and PayScale, Chetu assessed 22,302 Java developer salaries. We collected data from three career entry points: entry level, mid-career, and senior/expert level. Indeed generally gave the highest estimates for Java developer salaries, while Glassdoor kept their estimates modest.

We used these numbers to calculate average Java salaries at the three career entry points to illustrate the base salary XYZ Inc. would need to pay each one of their 18 Java developers, had they chose to insource their e-learning application.

pile of soil used with soil mapping sensors

Let's say XYZ Inc. decided hire 18 mid-career Java developers internally at an average salary of $66k/year. Insourcing XYZ's project would cost over $1 million for base salaries alone.

This doesn't factor in employment taxes, recruiting expenses, benefits, and cost of work space and equipment. SHRM estimates recruiting expenses cost around 4k/hire, while MIT puts total yearly cost of employees at 125-140% of base salary.

Okay, what if XYZ Inc., transitioned deadlines from the list of hard parameters to soft parameters, doubling their project timeline to hire only half the number of resources.

Adding on recruiting expenses, benefits, and employment taxes, a single, mid-career Java developer would cost XYZ Inc. $86,500 to hire internally. Now multiply that cost by the number of resources. I'll give you fair warning: it hurts to look at.

The yearly cost breakdown for one insourced, Java developer:

pile of soil used with soil mapping sensors

You're probably thinking, okay, how much can I save by outsourcing development instead?

We can't release the exact numbers for XYZ's project, but if outsourcing projects generally cost 50-75% less than insourced development projects, and if XYZ's project required resources for 7 months (December-Mid Summer), let's look at the costs if developers were acquired at 25%, 50%, and 75% less than the insourced cost.

pile of soil used with soil mapping sensors

Budget is the elephant in the room for CIOs, CEOs, and other C-suite executives captaining a ship they are doing everything they can to propel forward. In Deloitte's 2016 Global Outsourcing Survey, 59% of participants cited cost cutting as their reason for outsourcing. So, if cost is what is keeping the ship from moving forward, the sourcing debate will always conclude with outsourced development.

Simply put, outsourcing gains you the most mileage for the least amount of gas.

Step 3: Ask yourself, what's next?

Sourcing your project requires a deep sense of self-awareness, a holistic perspective on the past, present, and future of your business operation. An all-encompassing snapshot constantly begs the question, what's next?

This question ties into the insourcing vs. outsourcing cost analysis, because although the numbers clearly skew in one direction, they must be contextualized.

Will you need continuous development for a very small project? Does the project have a definitive deadline? Does it make sense to augment part of my staff through outsourced services? Am I willing to pay the costs that extend beyond base salary?

XYZ Inc. concluded their project would only take 7 months. If they had decided to insource and hire internally, they would still be paying a team of full-time Java developers that they only needed for a set amount of time.

pile of soil used with soil mapping sensors

Sure, they may need them again later down the road, but until then, those Java developers would have been inflating their overhead without purpose. Chetu operates with a hire whenever, fire whenever mantra; Chetu developers come in to attack a predefined, niche task, and once that task is complete, clients put our development services on pause until their next project. The hire or fire policy frees businesses from contractual agreements, preventing paid downtime and excessive overhead.

Every hour an outsourced developer works, they make tangible progress, but the same cannot be said for internal workforces. In a labor study polling nearly 2,000 office-based employees, researchers found in an 8-hour work day, employees are only productive for 3 out of those 8 hours. We do not pay plumbers full-time to fix a leaky faucet or onboard in-house doctors for yearly check-ups. So, why are doing this for software development?

If we are truly pragmatic with our project sourcing, we are finding the fastest, most efficient, and cost-effective route to our final destination. Paying for an insourced employee that is productive less than half the hours they are paid for, guarantees business mediocrity.

Step 4: Overcome your outsourcing bias

It's about time. We need to face the facts about IT software outsourcing.

Here are the facts:

  • XYZ Inc. defined their parameters, vetted software development partners, and hired 18 Java developers from Chetu.

  • They went to market in July of 2018 after only 7 months of development.

  • XYZ's e-learning application allowed them to kick-off after a rebranding period with a product they were proud to represent.

  • They did not waste time on a recruiting process or training period because they outsourced Java developers that were ready to tear through 2,000 math algorithm programming assignments from Day 1.

Had XYZ decided to take an alternative route, they would still be in the development phase, scrambling to give their new customer base something to hold onto. They would 18 Java developers and 2 QA programmers standing by with idle hands, and a severe budgetary deficit no new release could counteract.

In past decades, systematic failures plagued outsourcing reputations and stigmatized third-party software services. As we progress through the digital revolution, technology dismantles systematic failures by streamlining face-to-face and remote communication.

Remote working is a commonality today, mainstream in lieu of cutting-edge video and audio capabilities. Shortcomings antiquate as communication becomes increasingly instantaneous with a growing interconnectivity.

You can continue to hire full-time, in-house mechanics for a car that needs its oil changed every 10,000 miles, or you can outsource. Chetu's expert technicians whenever the check engine light happens to flash red.

Disclaimer:

Chetu, Inc. does not affect the opinion of this article. Any mention of specific names for software, companies or individuals does not constitute an endorsement from either party unless otherwise specified. All case studies and blogs are written with the full cooperation, knowledge and participation of the individuals mentioned. This blog should not be construed as legal advice.

Chetu was incorporated in 2000 and is headquartered in Florida. We deliver World-Class Software Development Solutions serving entrepreneurs to Fortune 500 clients. Our services include process and systems design, package implementation, custom development, business intelligence and reporting, systems integration, as well as testing, maintenance and support. Chetu's expertise spans across the entire IT spectrum.

- See more at: www.chetu.com/blogs

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