How IT Outsourcing Companies & Clients Adapt to Rising Rates
There is an inherent compromise built into any relationship between an outsourcing company and its client. The vendor is incentivized to charge the highest prices possible to maximize profit, while the customer wants services to come cheap. This compromise is slowly degrading, as outsourcing companies are forced to increase their hourly rates to compensate for the rising developer salaries. In this article, we will describe this problem further and show several ways how both sides can adapt to maintain a healthy and productive relationship.
The Problem of Costs
One of the main selling points of outsourced development services is their low price. A company in the USA, for example, could hire an engineer in Belarus for half the rate that their American counterpart could command.
In recent years, the difference becomes smaller and smaller, however. For example, an Android developer in New York gets an average salary of USD 92.800 which is equivalent to an hourly rate of about USD 45/hr. Most Belarusian and Ukrainian outsourcers list their price range at USD 25-49/hr, with many charging at least USD 50/hr. Even when we factor in the overhead that comes with keeping a developer in-house (vacation, perks, hardware, etc.) the margin becomes narrower.
This is largely due to the fact, that the IT job market in Eastern/Central Europe and other popular outsourcing destinations greatly favors the candidates. Once a software engineer gets a few years of experience under his belt, he is able to confidently ask for a large salary, as employers are hungry for new hires.
Another source of pressure on the outsourcing companies is their competitors in emerging offshoring destinations. Compare the rates of companies in India and their counterparts in Bangladesh or Vietnam, where you can hire developers for under USD 25/hr.
As a result, the vendors have to balance the following:
- Employee salaries
- Profit margin
- Competitive pricing
And doing it gets more and more difficult.
There are several ways both the clients and the outsourcing companies can act to adapt to the changing situation.
Trying to lower prices more than the competitors from the emerging outsourcing destination is a dead end. As the costs of living in developing countries are lower, companies from there can comfortably offer bargain rates and stay profitable. So the established outsourcers go a different route.
This route is specialization: focusing on several key industries to become experts in. We at Aristek, for example, chose eLearning, eCommerce, Oil & Gas, Healthcare, Logistics, AR/VR, Education, and eCommerce.
The domain expertise helps the company in several ways:
- Easier understanding of the client’s requirements
- Anticipating potential legal or technological hurdles and preparing for them
- Ready-made solutions for specific problems or even white-label apps (pre-made software that can be purchased and customized for the specific client’s needs)
As a result, the outsourcer is still able to provide significant value to the customer even despite the price being higher. The projects either get completed faster, require fewer changes/fixes, or can be scaled easier. Either way, the client gets more bang for his buck.
2. Outsource the Outsourcing
One of the ways that the outsourcing vendors could keep their rates competitive is to subcontract. A company can act as an intermediary, getting clients and having a reliable (but cheap) partner perform the work. This requires a great deal of trust but carries benefits for all parties: the client gets the work done, the subcontractor and the intermediary earn money.
There is a risk here, however. The more people there are in the chain of communications, the higher the probability of misunderstanding and something going wrong.
3. Expanding the In-house Team
The COVID-19 pandemic spurred the adoption of remote work, especially among tech companies. For example, Slack, Twitter, and many other companies are offering an option to telecommute permanently. And instead of being a perk, it is now expected: 74% of professionals and 76% of entrepreneurs expect remote work to become the new normal.
And if everyone works remotely and at a similar price, why not just hire your own people?
This is certainly possible. However, there are several problems that make it difficult.
The second is the lack of available specialists which drives up the hiring costs. According to Glassdoor, filling a job position will set you back by about USD 4000. Add the onboarding expenses (recruiter’s hourly rate multiplied by the number of hours it takes to get the new hire through the basics) and the issue becomes quite sensitive. Also note, that the cost of hiring could go up in the case of a rare specialty or a highly-placed managerial position.
A subtype of this solution is opening remote development centers. A company based in the USA, for example, can create a branch in Eastern Europe or Asia. There they can hire all kinds of IT specialists, thus keeping the balance between the lower costs of outsourcing and the easier control of in-house personnel.
Often, these development centers grow out of the dedicated teams that the company hired and tested. Some outsourcing vendors even specialize in such services, helping foreign businesses open local branches and staff them.
4. Teams Instead of Individuals
Another way an outsourcing company can adapt to the rising costs is by focusing on selling teams instead of individual specialists. These teams are composed of all kinds of professionals that are needed to successfully complete a project: programmers, QA engineers, project managers, business analysts, DevOps engineers, etc. Together they can reliably handle turnkey software development. The client only needs to explain their requirements and periodically provide clarifications.
Such teams often specialize in specific industries, as mentioned in point 1 of this list. Through synergy and experience, they bring a lot of value: suggest optimal ways to do things, develop faster, and understand the requirements better. They are costly but also cost-efficient, containing the “thinkers” (experienced professionals who drive the process) and “doers” — junior and mid-level devs who perform most of the work.
The vendors focus on full-cycle development teams, subcontracting, and domain expertise to provide more value. The clients, on the other hand, expand their in-house teams locally or through foreign dev centers — only the second option is favorable to outsourcers.
“Offshore outsourcing is a viable alternative for cost-effective software development, despite escalating costs.”