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Software Development Outsourcing Cost

Software Development Outsourcing Cost Reduction Tips

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The ever-evolving software development market influences a competitive and challenging environment through technological advancements and a growing demand for tech skills. Outsourcing software development has become an option for companies aiming to stay competitive through digital transformation or having a brilliant idea for developing a digital product. Outsourcing has become mainstream for the past few years. To answer the talent shortage, it provides access to a global talent pool, speeds up digital product time to market, and optimizes in-house resource allocation. It also offers substantial software development outsourcing cost savings.

However, before making this strategic shift, businesses must ensure that finding a dedicated team addresses the skill gap and thoroughly evaluate the cost of outsourcing IT tasks. To accurately compare all the pros and cons and the expenses associated with IT outsourcing and hiring an in-house development team, stakeholders should explore the financial pitfalls comprehensively, considering not only the obvious direct costs but also the underlying indirect expenses, tax efficiency, and potential hidden fees.

IT Outsourcing Statistics and Trends

Globally, most revenue goes to the United States (US$197.30bn in 2024), and the global revenue in the IT outsourcing market in 2024 is projected to reach US$541.10bn. From 2023 to 2030 the market is expected to grow at a compound annual growth rate (CAGR) of 8.0%.

Software Outsourcing Services market share

Source: Statista

The main factors driving modern IT outsourcing trends are the growth of innovative technologies and the lack of in-house skills to integrate them effectively. This can be seen in cloud computing, DevOps, chatbot development, AI, due diligence consulting, etc.

The most discussed technologies in recent years are ChatGPT and Generative AI. These technologies emerged in 2022-23, prompting businesses to find ways to integrate them into their operations. The urgency is clear: to cut overall costs, cut human labor costs, and offer personalized services to customers, staying ahead of competitors or simply avoid losing market positions.

Cybersecurity as a Key Focus on Privacy

As cyberattacks become more subtle, outsourcing companies must adopt a multi-level approach to risk reduction and data security. This will be a vital task in the digital age, where securing data is crucial for maintaining customer and employee trust.

Cloud Computing Services

Companies start cooperating with multiple providers to avoid relying on a single cloud provider. Businesses follow a multi-cloud strategy and use different cloud platforms to optimize performance, increase flexibility, and enhance security. According to Forbes research, the number of companies adopting a multi-cloud strategy will grow from 76% to 85% in 2024. The advantages are apparent as this approach offers a significant reduction in cloud costs and flexibility benefits, although, at first, you can face some integration challenges with existing legacy systems. Multi-cloud and hybrid cloud solutions (combining cloud services with on-premises infrastructure) are advanced infrastructure strategies that will continue to gain popularity.

Outsourcing Software Development Transformed by AI

Artificial intelligence (AI) has transformed outsourcing software development as a process. One of the changes is the level of automation. Traditional software development processes often involve repetitive tasks, extensive manual coding, and prolonged testing stages. AI has automated many of these tasks, reducing human error and speeding up the development cycle. AI-driven code generation tools can write basic code.

Generative AI and Chatbot Development

Artificial intelligence (AI) has transformed outsourcing software development. In recent years, Generative AI and Chatbot Development have offered businesses transformative advancements. Generative AI, as a subset of AI, uses deep learning models to generate content, mimic human-like responses, and enhance user interactions. This technology is particularly significant in developing chatbots, which allow businesses to influence the customer’s interaction with products or services, providing personalized experience and building brand awareness.

Countries that need the outsourcing strategy or outsourcing agency

In-House vs Software Development Outsourcing Cost Compare

As business owners, IT leaders, or CEOs, you can choose an in-house team over outsourcing to a reputable company, slightly overlooking hidden costs and additional time and effort that consume your company’s resources and divert your attention from core business functions.

Cost-per-Hire:Expenses related to the recruitment process, whether conducted by a recruitment agency or an in-house recruiting team.

Legally Required Benefits: These include sick leave, annual bonuses, overtime pay, training taxes, medical insurance, and more.

Office Infrastructure:This involves all costs associated with workstations, IT supplies, and licensing fees for software development tools.

Overheads:These are the ongoing expenses required to operate the business.

Taxes:Various taxes that need to be paid as part of employing staff.+

We offer you the opportunity to assess whether an in-house development team is a good solution and competitive advantage for your company’s strategic evolution.

Cost optimization with the outsourced development team

Hiring Expenses

Making new hires is pricey, encompassing office setup, equipment cost, and added overhead costs like software licenses and benefits. These costs pile up, significantly impacting your budget. Hiring an in-house team involves significant recruitment expenses, including advertising job openings, conducting interviews, onboarding new employees, office setup, equipment, and software licenses. These costs can be substantial, significantly impacting your budget, particularly for specialized IT roles.

By delegating these tasks to your outsourced dedicated team, you avoid expenses considerably, saving time and money.

Labor Cost

Reducing costs for a software development project is a top priority when considering IT outsourcing services. For example, choosing project-based teams over long-term in-house staff cuts expenses. You only bear expenses while tasks progress, and you are not engaged in retaining new employees when new ideas or projects arise.

Also, rate variations across countries give business owners options to choose the right cooperation practice: onshore, offshore, or nearshore. The trend in the past years shows that Western European countries prefer nearshore outsourcing. You get the team with beneficial options: the same time zone, similar culture, and high level of education, and you can benefit from lower rates and a nearshore location in Europe.

Employee wages are high in Western Europe and the U.S. With outsourcing development, outsourcing helps you reduce taxes, payroll, bonuses, and employee benefits such as paid leaves, health, and life insurance, etc. Also, you do not need to increase your employees’ salaries because of inflation in each software development life cycle. Software outsourcing company offers different cooperation models: dedicated team model, team extension, and project-based model. It’s up to stakeholders and managers to choose the right model to benefit businesses with tech skills, advanced technologies, and cost savings.


Office Space Costs and Equipment

Building an internal team involves more than just salaries; it involves extra costs like office space. More employees mean more offices, whether rented or purchased, demanding additional space and money.

Equipping the team is another expense, as you need to provide your tech staff with tools and laptops. Software development outsourcing companies come fully equipped, eliminating concerns about office space, energy usage, or tool expenses.

Training Costs

The in-house team needs to constantly be engaged in training programs, conferences, and team events that align with your company’s values but entail higher costs to retain top talent. Competitive compensation and career growth bring employees satisfaction and support team affiliation spirit. All those efforts demand investment in their development, including training expenses. You pay software project outsourcing companies solely on agreed terms, significantly reducing financial obligations.

Tax Efficiency and Outsourcing Rates by Country

Outsourcing can help businesses lower their tax burdens by different tax rates, incentives, and regulations across various jurisdictions. By partnering with an external provider, businesses can allocate their income, expenses, or assets to countries with lower tax rates, thereby reducing their income tax. Additionally, they can benefit from tax credits, deductions, or exemptions specific to certain outsourcing activities or locations. We offer to delve into several examples to compare US, UK, Germany, and Switzerland salary taxes.

US Software Engineer Salary Example

Hiring a software engineer in the US can cost between $67,000 for a junior developer and $119,000 for a senior developer annually. Typically, 70% of the total cost consists of the net salary, while the remaining 30% covers taxes and benefits.

Here’s the annual cost breakdown for hiring an in-house developer in the US:

  • Net developer salary
  • Supplementary pay:3.2% of the annual net salary
  • Insurance: 8%
  • Paid leave: 7.1%
  • Retirement and savings: 3.8%
  • Legally required benefits: 7.6%
  • Overheads: 15%/li>
  • Cost-per-hire: $4,000 on average

German Software Engineer Salary Example

We checked Glassdoor reports average rate for a Software Engineer in Germany is €60,000 per year. However, this figure varies; for example, a Software Engineer with five years of experience can earn around €70,000 per year, while a Senior Software Engineer with 10+ years of experience earns up to €100,000 per year.

Companies also must provide benefits such as health insurance and pension contributions. Employers and employees share taxes and social security contributions 50/50. Statistics show these additional costs represent around 38% of an employee’s salary.

  1. Annual salary: €60,000.
  2. In taxes and social security contributions: the employer would incur an extra €22,800 each year.
  3. Recruiting software engineers in Germany:Glassdoor data indicates that the average cost of recruiting a software engineer in Germany is €4,000 per hire.


UK Software Engineer Salary Example

Entry-level software engineers in the UK earn approximately £41,000 per year, according to Glassdoor. Experienced senior software engineers can earn upwards of £60,000 per year, often including bonuses and equity options.


Source:  Wearedevelopers
If the contract states a gross monthly salary of £5,000, the bank account will only receive approximately £3,500. As for a software engineer in the UK, the tax bracket of 40%. With a gross annual salary of £51,600, a take-home pay after tax and National Insurance will be £38,133.

UK Tax Brackets

Income (GBP) Tax Rate (%)
Up to £12,570 0%
£12,571-£50,270 20%
£50,271-£125,140 40%
over £125,140 45%

Source: Wearedevelopers

Switzerland Software Engineer Salary by Experience Example

The average salary for a software developer in Switzerland is estimated at €105,000. That’s €8,670 per month or €6,140 per month after tax (29.2%). 


Check out the tax calculator for Switzerland to assess the Software Developer’s net salary. Source: Wearedevelopers

Extra Insights To Take In: The International Tax Competitiveness Index


Source: Taxfoundation

Estonia has had the best tax code in the OECD (Organisation for Economic Cooperation and Development) for 10 years.

  1. Corporate Income Tax: Estonia imposes a 20 percent tax rate on corporate income but only on distributed profits.
  2. Individual Income Tax: A flat 20 percent tax is levied on individual income, which does not apply to personal dividend income.
  3. Property Tax: The property tax is levied solely on land value rather than real property or capital.
  4. Territorial Tax System: Estonia exempts 100 percent of foreign profits earned by domestic corporations from domestic taxation, with minimal restrictions.

LaSoft offshore onshore nearshore outsourcing partner

Why Outsource Software Development Services is a Solution?

When specific tasks become excessively time-consuming and distract your team from their primary responsibilities, it’s time to consider outsourcing. Successfully scaling a business means continuously improving operations. Processes should become more efficient and streamlined, not more cumbersome.

You need a well-structured, functional web development team to do research, validate your idea, and develop a successful digital product. Most businesses can’t resist the temptation to cut some positions from the necessary team structure to save costs. That’s why outsourcing a dedicated best professional team is the proper strategic move: you get the complete team to develop a commercially successful product according to your business requirements and reduce costs on hiring extra experts for your in-house team, which are crucial for the development process.

Ideal team structure for the software development process:

  • Software engineers (Front-end, Back-end, DevOps);
  • Business Analyst;
  • QA (Quality Assurance) specialists;
  • UI/UX (user interface/user experience) designers;
  • Project manager/ Scrum master.

Each role is irreplaceable as it requires unique skills and knowledge to create a competitive and valuable product for your target audience.

Discover the ideas of Andryi Tatchin, a founder of LaSoft, a software development company, who shares valuable insights on proper web development team structure, leading to successful software solutions.

Final Insights: When Outsourcing Software Development Saves Your Money

An outsourced team helps you and your team focus on what matters while cutting your costs on software development or digital transformation of your business. From a cost perspective and filling in the existing gap of IT skills shortage outsourcing is a life savior, as it addresses the following issues:

  • To spend and use resources smartly;
  • Assess the company’s tech potential, team’s skills, and options for your business in the competitive environment;
  • Speed up software product development;
  • Offering expertise and knowledge your in-house team doesn’t have;
  • Cut down hiring and training costs.


What is Outsourcing in Software Engineering?

Outsourcing in software engineering means delegating specific software development tasks or projects to third-party service provider to allow businesses to use external expertise, reduce costs, and focus on core competencies.

What is the IT Cost Reduction Framework?

Businesses use a strategic approach to identify and implement cost-saving measures within their IT operations. This framework typically includes assessing current IT expenditures, optimizing resources using advanced technology for efficiency, and exploring outsourcing options to reduce overhead and operational costs.

What is Cost-Cutting in the IT Industry?

Cost-cutting in the IT industry refers to various strategies and practices for reducing expenses without compromising service quality or performance. These can include optimizing IT infrastructure and business operations, streamlining processes, automating repetitive tasks, renegotiating vendor contracts, and outsourcing non-core activities to cost-effective providers.

How Does Technology Reduce Cost?

Technology helps with significant cost savings:

  1. Shifting to cloud services eliminates the need for expensive hardware and maintenance;
  2. Advanced project management tools enhance collaboration;
  3. Utilizing data analytics helps in making informed decisions, optimizing resource allocation, and minimizing waste.

How to find outsourced developers?

Our team has worked in the outsourcing market with software development projects for over a decade and as an expert in outsourced software development services, we want to share the checklist with several key factors that can help you make an informed decision when searching for a reliable outsourcing partner:

Browse the Company Website and Evaluate Services

Start by assessing the services offered by various software outsourcing companies. Some offer comprehensive services, while others specialize in specific areas. Understanding their service scope and how it aligns with your needs is crucial.

Customer Feedbacks

Customer feedback is invaluable in assessing the credibility of potential partners. Reading reviews, testimonials, or case studies can provide insights into the strengths and weaknesses of your potential partner.

Assess Experience and Expertise

Evaluate the experience level and expertise of the outsourcing company’s employees. Inquire about their skill sets, qualifications, and previous projects to ensure they align with your project requirements and business processes. Understanding the type of work they offer helps define the potential output quality.

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