Outsourcing: Local Rates vs Outsource Rates

  • February 21, 2017
Outsourcing: Local Rates vs Outsource Rates

Can offshoring reduce the cost of your project? The answer is yes, the cost will be drastically reduced. Sometimes customers compare outsourcing prices with the local salaries, but this comparison is fallacious. Local hiring implies various additional expenses like insurance, vacation, taxes, and so on. What is a real coverage of software or web development?

Cost

The clients often ask this question: ‘Why I need to pay $50,000-$60,000 per year to a remote developer, while I will pay local, in-house developer almost the same salary?'

The actual employee expenses are 40-50% higher than just the salary. This percentage includes taxes, insurance coverage, workplace, vacation, sick absence, education, motivation and will add up to 50%.

Steve Mezak, the author of Software without Borders' and ‘Outsource or Else', described a total annual U.S. employee cost, counting salary and other expenses in 2016:

Annual U.S. employee cost, counting salary and other expenses

Source: Software without Borders' , ‘Outsource or Else', 2016.

 

From the table above, it is evident that salary is just a part of the employee's cost in the U.S. The European indexes will have similar numbers. The full coverage of the software developer is approximately 40-50% more than actual salary. The third column shows the hourly cost of an employee where salary including other expenses (taxes, vacation, benefits, etc.) is divided by the number of hours in a year, so it's 52 weeks x 40 hours/week = 2,080 hours / year.

Below there is a chart that shows Ukrainian and other Outsourcing Areas rates in 2016:

 

Ukrainian and other Outsourcing Areas rates

 

Comparing Ukrainian rates with other well-known outsourcing destinations, you should consider travel expenses, time zone and cross-cultural communication difference. Ukraine has comfortable geographical position, as well as similarity in mentality and business ethics.

Steve Hamm, Bloomberg, described a negative experience of a customer who outsourced a software development in his article 'India software outsourcing: One unhappy customer'. Communication, a difference in time zone, and other cultural distinctions can add more costs for the project as expected.

In the following infographics, you will see how outsourcing in Ukraine differs from Western countries' rates. The Western rates are higher than outsourced rates with the difference almost in 40-50%:

 

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Location

The most ‘used' outsourcing destinations are India, Middle-East, Latin America, and Eastern Europe. The labor costs lower than in Western countries, less bureaucracy, and a wide variety of skilled workers in the market make these destinations attractive for investors. Jobrack also states the relevance of outsourcing to Eastern Europe in their article 'Starting Outsourcing? 3 Things You Need To Do Right Now'.

The main reason why you need to choose Ukraine is not only the cost reduction. Ukraine has developed infrastructure to maintain IT sector. The infographics below highlights key benefits of outsourcing to Ukraine:

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Conclusion

If you are willing to get lower prices for your project, the only way is to outsource your business. From this article, you see that Ukrainian developers require 40-50% less than local U.S. developers, counting salary and additional expenses like taxes, vacation, benefits, etc. But it's not only about the price, the Ukrainian market focuses on IT sector as well as offers highly-skilled developers and IT specialists.

 

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