Breaking Down The Cost Of Hiring In-House Vs. Outsourcing Software Development
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Breaking Down The Cost Of Hiring In-House Vs. Outsourcing Software Development

ITMAGINATION Team
  • The average recruiting process for software engineers lasts 40.8 days according to Glassdoor.
  • Layoffs and investors tightening their belts hinder hiring capabilities.
  • Recruitment and training expenses factor into the final cost of hiring and pricing.
  • Polish developers’ average salary creates competitive costs for clients.

Looking for a software development agency may feel daunting. With so many options in so many countries, it’s easy to feel overwhelmed. As always, the key metrics companies look at are the quality, price, and the ratio of the two.  

There are a few main approaches to hiring & maintaining software development teams, you can hire in-house, augment your staff, outsource software development, or go with managed IT services. Of course, life isn’t black and white, and likewise, the process of choosing the approach isn’t either.  

It may seem like the best path forward is to have your own team under one roof, but with the added costs of doing so and the possibility of limited expertise with different tech stacks, the hiring may be an expense that won't live up to your requirements. There is also the aspect of the time it takes to hire developers; nothing happens instantly... unless you hire a company that has developers on the bench ready to join your project.

On the other hand, we may fully outsource software development. It lets your company scale easier and faster, though the costs might pile up down the line. We trade money for the peace of mind, and flexibility. This approach usually works best when outsourcing non-core processes, though you may also outsource the development of the core process that creates value for your company.  

Let’s dive a little bit deeper into the intricacies of having your developers and engineers in-house vs outsourcing them fully.

Hiring In-House Vs. Outsourcing

The working relationship is the primary difference between an outsourced IT professional and a hired employee. A hired employee is precisely that, with all the costs of recruiting, management, equipment, training, and time.

Those extra costs are part of the overhead for the agency that hired the software developer when working in an outsourcing model. This relationship typically lowers the costs for the client, but prices will fluctuate for the software agency due to economic circumstances in their country of operations. Some of the key points to consider are:

Commitment Length

When hiring software engineers in-house, you commit to the employee and must maintain the agreements in your contract. If the employee does not pan out, you are back to square one in the recruiting cycle, possibly putting you back months in project completion. You also risk the turnover of employees, which compounds the problem.

When hiring an agency, you are committed to the project itself. Depending on the model, whether it’s staff augmentation, software outsourcing, or managed IT services, you have the benefit of receiving talent and expertise for the agreed requirements. This method provides you with flexibility and scalability for your business objectives.

Time To Hire

As any recruiter will tell you, it's not an easy task to find the right talent. Time to hire is a significant factor in deciding to hire in-house or outsource. When you require a developer for a specific job or aim to create an entire team, this endeavor could take months to get the right people.  

Glassdoor’s 2017 study revealed that the average interview process lasts 23.7 days, with the average interview process to hire Software Development Engineers taking 40.8 days. If you include that it can typically take anywhere from 3 to 8 months for a newly hired employee to reach full productivity, resulting in a significant amount of time for a company to get a project up and running with new talent.

That's just step one. You also need to wait for the new hire to serve their notice period at their current job after they accept your offer, which can usually add an additional month or more to the timeline – and this is often longer with higher developer seniority.  

Now all of a sudden, you’re looking at a waiting time of 2.5-3.5 months to have a software engineer join your team. With a software outsourcing agency, you can scale your team up by up to 10 people within 2 weeks and 40 people within three months.

You will then need to onboard, train, and possibly expand a new hire's expertise with the tech you plan to use. All these steps take time and money while the new hire is not actually working on the project.

Bench

Agencies typically will have a bench; this is a group of software engineers within the agency who are not currently working on other projects and are ready for their next assignment. In sports, we hear the word bench and think this is a super-sub, someone prepared to come in and do the job, but not good enough to be on the first team.  

Within a software house, this doesn't mean they aren't the best talent in the agency but are software engineers who are finished with other projects and are currently not assigned to new ones. These are salaried employees of the agency who are moved from project to project based on their tech ability and specifications of a client’s project.

Operational Risks Of Hiring In-House?

When it comes to the risks of running a business, you may run into challenges that may be out of your control. Economic realities, revenue slumps, and investor uncertainty can result in situations where the size of your team is changed instantly.

Here are some of the pitfalls you may experience in such a situation.

Layoffs

Over 16,000 tech workers lost their jobs in May of 2022, causing a ripple in the tech world, with developers wondering if they will be next. Most of these companies were VC-funded unicorns that hired excessively in 2021 only to let a large part of their workforce go the following year.

When upper management decides to cut costs, everyone down the line suffers. Projects end up on hold, and money and time go to waste.  

This situation can cause havoc for teams built for specific purposes. Companies such as WhatsApp, GitHub, and Slack have countered potential risks by outsourcing some of their development abroad. If you are trying to finish a project and have a contract signed with an agency, you have some assurance that what you need will be completed.  

Investors Tightening Their Belts

Many layoffs mentioned above are due to investors tightening their belts for a potential economic slowdown. Inflation rates are at decades-long highs in many countries worldwide, and the ongoing Russian invasion of Ukraine is not helping the situation.  

However, companies are still hiring, and the market for developers is still competitive; for potential hires, this still means a lot of benefits and bonuses adding to a much higher cost to hire.

These factors could also limit any new projects from taking place within a company. Searching for a solution elsewhere, in some cases, is the best possibility to continue growing. Software agencies will continue to provide you with the skills needed and offer you stability in your decision.

Severance Packages

The biggest budget threat to hiring in-house is when an employee gets laid off. Contracts typically include a severance package, thus taking out more money from a project budget. You spent all that time and resources to have it all vanish because of a decision made in the board room.

What Other Costs Are Involved With Hiring In-House?

You've managed to weather the funding, and economic storm and are still looking to hire. Great, now all we need to do is find the right talent, budget their salary, and everything will be plug and play with the new hire. If only it were that simple.  

The costs of recruiting, hiring, and onboarding a new employee can start to put an unforeseen dent in your project's budget. What began as a simple hire requires a whole team to find the right fit.

We’ve broken down some of the added costs of doing so.  

Recruitment

To recruit in-house, you will require at least one recruitment team member to seriously find the talent you need. The median salary for IT  recruitment specialists with 1-3 years of experience in the U.S. is $66,548/yr with total pay including bonuses reaching $97,745/yr. With all the associated tools for recruiting tech, job boards, marketing, job sourcing, background checks, and any referral awards, Glassdoor estimated the average cost of hiring a new employee is $4000 per hire.

Onboarding

Onboarding new hires are never just plug and play. Companies have different procedures and training sessions to get someone up to speed. So, after the cost of recruiting and hiring new talent, what happens after the offer is signed?

  • Training ($1,250)
  • Equipment ($1,500)
  • Tools and software for development ($1,000)  
  • Office supplies ($1,000/yr)
  • Office space ($18,000/yr)

Employee benefits

Salary is typically not the only deciding factor for a new hire. Many mid-sized companies offer some form of a benefits package. These perks may include:

  • Signing Bonus
  • Annual Bonus
  • Health Insurance
  • Catering or Meal Vouchers
  • Dental Plan
  • Paid Time Off
  • Recreation/Sports Vouchers
  • Balloon Budget

Raising Competencies

Investing in employee education for development is critical to staying ahead of the curve. Software agencies will invest in training and certification programs to ensure employees have the skills they need to improve their knowledge.  

Here are a few off the top of our head:

  • AWS Solution Architect Professional ($300)
  • AWS Cloud Practitioner Associate ($150)
  • Azure Administrator Associate ($165)
  • Data Engineering on Azure ($165)
  • Professional Scrum Master Certificate - PSPO ($200)
  • Professional Scrum Master Certificate – PSM ($150)
  • Google Associate Android Developer - ($150)
  • Certified Kubernetes Application Developer – CKAD ($300)

You will also need to factor in prep courses, workshops, and materials to prepare for these exams. These can double or triple the cost of the certificate themselves.  

Bang for the Buck

If you need a project started with minimal setup time, one of the best-valued methods is to find a software agency that can provide talent with the experience required for your specific project.  

There are a variety of partnership setups that can be formed. We’ve outlined some differences between staff augmentation, software outsourcing, and managed IT services more in-depth, and it is an excellent resource to understand the differences between your options.

Since we are a software agency in Poland, our rates are very competitive compared to hiring talent in-house or going with an agency in Western Europe or North America. This will play a significant part in estimating the final cost between the options you have.

Polish developers are also highly experienced and possess various coding accolades, making Poland one of the best destinations to find developers. There are, of course, cheaper sources of talent than in Poland, but the reputation for the quality of Polish programmers has been well documented.

When deciding if hiring an agency is cost-effective, you need to look at all the factors affecting the overall cost. We are no different. Our in-house costs also influence our price estimates for clients. However, we also provide years of invaluable experience for complex projects.

If you are interested in learning more about how we can find solutions to the challenges you face, please feel free to contact us anytime.

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