In the dynamic landscape of technology, businesses often find themselves navigating a complex maze to stay ahead in the market. One consideration is whether to grow their in-house development team or use external software product development services. This choice isn’t merely about getting the job done. It’s about optimizing resources, minimizing risks, and maximizing returns on investment (ROI).
Turning to software product development services has emerged as a strategic solution for businesses seeking efficient, cost-effective, and high-quality execution. Some may harbor reservations about relinquishing control over development processes. However, a closer examination reveals many benefits that contribute significantly to the bottom line.
First let’s define software product development services
Many leaders have been burned by outsourced tech companies before. Before we do any calculations, let’s establish the parameters. Software product development services help organizations advance their technology products and processes by augmenting their existing resources with external resources. Not all software product development services look alike though. Here are a few factors you should consider when selecting your partner.
It is not all or nothing.
You do not have to hand over all control and development of a product to an outside firm. Some organizations can handle everything A to Z. Other companies only handle things A to Z. Many partners supply expert talent as needed. This is true even if it’s only an extra set of hands or two to make the work get done faster and better.
Outsourced ≠ Overseas.
Many firms tout their positive ROI, but not because high quality work is executed more efficiently. Instead the financial gains are achieved by paying low wages for tech talent, oftentime overseas. Understand that all outsourcing does not need to go that path. While that could work for some projects, many will benefit from development resources that are stateside with experience at large corporate powerhouses.
It’s not always on.
That’s actually one of the biggest perks of using external software development services. You can interject them into your organization when you need them, turn them off during slow or tight periods, and even turn them back on when they are needed again. While some firms require long term commitments, VSE’s agreements range from 1 to 12 months.
To examine the ROI of external software product development services, we will be comparing the cost of a full time hire compared with flexible support, like that which is provided by Value Stream Engineering.
Cost Efficiency
Cost efficiency is often the foremost consideration for businesses contemplating outsourcing software development. Establishing an in-house development team entails substantial expenses, including recruitment, salaries, benefits, infrastructure, and ongoing training. Conversely, outsourcing offers a more economical alternative, as companies can leverage the expertise of skilled professionals without bearing the overhead costs associated with internal teams.
Moreover, outsourcing allows for flexible cost structures, where companies pay for the services they require without committing to long-term obligations. This scalability enables businesses to adapt to fluctuating project demands and optimize expenditure according to budgetary constraints, thus enhancing overall cost-effectiveness.
Calculating the Cost of a Full Time Employee (FTE)
To understand if you are spending more or less on external software product development services, you first need to understand how much an expansion your internal team would cost. Sounds obvious, but many leaders miss many costs that add up when supporting a team of only internal employees.
One of those costs is the time it takes for existing team members to assist with the hiring and onboarding of new employees. This is time they could have been executing against items on the roadmap, so should be included in any calculations. Essentially, your time isn’t “free” or you wouldn’t need to add extra hands.
Need to figure out your own hourly rate?
Here is a calculation you can use to determine when a task is worthy of an hour or two of your time.
| Average Salary for a CTO | $198,158* |
| + | |
| Additional employee costs (40%)** | $79,263.20 |
| = | |
| Total Employer Cost | $277,421.20 |
| / | |
| Work hours | 1,920*** |
| = | |
| Hourly Rate | $144.49 |
*Glassdoor calculations for CTO average salary
**Additional costs may include benefits, payroll, taxes, office space and equipment, etc. The range is 25% – 40% on top of the employees salary. This does not include recruiting and onboarding costs.
***2,080 working hours per year for professionals working a traditional 40 hour work week 52 weeks per year. Remove 4 weeks to allow for vacation time, paid holidays, and sick days. 40 (hours per week) x 48 (weeks a year after time off) = 1,920.
Recruiting and hiring
Defining the job scope and requirements for a successful candidate is an essential step. This needs to happen for internal or external expansion. However, internal hires will need a formal job description which should take 1-2 hours to write by someone with the correct background who may have an hourly rate around $144.
Posting the job to a site or two may take an additional 2 hours. This will likely be executed by an HR team member with an hourly rate closer to $57, with a total “internal cost” of $114. There are typically external costs as well, such as platform fees around $800.
Unfortunately the harder part is reviewing resumes and conducting interviews. Reviewing applications may take 8 hours from the hiring manager ($1,152), and 4 hours from HR ($456). Once interviews begin, the hiring manager will need another 8-12 hours for interviews and internal discussions at a cost of $1,733.88.
Total cost if executed extremely quickly = $4,399.88
Onboarding your new full time developer
Once the right candidate has been selected, offered the position and accepted it the real work begins. HR will need to spend a minimum of 8 hours getting them set up ($912). The tech team will also need to spend a minimum of 24 hours training ($3,456) to get them up to speed.
Total cost of two weeks of training = $4,368
Ongoing cost of internal software product development
Now that your new hire is trained and set up, they should be able to jump in and contribute. When you calculate their costs, remember to take the salary and additional comp like bonuses, and add on 40% to account for payroll, benefits, taxes etc.
Here is where external and internal resources differ. You are paying these costs no matter what the person is working on. That hourly rate applies whether the person is coding, or attending an all-hands, or participating in the office family day. Studies show that average workers are only productive for about 2 hours and 53 minutes per day. The rest of the workday may include everything from bathroom and coffee breaks, to chatting with colleagues, reading news, and making or consuming food.
External software product development services only charge for the 2 hours and 53 minutes of productivity. Meanwhile, internal resources are a cost for the entire 8 hour workday.
Non-financial contributors to an ROI calculation
Now that we have reviewed the differences in costs between going internal vs external for software product development services, let’s look at some other factors to include in your ROI comparison. Every organization is different and some benefits below may apply to your organization while others do not.
Access to Specialized Expertise
In the rapidly evolving field of technology, staying abreast of the latest trends and advancements is imperative for maintaining a competitive edge. However, assembling an in-house team with diverse skill sets encompassing various programming languages, frameworks, and domains can be arduous and prohibitively expensive.
Accessing external expertise alleviates this challenge. Organizations gain access to a talent pool comprising seasoned professionals proficient in a myriad of technologies. Whether it’s web development, mobile app development, AI, blockchain, or IoT, businesses can work with specialized expertise tailored to their specific requirements. This access to niche skills empowers companies to undertake complex projects. They can move forward with confidence, knowing that they have the requisite expertise at their disposal.
Accelerated Time-to-Market
In today’s fast-paced business environment, speed is of the essence. Launching software products or updates ahead of competitors can create a significant competitive advantage, driving customer acquisition and revenue growth. However, the extended process of recruiting, onboarding, and training an in-house team can impede time-to-market. This extended timeline may delay product releases and show a diminished market impact.
Partnering for software product development services circumvents this bottleneck by enabling companies to tap into work-ready experts. By harnessing the agility and efficiency of external partners, businesses can compress development cycles and seize market opportunities swiftly. This in turn enhances their team’s ROI.
Focus on Core Competencies
Every organization has development exercises that contribute to competitive distinction. Every team also has table stakes products can dilute focus and impede organizational productivity, but still need to get done. While technology is undoubtedly integral to all modern enterprises, every project may not align with an organization’s core competencies or strategic objectives. By tapping into software product development services, businesses can reallocate internal resources towards activities that drive competitive differentiation. The ‘less sexy’, but still important, aspects can then be delegated externally.
Internal or External Software Product Development Services: No one-size-fits-all
Augmenting your software product development offers a compelling proposition for businesses. It can allow teams to optimize ROI while maintaining a competitive edge in the market. By capitalizing on cost efficiency, accessing specialized expertise, accelerating time-to-market, and focusing on core competencies, companies can realize significant returns on their investment in outsourcing initiatives.
However, it’s crucial to emphasize that successful projects hinge on careful vendor selection, clear communication, and robust project management practices. Establishing strong partnerships built on trust, transparency, and collaboration is essential for unlocking the full potential of outsourcing and driving sustainable business growth.
Ultimately, by embracing external expertise as a strategic imperative, rather than a mere cost-saving measure, businesses can position themselves for long-term success. The ROI of augmenting software development extends far beyond immediate financial gains. It encompasses enhanced agility, innovation, and resilience, laying the foundation for enduring competitive advantage and sustained profitability.
Have a project in mind, and wondering if external experts can help increase quality or speed? Let’s collaborate! Contact us to set up a discussion focused on your team and goals.