True hourly costs versus salary-based hourly rates

When comparing the hourly costs of software engineers in high cost versus low cost countries, one may wonder whether there is any good reason to develop software in Europe at all. One fundamental problem with such comparisons is an assumption that companies pay for working hours. Well, it’s important to get the value for money, isn’t it? What constitutes value in this context is timely delivery of working software that satisfies requirements set by the customer or the company that outsources their development to an offshore vendor.

To understand the true hourly costs versus salary-based hourly rates me and my colleague Rini van Solingen have dived into an outsourcing collaboration between a Dutch software company and an Indian vendor (link to read). We have compared a team of in-house developers with a team of offshore developers. Our goal was to account all the hidden and often overlooked costs and include them in the hourly cost calculations. We did so by conducting focus groups (group interviews) with people involved in the collaboration, and going through different cost-related artifacts.

The extra costs of managing the offshore team included travel costs, control costs in terms of additional testing, and costs for establishing and maintaining communication infrastructure. However, our major finding emerged when we calculated the impact of offshore employee turnover. Since the software project required specific domain knowledge and an understanding of legacy code, it took several years to learn the system and become productive. The learning curve of the in-house team was estimated to be 2 years long. However, the distance between the offshore team and the original developers, and the absence of local senior developers due to employee turnover, made the offshore team learn slower, resulting in a 3-years long learning curve. The loss of productivity associated with onboarding new developers became the biggest cost factor in the offshore team.

After accounting the hidden costs, and propagating their impact on the hourly rate, we found that an offshore team’s hourly costs took three years to become comparable with the in-house team’s costs. Getting close to break even took five years.

Do you know the shape of learning curves in your in-house and offshore teams? Do you have control over employee turnover or at least awareness of the extent to which you are impacted by this? And not only external turnover, when people leave the company, but also internal turnover, when people switch roles or projects. Many companies fail to include the loss of productivity associated with loosing key persons in the project, onboarding new developers, or simply switching team members.

And, by the way, what we call ”control costs” can be also treated as a curve – a mentoring curve associated with the loss of productivity of in-house developers supporting offshore developers (link to read)

All details of the case and our calculations is available in our IEEE Software article – link to read.


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