Pragmatic Outsourcing

What is a fair rate for a mid-level Java developer working offshore? Seems like a simple question, yet the answer you are likely to receive from anyone familiar with the subject is “It depends…” A fair rate you need to negotiate towards to with your supplier depends on many attributes and circumstances. Here are the most important:

• Location. Almost like in the real estate business location plays utmost important role in the cost of the product (rates in this case). Location granularity is roughly at a city level, meaning that in a single city you will have roughly the same rates for specific position. Large cities such as Bangalore, Beijing, and Moscow may have some pockets / districts with higher / lower rates, those differences are not as dramatic. Raising level of granularity to a country level skews the results significantly unless you limit your horizon to only “first tier” cities.

• Other geopolitical factors. In countries experiencing explosive growth or political turmoil standards of leaving fluctuate greatly and that inevitably leads to dramatic changes in rates. Rates of vendors from Eastern Europe and China have been growing at the highest rate recently. It’s no surprise considering major improvements in standards of leaving of these countries and weakening dollar as well.

• Competency. That’s an interesting phenomena I have observed over the years. It appears that engineering community competency has very notable local preferences. For example there is a great deal of skills in mobile development in Russia, Vietnam developers seem to prefer to speak .NET, you find many developers working with OS cores in Israel.

• Company size. Unlike in the food industry where large chains offer lower prices s/w outsourcing has opposite trend – typically you will be able to negotiate better rates with smaller shops.

• Vendor business model. In high-level view there are several business models which offshore organizations operate on:

• “Body shop” – under this model the vendor is focused on billable hours / resource utilization and is typically in the business of selling mediocre resources in bulk. This not the business model you will find presented in RFP or website of the vendor, however you will see it between the lines of the proposal, in general practices, etc. This model scales well and you can see body shops ranging from Krishna’s Shack to multi-nationals of colossal proportions.

• “Consulting Organization” – same as above but with vigorous attention to the quality of resources. These organizations are typically smaller and have much higher quality of the resources.

• “Boutique shop” – I use this term for small sized high-end consulting firms which offer top quality resources often in a very narrow field / niche.

Rates naturally would be the lowest for first model and the highest for third. The questions of course is appropriate analysis as most of body shops present themselves as consulting organizations and some smaller one pretend to run “boutique” operations.

• Engagement model. There are plenty of models you can elect to work with offshore, for example resource augmentation on T&M basis, fixed bid engagements, Built-Operate-Transfer, Managed ODC, etc. Each model will offer slight adjustment to the actual rates.

• Contract details. Rate can vary greatly depending on the details of your contract, with each element being a double edged sward though. For example you can reduce the rate by committing to large number of the resources or longer term of the engagement, by agreeing with termination fees, etc.

Here are a couple links for more detailed view on this subject:

Offshore outsourcing statistics for services in 2007
Global Services Location Index (GSLI) for 2007
Choosing the Right Country for IT Offshoring

And finally, the rate table, take it with a huge grain of salt though