Outsourcing Myths: cost advantage

On a surface that seems obvious: even with dollar fall, rising cost of living in India, China and especially eastern Europe the hourly rates continue to be much lower than those you have to pay in the states. For example, a mid level java developer would roughly cost you:

SF Bay Area, full time $60/hr
SF Bay Area, contractor $80/hr
Bangalore, India $25/hr
St. Petersburg, Russia $30/hr
Shenzhen, China $20/hr

So for every contractor in your San Mateo office you can put 4 in Shenzhen or 2 in St. Petersburg. Or, looking from savings angle, instead of paying a team of 8 engineers roughly $80K a month you can pay less than $30K in China and get yourself a hefty raise.

However, let’s take a look at real cost of outsourcing. The first rate killer is productivity: in my experience on average productivity of resources in India would be 50% of what you would get with local mid level resources, for senior developers it would be at best 75%, and for juniors you could potentially see it as good as 80%. To achieve that level of productivity you would need to put above average efforts in shaping your team and have considerable amount of luck. Typically getting a good senior developer is only possible if s/he is managing is at least 20-25 resources. Also be prepared that understanding of seniority may greatly vary from what is considered a norm locally, and in that light delivering another productivity hit. Let’s imagine that you are planning to outsource a 5 member team that includes one tech lead, two mid-level java developer and relatively junior ones. Your cost for the team would be roughly:

Role Level Experience QTY Salary Aprox Rate Monthly Cost
Tech Lead Senior 10+ 1 $140,000.00 $ 82.60 $ 14,537.60
Developer Mid 7+ 2 $100,000.00 $ 59.00 $ 20,768.00
Developer Junior 3+ 2 $ 75,000.00 $ 44.25 $ 15,576.00

Total:

$ 50,881.60

What would it cost you in Noida? Let’s assume that you got lucky in finding a tech lead for the team and the rest of the members were typical developers you could find out there.

Role Level Experience QTY Salary Aprox Rate Monthly Cost
Tech Lead Senior 10+ 1 N/A $ 32.00 $ 5,632.00
Developer Mid 7+ 2 N/A $ 28.00 $ 19,712.00
Developer Junior 3+ 2 N/A $ 25.00 $ 17,600.00
PM Mid 5+ 1 N/A $ 30.00 $ 5,280.00

Total:

$ 48,224.00

Note that team in India also includes full time PM which is not surprising for a team of 9. The result is a staggering 5% of cost savings. Your actual numbers could be different based on your negotiating skills, but the dynamics won’t change.

I am sure that many outsourcing companies would dispute my assessment of productivity. Well, let me give you a couple examples:

  • We stopped a development project (CICS adapter) being developed by team of five “very senior engineers” from Mastech after ~3 months due to unacceptable quality of deliverables. 2 months later the adapter was developed by a single developer we had on staff.
  • We had to stop and take in-house a handheld development project (.NET) being delivered by a senior developer and several mid-level ones from MindTree due to low quality of code and extremely low productivity. This project was later delivered by a single mid-level developer with oversight from a senior developer in time shorter than it had taken us to ramp up the team in Bangalore.

The list of examples can go on and on, they are just examples, however, considering that I could not offer any examples of an opposite nature, there is possibly a trend here. The question is why offshore developer’s productivity is so low? I’ll put my thoughts on in a separate post.

5 thoughts on “Outsourcing Myths: cost advantage

  1. Table and calculations for Monthly Cost is completely wrong. So how you can believe person who dont know simple math ?

  2. Ken, I believe that when you were checking the numbers you did not consider benefits and other elements that affect monthly rates. In any case these numbers are here not to test my knowledge of math (or MS excel ability to calculate), instead I put them here to illustrate that cost advantages of outsourcing should be treated with grain of salt.

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