26 October 2015
Nowadays, the software outsourcing business attracts great attention. This market is becoming huge. According to Gartner (a leading American IT research and advisory firm), the numbers are approaching €100 billion in 2015. Basically everyone who has a computer, internet connection and skills can play on this arena and be your software engineering vendor. To find the right vendor as a client you need to understand who the main players are, what the differences are between them, how they deliver value and make money.
For the sake of our analysis we group vendors into 5 categories:
These software companies mainly have delivery centers in India, China, Latin America or Eastern Europe. They employ thousands of software engineers. To achieve such scale, their rates are very competitive and based on high volume contracts ($500K+).
They enterprise mainstream technologies like Java, .Net, and large pool of the software engineers are among the strong points of these firms. However, they act slowly and are not always able to rump up your team quickly and only do the things they were hired to do. Coming up with new ideas or risking with investing into emerging technologies are not their strength either. They often have a high attrition rate and are unable to attract the best talent.
Mid-Level Software houses is a very numerous group that includes a wide range of companies. Here you may find really great vendors but many of them are mediocre struggling companies. If a company has more than 50 employees the quality of management and business processes start to play a vital role and not always, the founding fathers (often technical guys) don’t have enough knowledge how to manage people in a large company. To a certain extent, this leads such companies to the chaotic and unpredictable way of living.
The key here is to find a good vendor. It is better to move step by step from a small project to a larger one but it takes time. Carefully checking who is in the management board. From my experience if you need to move faster, the Offshore Development Center (ODC) model gives you the best results. In such a model, you know exactly and control who is being hired and you’re able to co-manage your ODC team. Although there is one disadvantage here – you have to spend time on recruitment as well as people management in order to keep the team 100% dedicated to your own projects.
Body shops – this business model was created in India and we see more and more such companies in Eastern Europe and Latin America now. A typical body shop company hires entry level developers straight out of universities or colleges and then sell them out adding a couple senior guys to over-seas clients (off-shore teams) or delegate them to work at a client’s local office with minimal training, management or leadership. Over time, more experienced engineers are getting promoted to make the client pay higher rates or being moved to open new accounts or simply leave the company. With a 50% attrition rate, it doesn’t come to much of a surprise suing such vendors. To get their lion’s share in this business, they offer competitive rates.
This is a special kind of vendor. It takes discipline and time to develop particular skills, domain knowledge and, to stay focused. These companies tend to be expensive by offshore standards. They invest more into people, technologies (e.g. Data Science, Meteor.JS) and domain expertise (e.g. Fintech, ehealth). They are expat-run or have management/partners with international background and are at least 5 years in the business. Since the management team is matured, they do better in terms of work ethics, stable delivery teams and well defined processes.
This is probably the best type of vendor if you are looking for a technology partner who can work independently, contribute to your technology stack and product development. Hiring such vendor, saves you on technological know-how, quality and communication.
Such companies usually require new clients on conferences, personal business connections or via LinkedIn talking directly to decision makers. To find such vendors, you’ll need to know somebody who knows them or search online and then contact them directly. Usually they are very transparent: tell clearly what they do and can show examples of their work. There is no problem for them to arrange a meeting with you or to have business lunch with current clients.
You can find them on Upwork (old Odesk) or similar marketplaces. Here we talk about individuals or guys working together in one area. Their skills and experience may vary from very basic to superb. They work from contract to contract, some of them have aspirations to build a larger company, others would to stay freelancers. You can find good experts in this group but it is extremely difficult. I mean the risk associated to business continuity and intellectual property rights are very high. All in all, it is the good source to hire temporary experts for filling skills gaps in your team.
These vendors will promise you everything for very little money, but right after starting to do business with them, project finishes in “forever” in terms of deadline or being developed by students who don’t know what they are doing. A good software engineer now can work from anywhere and no company can work for 10 Euros per hour and deliver good quality. It is a trap. Your life will turn into a nightmare and at the end if you are lucky you will get a low quality product with bare minimum working functionality. My advice is to keep in mind the phrase: “You always get what you paid for”.
Typical rates per each category
Without doubt rates are always of high importance for both vendors and clients. The chart below provides baseline data that represents typical cost range for software engineers with 2-3 years of experience with an offshore location. If an engineer is being delegated to work at a client’s side (not all vendors offer this) add travel costs and allowance fee (100-200 Euros per day).
The cost ranges are rough and provided as informational guides only. I’ve collected this data working on various sourcing projects for Western European and USA customers. Rates may differ +/- 10%-20% from country to country but often, the differences are being compensated by cultural, language, visa regulations and, distance factors. The price is only one of many factors in vendor selection process. I will write more about vendor selection process in my next post.
|Vendor Type||Offerings||Hourly rate*|
|Large Offshore Software Companies (500+ employees)||Wide range of resources with different prices||€ 22 – 25 per man-hour|
Large long-term contracts, large teams
|Offshore Mid-Level Software houses and Body shops (50 – 500 employees)||Focus on skills in high demand (.NET, JAVA, JS, QA)||High quality vendors: € 25 – 35 per man-hour. Low quality vendors usually keep their rates closer to Body Shop level which is € 20 – 25 per man-hour.|
|Premium specialized and expat-run vendors (20 – 150 employees)||Highly specialized in particular market segment or/and|
|€ 40 – 60 per man-hour, prices vary for specialties (e.g. SAP expertise may cost even more) and they have more experienced engineers (6+ years).|
|Freelancers and small teams (1-10 employees)||Focus on particular skills||On average it is about € 20 per man-hour. New freelancers trying to enter the market offering rock-bottom rates (€ 10) but more established specialists may charge up to € 100 per man hour|
|Cheap vendors that can do everything||Everything||Rates between € 7 – 15 per man-hour (Mostly in India but we see more such companies in China, Vietnam and Malaysia).|