Factors To Consider While Finalizing Your Outsourcing Product Development Budgets

Introduction

With companies still reeling from the aftermath of the pandemic, inflation, and global recession, cost reduction has become a priority. They must strike a balance between costs, digital transformation, and innovation. That’s why most of them choose to outsource product development. 59% of companies cite cost reduction as the main reason for outsourcing. They save costs on hiring, training, and other overhead expenses.

However, it’s not as cost-effective as it seems. Companies are often taken by surprise when they receive a bill that’s more than what they had expected. Most of these expenses are hidden charges. Hidden charges are expenses that are not very apparent. They could include consultation charges, documentation and knowledge transition, server management, and even creating an outsourcing contract.

Companies must be aware of these charges to avoid any unexpected surprises in the future. They must consider certain factors while finalizing the budgets.

What are these factors, and what should companies know while working with a partner? Let’s explore all this in detail.

What Are the Typical Costs Involved in Outsourcing?

Before finalizing the budget, companies must understand the typical or direct costs of outsourcing product development. These are the main components of the outsourcing budget.

1. Hiring Costs

Different projects need different types of hiring. The hiring costs vary accordingly. For example, small-scope projects might require a single developer from an offshore location. These developers charge around $30-$120 per hour. Large-scope projects that would continue for more than 12 months might require a team of full-time developers. They work as an extension of the in-house team and are hired specifically for this project. The company will have to pay for each of them. The costs may vary according to the location, expertise, and skill sets needed for the project. Companies may have to shell out additional money if they onboard a technical consultant or a CTO.

2. Project Scope

The scope and complexity of the project play a crucial role in determining the project costs. The cost of developing a single-page application would vary from that of a full-fledged application with multiple screens and functions. Similarly, building a complex application for different platforms might require more time, resources, and budget. The outsourcing partner could also charge more if they use their proprietary tools and systems for the project.

3. Stages and Types of Development

The budget varies depending on the stage and type of project. For example, building a new product from scratch will cost more than building a new feature for an existing application. Modernizing a legacy application could cost more too. The stage and scale of a project could influence the budget too. Sometimes the company might need help building a minimum viable product (MVP). After that, they might complete the project in-house or continue with the same outsourcing partner. The budget would vary based on that decision.

What Are the Different Pricing Models?

Pricing models help determine the budget for outsourcing based on the project’s duration, scope, and scale.

1. Fixed Pricing

Fixed pricing plan works well when the company has defined the project goals clearly and agreed upon the timelines, deliverables, and other details. This type of model is not flexible. So, any changes in the project scope could lead to budget readjustment or cost escalation. The outsourcing partners have to complete the project within the stipulated amount.

2. Time and Material (T&M)

In the time and material model, the founder pays the partner for the time they invest and the material (in this case, the resources and tools) they use to develop the product. T&M is a perfect choice for building products that evolve based on market and customer needs. The partner allocates resources with pre-determined skill sets and provides a time-based billing rate to the client. The only challenge is there’s no visibility on the overall costs. The company comes to know the final amount after the project ends. The chances of exceeding the budget are high.

3. Offshore Development

Offshore development can reduce outsourcing costs depending on the partner’s location. They have to follow the compliance and basic payout rates determined by the law of the land.

4. Dedicated Team

A dedicated team could cost high for the company. However, they are necessary for large-scale and long-term projects that would continue for several years.

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