Calculating ROI in software outsourcing

The main resources of any company are money and employees’ time. To save both, an entrepreneur may want to delegate all or part of their work to an outsourcing partner. Svitla Systems knows how to help with this task, since our expertise is in providing our clients with the best technical talent. Cheaper labor, fewer operational and recruitment costs, more time to concentrate on business tasks, and risk-sharing in software development are our key advantages that attract both large and small companies to become Svitla’s long-term clients. 

But what’s the best way to measure the effectiveness of outsourcing software development? This is what we want to discuss today. 

Return on Investment (ROI) is the most valuable financial measurement in the world of business that helps entrepreneurs determine how their limited resources will be used to deliver maximum profit. However, as it is quite obvious how to quantify the expected and actual financial profit, the rest of the factors like labor efficiency, time saving, and hidden costs can be a weak point in risk mitigation measurement. Let’s see how not to drown in the flow figures.

Create Cost-Benefit analysis

Before you decide to turn to an outsourcing vendor, you should analyze your current state of processes in your company and come to agreement on the strategy within your management team. Think about the goals you want to achieve by switching to the outsourcing partner. Of course, with time, your strategy may change, but at the beginning, you should clearly understand what the key point of your decision is. So first of all, create a precise document for actual and expected financial and quality benefits. 

Outline success metrics

Make a roadmap to control you ROI at each step of your work. In this document, you can calculate the expected profit on the benchmarks you are interested in (expected percentage of revenue increase, stage of development, user numbers, views rates, etc.). These metrics should be agreed with the outsourcing partner at the beginning, so everyone is on the same page.

Compare on- and-off

Estimate and compare the costs that you would spend on an in-house staff and offshore staff. This should include not only salary of personnel (with sick leaves, pension, taxes, insurance, etc.), but also office management costs. As a rule, an outsourcing company takes care of all the payments to the staff, so you should not worry about unplanned expenditures. Also, don’t forget to count the costs of hiring an internal recruiter vs. using the services of your outsourcing partner.

Anticipate hidden costs

While the costs related to personnel, infrastructure, OS and software licenses are on the surface, there can be some hidden expenses. These can include business trips of onshore staff and management to an offshore office in order to check the work, train the staff, and enter into agreements. 

The second thing that comes to mind is maintenance of a project after the go-live date. Put into your business case the costs for the transitional headcount that may increase the total amount up to 10-20%.

At least 10% should be added for unexpected cases, such as additional personnel, overtime work payment, and transaction operations. 

Make reviews and audits

It is important to carry out regular ROI audits to ensure the compliance of agreement between your company and offshore vendor. This is also why careful initial business case is a must. 

In total, statistics says that using outsourcing services has a positive effect for most companies. The increase in revenue on average reaches up to 7%, and the customer retention rate grows by as much as 20%, while the operational costs go down by 20-30%. Having an initial in-depth analysis will give you a base from which you can observe the ROI results in the future and understand the further strategy. Include into your ROI calculations everything that you may think is important. This will help both you and your outsourcing partner to understand what drivers are important to you and move in the same direction.