Calculate your Total Cost of Ownership before you start to outsource

17. June 2015

TCO_1If you only focus on the salary level, when you evaluate whether to outsource or not, you will definitely be surprised when the invoices arrive and you discover your real costs.

I always recommend calculating the total cost of ownership, before you start to outsource, so you can evaluate whether or not it is profitable for you solve the development tasks with outsourced developers. Beneath, I have gathered some of the typical costs that have to be included in the big outsourcing-equation.

Start-up and knowledge transfer

It is not possible for your outsourced employees to work 100% efficient from day 1. It will take a while before they are at the level of your internal developers. When your internal developers have to spend extra time and energy on transferring knowledge to the new employees, they cannot work as efficient as usual. Naturally, you also spend extra resources when you hire internal developers, but you have to focus on different aspects, when the developers are not based at your location, such as the physical distance, cultural differences and time zones. All in all, it takes some time before your company can benefit 100% from the outsourced developers, and this aspect have to included when you calculate the total price for outsourcing.

New structures and processes within the company

When you outsource, there are also costs related to the new structure within the company. Maybe some responsibilities have to be change hands and you have to establish new procedures. In the beginning, new procedures take time to implement, but they ensure that outsourcing becomes less time consuming, and eventually you will get the best value for your money.

When you reduce the distance

Naturally, there are also travel expenses when a company chooses to outsource. Many things can be managed online, but you should bring the outsourced and internal developers together from time to time, in order to strengthen the good cooperation across borders. Some businesses choose to deploy an employee to the sourcing country. If you have 10 developers in a country, who each earn DKK 20,000 per month and you also choose to deploy an employee, who might earn DKK 50,000 per month – all of a sudden – you are paying DKK 25,000 per month for an outsourced employee. This expense has to be included in the equation as well.

Start by calculating the actual costs of outsourcing

Does the outsourcing equation always make sense? No, it does not, and that is exactly why you need to look at the TCO, before you start your outsourcing journey. If you from the beginning have addressed all extra costs, and you have decided if the investment makes sense, then you have a good foundation for evaluating whether or not investing in outsourcing is the right choice for your business.