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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.

What Factors Should Companies Consider While Finalizing the Outsourcing Budget?

Companies must resist the temptation of choosing the most cost-effective partner to save costs. They must evaluate the partner based on the following parameters to ensure a hassle-free product development process.

1. Transparency in Contracts

Ensure that the partner shares the detailed breakup of expenses and also includes other costs, such as for change in scope or expert consultation throughout the development process. There should also be no hidden or ambiguous clauses on issues like notice period, intellectual property, data confidentiality, vendor lock-in, payment terms, etc. The contracts should contain all details of the engagement, costs, and other terms and conditions to avoid future misunderstandings.

2. Partner’s Credentials

Check the partner’s credentials before signing the contract. Check if they are as transparent as they claim to be or if there are concerns like a lack of clarity on costs. Independent online reviews and peer reviews can help companies finalize the right partner.

3. Size and Scope of the Project

Evaluate the project’s size and scope before signing the contract with the partner. Be clear about the project’s intent and ensure that the partner understands it. An experienced partner will be able to understand the project needs, specifications, and expectations and finalize the scope before quoting the price.

4. Maintenance and Knowledge Transfer

Product development is a continuous process. It doesn’t end with launching an MVP. Post-launch maintenance and knowledge transfer to the in-house team are as crucial as the development process. Post-launch maintenance ensures the product is up and running, even at its peak. Knowledge transfer ensures that the responsibilities, access, and process information are shared with the in-house team to train new members to ensure business continuity. Ensure that the partner offers post-launch maintenance and knowledge transfer services.

5. Communication Model

Silos or lack of understanding between the client and partner could lead to irreparable repercussions, project delays, poor outcomes, and elevated project costs. The communication should be clear and transparent, and the partner must be aligned with the company’s business goals and metrics. Discuss the mode of communication, the language of communication, time zone, frequency, and SLAs with the partner before signing the contract.

How Can the Right Outsourcing Partner Help Optimize Costs?

Don’t let the current economic situation deter the product development plans. The right outsourcing partner understands the business needs and finds ways to optimize the costs. They prioritize the features necessary for achieving business goals and use proven frameworks and methodologies to build products quickly and cost-effectively.

Pratiti Technologies helps companies save costs and build innovative products that could give them an edge over their competitors. We provide end-to-end outsourcing product development services like new product development, product support, and staff augmentation to accelerate time-to-market at reduced costs. With over 25+ years of experience and deep knowledge in product development, we take care of the entire product development process so that the customer can focus on growing their business to the next level.

For more details on how we can help, contact us.

Nitin Tappe

After successful stint in a corporate role, Nitin is back to what he enjoys most – conceptualizing new software solutions to solve business problems. Nitin is a postgraduate from IIT, Mumbai, India and in his 24 years of career, has played key roles in building a desktop as well as enterprise solutions right from idealization to launch which are adopted by many Fortune 500 companies. As a Founder member of Pratiti Technologies, he is committed to applying his management learning as well as the passion for building new solutions to realize your innovation with certainty.

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