How Software Companies Can Reduce Outsourcing Costs Amid A Global Financial Crisis
Months of lockdown have given us an understanding that this is just the beginning; the world is approaching a rather hefty financial crisis.
With markets collapsing, the global tech industry also faces significant challenges. Most IT players have already witnessed a shortfall of revenue that has forced them to reconsider (and reduce) budgets. Reducing outsourcing costs could help significantly.
Impact On Technology Industries
According to The New York Times, over 50 startups in Silicon Valley have already laid off 6,000 of their staff, and dozens of other startups just shut down.
Many IT companies have gotten used to remote work, so the massive lockdown has not really disrupted their normal pursuit of business. However, with layoffs, it’s not so easy. Let’s say you have a team of 30 software engineers in Ukraine, and the need to lower the budget forces you to cut the staff by 20%. So, you lay off six people and the workload is distributed among the rest of the team, making them work more. Team productivity falls. People experience burnout, and the general atmosphere is tense. Therefore, your company might not have the stamina for new challenges or to stay afloat.
What’s Wrong With Pricing Models Of Outsourcing Vendors?
Ukraine has been evolving as an IT outsourcing and outstaffing location. The fee-for-service pricing model has become the most common among Ukrainian vendors. However, foreign customers are not always aware of the local specifics, and they may be unintentionally misled and end up paying more.
For example, one U.S.-based product software company that had been working via the outstaffing model in Ukraine contacted us with a request to change its current model because it had been paying $6,000 for a middle software engineer every month. Searching through an independent developer’s community, the company found out that the real monthly remuneration for middle engineers in Ukraine is far less: around $2,500. The company knew the vendor’s pricing included fees, but it didn’t expect the number to be that much higher.
Another popular model is cost-plus pricing. It consists of the remuneration of developers, equipment and furniture costs (computers, tables, chairs), plus the vendor’s margin. Foreign customers usually do not pay much attention to the costs of equipment, furniture and other back-office services. This is a mistake because you may not use all of these items. For example, prices often include recruitment services even if you have already built the team. Does anybody check the costs every month?
Overall, neither of these two models is transparent enough and adaptable to crisis, thus leaving the only alternative: saving money by laying people off. The decision is up to you: Dance to somebody else’s bagpipe, or play your own music.
R&D Office As A Game-Changer
In tech, this new financial crisis will probably start the era of companies opening their own software R&D centers in countries like Ukraine. This engagement model suggests a separate office (which you can easily sacrifice if needed), your own development team and full control over costs.
Why Ukraine now? Ten years ago, Ukraine was a black spot on the map, and customers didn’t want to take extra risks; they just agreed to pay a single invoice to a vendor in order to land offshore with fewer difficulties. The situation hasn’t drastically changed, but the fact that Ukraine went from No. 130 to No. 64 in World Bank's Easy Doing Business ranking speaks volumes. Now it’s ready to both attract and secure foreign businesses.
For software product companies that continue to work with outsourcing vendors, the new financial crisis is a perfect opportunity to transform their business model and pull through.
This model offers significant cost savings, but having your own R&D office offers many more benefits: brand establishment in Ukraine, your own corporate culture and policy, and no buy-out fees or hidden costs. You can become the one and only host of your office, without asking the outsourcing vendor for permission for minor things, such as purchasing a chair or changing a monitor.
Many business owners think things will get better after lockdown ends. In reality, markets transform and business environments change after any crisis. Will this crisis be your push forward or your downfall? If you move to your own development office now, you’ll get all the advantages of outsourcing and outstaffing models but won’t pay for their disadvantages. Hire talented people independently, and keep full control over costs. With an R&D office, your employees will be yours, which will enable you to set the rules of the game.