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Tue 05 November 2019 | Nivaldo Gomes

The real cost of outsourcing technology

The real cost of outsourcing technology

Image from Pepi Stojanovski

It is very hard to estimate something when the numbers aren’t really there. Specially for companies, who have to make budgetary decisions on a daily basis. That’s why it is so important to know what are the real numbers behind each decision, so that they can make well-informed decisions in different situations.

I’ve already wrote an article explaining when it's better to choose a contractor for their company and when it's advantageous to hire an employee. But now I’d like to explore the financial aspects of this subject.

According to Indeed, in September 2019 the average salary for a Python Developer is $118,386 per year in the United States. On the other hand, the cost of a great software studio could cost $50 - $99 per hour. On a 40-hour weekly basis in a year at the cost of $70, you’d have to pay about U$134.400 per person involved in the project.

Supposing that both of them had the same delivery capabilities, we're inclined to think that hiring an employee is the cheapest choice. However, that isn’t the whole picture. Or even the real numbers in this situation.

When we talk about contractors, we are dealing with services. In other words, the price of the service is the total cost. But, when we're dealing with hiring, the total cost should include:

  • Recruiting expenses.
  • Basic salary.
  • Employment taxes.
  • Benefits.
  • Others (space, equipment, training, etc).

According to Joe Hadzima, senior lecturer at MIT’s Sloan School of Management, to figure out the real cost of an employee, you take the base salary and multiply it by 1.25 to cover employment taxes and benefits, or even by 1.75 to add rent, equipment, etc.

Therefore, the real cost of hiring a Python developer would increase from $118.386 to at least $147.982,5. Which makes for a higher cost than simply getting a contractor.

So, the conclusion is “get a contractor”, right? Wrong!

It’s very important to remember that the company’s decision must vary according to it’s demand. If your needs could be met by a Junior developer, the real cost could drop to as low as $94000 per year. In this scenario, a contractor would be more expensive and potentially a work overflow.

Another important detail to remember is that, when you hire a software studio, you get the expertise from the entire team, not just from a single person. Again: you have to assess the company’s demand to understand what decision could be more advantageous.

Once you understand the real costs behind hiring employees of contractors, and in which situations the former is better than the latter, the choice becomes easier and better informed.

If you have any questions about working with third parties, please feel free to comment here or email me. I’d be glad to chat you with!

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