Why is outsourced less expensive? How does this impact quality?
Outsourcing.
In software development, this term is virtually synonymous with saving money, one way or the next. But why?
How is it that the same service can cost vastly different amounts in different countries? Does costing less really imply sacrifices to quality? From some of our research, two variables have a profound impact on these.
Cost of living and the prominence of IT in relation to other industries.
Cost of living, as expressed in dollars, is a measure that, more often than not, differentiates countries like none other. According to the Economist, with their Big Mac Index, the price of a big mac at McDonalds tends to be a good indication of a country’s overall cost of living. It may be tongue-in-cheek, but it’s a lot easier to make sense of than some of the drier methods of estimating a currency’s purchasing power in it’s respective country. Surprisingly, the price of a big mac tends to track overall purchasing parity closely, and thus, we’ll use it for this comparison.
Currently, a big mac costs about US$5.00 in the US, US$2.30 (9.80 lei) in Romania, US$2.40 in India, US$3.90 in the UK, and US$4.60 (C$6.20) in Canada.
As such, from a US perspective, the index would imply that to get, for example, US$5,000 worth of services in different countries, you’d need to spend:
- US$5,000 in the US.
- US$4,600 in Canada.
- US$3,900 in the UK.
- US$2,400 in India.
- US$2,300 in Romania.
If $5,000 represents the typical monthly cost of employing a single software developer in the US, we can easily infer what a fair cost might be in other countries for the same service. While the Big Mac Index is by no means a conclusive guide to the costs of outsourcing, it is a good reference point for what a certain amount of money that would be spent on services in one country, buys in another.
According to the index and our assumption, if quality was equal, a US based company would experience a 54% cost savings by outsourcing to Romania, slightly more than India- all while getting the same service for their money.
Although this is important, the prominence of IT in a country’s economy is arguably even more important when it comes to the cost effectiveness of leveraging IT resources in a given country- due to competition and economics of scale (ie. more developers attending specialized courses). The more prominent IT is relative to other industries, arguably, the better quality IT services you’ll receive. In particular, countries like Romania and the US, seem to have a very prominent IT industry when compared to other countries. India also has a large IT industry, but India is so large that IT actually makes up a very small component of their overall labour force.
As such, we can infer that if you’re looking to outsource, you’re best off outsourcing to a country with a low cost of living and a prominent IT industry. We’d recommend you look into the Romanian market, and if you’re curious, feel free to contact us any time, and we’d be happy to answer any question that you might have. We’re in Bucharest, Romania and Montreal, Canada.