So, you say you save money by nearshoring your IT operations. Really? How much?
I was attending an event organized by the Channel Company in Nashville, TN back in 2017. I was giving my speech to a small group of CIOs during a break. Coffee in hand, I was telling them how we all know that Nearshoring your Software Development efforts save a lot of money and increase your ability to deliver. Suddenly a tall man wearing a hat approached me from outside of the small crowd and asked me with a strong voice; So, you say I can save money by Nearshoring my IT operations? Exactly how much money can I save?
Truth is that very often we listen to a statement so many times that we end up just believing it is true. Not even taking the chance to revisit the facts and make sure that it is still true. Many large corporations such as Intel, HP and Bank of America claim to save a lot of money with Outsourcing (Nearshoring is a form of Outsourcing). In fact, they not only claim to be saving money but also increasing their efficiency. Nevertheless, most of their outsourcing positions are related to BPO and not ITO. So here comes the question. Despite your company size, do you really save money by Nearshoring your IT operations? And if so, how much?
Sometime ago we started a Nearshore operation in Costa Rica from where we deliver IT services to our clients in the United States and Canada. We know for a fact that we are saving money to our clients. Between 30% and 50% – I told myself – But I had to face it, I didn’t have exact numbers at that moment and that was something that I couldn’t afford not to have. So, I played an old trick. I asked all of them to provide me with their contact cards 😉so that I could send them specific information based on the cities where they were headquartered.
I spent quite some time investigating further with my marketing team and with some help from my CFO, who walked that trail before me. Finally, I was able to make some interesting findings. One month after that event I was able to send meaningful data to each one of those CIO’s that I was trying to convince, including my friend Mark (The tall man wearing a hat) who I count as one of my clients today.
As the holidays approach I decided to share some of my findings to a wider audience. Mostly because I know this is a question that we often ask ourselves and what’s best than a Blog to share interesting findings?
What did we compare?
Before we jump to the numbers let’s understand how we created this study. We compared the cost of Nearshoring vs the cost of hiring new talent (in-house resources) in each target city. We considered every cost that is directly related to hiring talent and providing the necessary resources to work. The following paragraphs explain how exactly we compared the costs and how did we determine what should be accounted. If you prefer to go directly to the numbers, click here.
Cost of Talent
The national average base salary for a Software Developer as of 2018 is $91,887 in United States. But there are many different variables that directly impacts how much any given person is getting paid. For instance, the lowest salary rank reported in Glassdoor.com for this position is around $67,000 while the highest is around $120,000. The level of seniority as well as the person’s location are two of the most important variables to determine why someone’s salary is higher or lower. Fortunately, sites like Glassdoor.com, PayScale.com and Monster.com keep amazingly good statistical information about salaries throughout the United States. Our marketing team researched these databases and gathered information from base salaries on the biggest 100 cities in the country. For the purpose of this post I will only display the top 12 cities per technology.
- Junior Developers (1 to 3 Years of Experience)
- Intermediate Developers (3 to 5 Years of Experience)
- Senior Developers (5 to 7 Years of Experience)
According to careercast.com application software developer is the hardest position to fill in the United States, with more than a quarter of a million vacancies projected by 2026. Under these conditions nobody in his right mind would pretend that a recruiting unit of an average HHRR Department would be able to fill such position without some help. So, recruiting agencies come to the rescue. According to topechelon.com, a nation-wide recruiting network the average fee for recruiting services is 20% of the “chosen one” starting salary. We used that percentage (20%) to calculate the recruiting expenses based on the base salaries per city.
Not much to explain here. All employers in the United States are required to pay FICA (Federal Insurance Contribution Act.) 6.2%, FUTA (Federal Unemployment Tax Act) 6.0% and Medicare 1.45% calculated against the employee’s base salary. We didn’t consider Workers Compensation Benefit Funds for simplicity as it is a State tax and may vary.
According to Glassdoor.com the average benefit paid to Software developers in United States is $6,074, ranging
between $1,350 and $19,643. For the purpose of this study we used $4,976 for Junior developers, $5,667 for Intermediates and $6,000 for Seniors. All the previous amounts are based on average data from glassdoor.com, payscale.com and monster.com for the correspondent levels of experience.
A quick look at ebay.com and amazon.com showed us that a decent Laptop ($1,100), plus an extra monitor ($350), an 8’x8′ Cubicle ($1,900) and a chair ($150) will sum up somewhere around $3,500.00 give or take.
Lease Office Space
According to thebalancesmb.com, a programmer would need at least 125 ft2 of space to be comfortable and perform better at work. Using CoStar’s and Copaken-Brooks’ National Office Market Report we obtained the exact cost of lease per ft2in each one of the mayor 100 cities in the United States which we used to calculate an exact cost for lease of office space per each city.
What we decided to leave out?
We didn’t consider any costs related to training, onboarding or communicating as well as traveling because there is a big chance that you will incur in this cost no matter if you decide to DIY or Nearshore. Without any more delay, let’s find out how much money, if any, you could be saving by Nearshoring your IT Operation
The following are the results that we found with our investigation for:
For .Net Developers
If your business is strongly dependent on .NET technologies and is also located in one of the following cities, you are amongst the top 12 places where you can get more savings by Nearshoring you Software Development operations.
Junior .Net Developer (1-3 years)
For Junior .NET developers the saving ranges from 32% in EL Paso, TX to 54% in San Francisco, CA. The following graphic shows the top 12 cities where you could be saving more money for Nearshore Software Development with Junior .NET developers. i.e. IF you are in San Francisco, CA you could be saving 54% of your actual budget, reducing your cost to only 46% of what it is today.
Intermediate .Net Developer (3-5 years)
For Intermediate .NET developers the saving ranges from 19% in EL Paso, TX to 46% in San Francisco, CA. The following graphic shows the top 12 cities where you could be saving more money using Nearshore Software Development with Intermediate .NET developers. i.e. IF you are in San Francisco, CA you could be saving 46% of your actual budget, reducing your cost to only 54% of what it is today.
Senior .Net Developer (5-7 years)
For Senior .NET developers the saving ranges from 3% in EL Paso, TX to 39% in San Francisco, CA. The following graphic shows the top 12 cities where you could be saving more money using Nearshore Software Development with senior .NET developers. i.e. IF you are in San Francisco, CA you could be saving 39% of your actual budget, reducing your cost to only 61% of what it is today.
For Java Developers
If you live in the Java development world and your company is in any of the following cities, you are amongst the top 12 places where you can get more savings out of Nearshoring you Software Development. Depending on the level of seniority that you require.
Junior Java Developer (1-3 years)
For Junior Java developers the saving ranges from 34% in EL Paso, TX to 54% in San Francisco, CA. The following graphic shows the top 12 cities where you could be saving more money for Nearshore Software Development with Junior .NET developers. i.e. IF you are in San Francisco, CA you could be saving 54% of your actual budget, reducing your cost to only 46% of what it is today.
Intermediate Java Developer (4-6 years)
For intermediate Java developers the saving ranges from 21% in EL Paso, TX to 47% in San Francisco, CA. The following graphic shows the top 12 cities where you could be saving more money for Nearshore Software Development with intermediate Java developers. i.e. IF you are in San Francisco, CA you could be saving 47% of your actual budget, reducing your cost to only 53% of what it is today.
Senior Java Developer (5-7 years)
For senior Java developers the saving ranges from 8% in EL Paso, TX to 36% in San Francisco, CA. The following graphic shows the top 12 cities where you could be saving more money for Nearshore Software Development with intermediate Java developers. i.e. IF you are in San Francisco, CA you could be saving 36% of your actual budget, reducing your cost to only 64% of what it is today.
It makes a lot of sense to adopt a Nearshore Software development model if you can save at least 25% of your budget, because it gets payed back in the short run. As shown by the numbers we exposed, you could be maximizing your savings by creating teams with more junior to intermediate members and fewer senior level developers. Also, a good strategy would be to keep hiring your own Architects or promote your actual senior developers to Architect level and retain the know how while leaving the “weight lifting” work to a Nearshore team.
We have helped a lot of businesses in United States to get advantage of this model with our operation in San Jose. Some of them opted to outsource their development needs to us in the form of team augmentation or Turnkey projects. Others prefer to go with a BOT model in which we start the operation, grow it and the transfer it to our clients. Whatever way you prefer we can help you get going with your Nearshore Software development strategy as we did with my friend Mark.