Outsourcing: it’s the art of delegating work to a third-party specialist or service provider to free up internal resources, leverage external skill sets, and reduce costs. American businesses have long been known to dramatically reduce overhead by getting work done with talent overseas. The costs of living in regions like Latin America, Asia, and Eastern Europe can be significantly lower than in the states. Consequently, foreign workers are able to charge lower rates.
Conventional wisdom would dictate that when it comes to cutting costs, engaging foreign independent contractors abroad is a no-brainer. After all, what works for companies hiring full-time employees should more or less transfer over to the world of freelancers, right?
Not so fast. It turns out that most labor statistics floating around the web appear to be quoting rates from outsourcing companies or salaries. The actual rates charged by independent freelancers can vary greatly, and therefore there are many reasons why the myth that it’s always more economical to source talent abroad than hire U.S. freelancers is false.
Let’s take a deep dive into the details and see if we can learn why more businesses are flocking to the latest hotspot for tech outsourcing — the United States.
Many Benefits of Outsourcing Are Location-Independent
There are many reasons to outsource besides leveraging the cost differences between different locations:
- Freeing up internal resources so you can focus on your core competency
- Streamlining a process or replacing it with a more efficient one
- Offsetting risks to an external party
- Temporarily expanding your expertise for a large project
- Bringing in an expert to solve a tough problem
Many cost-saving measures of outsourcing are often indirect savings gleaned from gains in efficiency. Having the flexibility to contract talent when necessary to respond to new challenges and free up resources when times are slim are all part of the equation.
The Cost Difference Between Foreign and Domestic Freelancers is Decreasing
Perhaps the gap is still pretty drastic by most measures, but be careful. We tend to see the most dramatic offshoring numbers in industries like manufacturing where workers will toil for wages as low as $3.60/hour. If you’re talking expert independent professionals, especially in the tech sector, the numbers are not as dramatic as they once were.
The prevailing global trend is that overseas rates are on the rise. India, a traditional favorite among outsourcers, has seen a steady annual 10% pay increase since 2015, a trend that’s projected to continue into 2018. While these rates are still a far cry from the United States, it narrows the gap enough to change the equation when you dive into the details — proof that how you outsource can have a big impact on the overall cost of your project.
There Are Hidden Costs to Hiring Abroad
Is it true that you can find senior developers abroad for as low as $30/hour? Yes, and this works for many, but you’ll want to factor in the hidden costs to make sure this works for you. Time zone differences, language barriers, legal costs, and other issues can lead to a loss of productivity. While these issues are well known and can be overcome with the right approach and collaboration style, that increased overhead is itself a cost that must be factored into the total budget of your project.
TCE (Total Cost of Engagement) is an attempt to measure these costs so that you can more accurately compare your outsourcing options. In general, the further away your freelancer lives, the higher the TCE. Besides the obvious increase in overhead, things like attrition rates (higher turnover), and travel costs must be considered as part of your TCE. Knowledge transfer — meetings, physical travel, documentation, well-commented code — comprises all the effort that goes into effectively communicating your objectives to a remote team, which will add to your TCE.
The base rate may still be low enough that you’re getting a good deal, but your total savings may be closer to 20% than the original 80% you were expecting from that $30 hourly rate. And as we’ll see later with independent contractors, a low TCE combined with a naturally higher variance in rates can further close the gap, making it possible for a U.S. freelancer to be on par or less than their foreign counterpart.
Agencies vs. Independent Contractors
Consider the table of the global software outsourcing rates courtesy of Accelerance:
|Rates for hiring and outsourcing agency or similar||United States||Latin America||Eastern Europe||Asia|
These rates are from software outsourcing companies working with Accelerance. As you can see, in regions like Asia, it’s possible to get a senior QA engineer for as low as $25/hour vs. $143/hour stateside.
Fair enough, but what happens when you contrast these with the rates charged by independent contractors?
|Area of expertise||United States||Latin America||Eastern Europe||Asia|
A cursory search of freelancers with over 1,000 hours billed and a 90% or higher job success rate on Upwork reveals that rates charged by freelancers vary greatly across all regions, even when isolating search results to top talent. While the above numbers should be taken with a grain of salt (these are just rough estimates from the client search tool) it does show that you can find highly rated freelancers in the U.S. priced competitively with other regions around the world.
It turns out that the reason U.S. outsourcing rates were so high in the first table is because these agencies have to pay overhead in addition to worker pay. When you work with an agency in the U.S., it’s less about outsourcing for cost-cutting measures and more about gaining a skill set outside of your core competency. You’re paying for the mindshare of an experienced team to fulfill a specific need.
When freelancers set their own rates, you end up with a more diversified talent pool. Some developers around the world have realized the quality of their work can demand a higher rate while others are willing to work for rates that are still competitive within their own home countries. The reasons for the variance are many, but the main takeaway is that location is only one of the factors that affects cost. In the competitive marketplace of independent freelancers, the individual, their track record, and the type of expertise you’re looking for can have just as big of an impact. It’s important to remember that you do tend to get what you pay for. The freelancers who are capable of commanding the highest of rates, regardless of country, can do so for a reason.
Upwork is a freelancing website where businesses of all sizes can find talented professionals across multiple disciplines and categories. If you are a business and are looking to get projects done, consider signing up!