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Total Cost of Ownership in IT Outsourcing – the hidden costs of in-house development

Reading time: 3 min

According to research, almost 50% of IT leaders enjoyed budget increases in the last 12 months, the highest level for over a decade. This follows on from the strategic role which digital plays in the world of business today. However, despite IT spending levels looking more positive, cost remains on the boardroom agenda of many organisations when deciding on the direction to follow while implementing digital innovation. And, there are two main options: do software development required for the digital transformation in-house, or outsource it to another company.

The hidden costs of in-house operations

With both the in-house and the outsource approach, there are certain costs incurred by client organisations which may not be obvious at the first glance. These costs must however be borne in mind to have the full picture of the actual cost for comparison of in-house versus outsourcing.

When comparing in-house costs with outsourcing, it is not simply about capturing the current costs of in-house operations and relating them to those of a proposed outsourcing company. This is because – more likely than not – not all current in-house costs will be included in the department’s budget – for example certain overhead costs like rent, building maintenance, or insurance.

To properly compare the cost of in-house versus outsourcing, a comprehensive review of in-house costs would need to be conducted – costs of resources used in every activity would need to be known and all costs would need to be traced back to the processes they support.

Below is a checklist of a number of cost elements which should be identified in order to consider the real cost of in-house IT. The checklist will help you make sure that all costs that may not be a part of your department’s budget are accounted for.

Download the checklist: the real cost of in-house IT

 

Cost Element

Cost applicable Y/N

Which department’s budget?

1. Personnel costs

Staff recruitment costs
Staff benefits
Bonus
….

2. IT System costs

Software licences
Telecommunications costs
IT support

3. Facility costs

Property taxes
Utilities
Staff canteen or kitchen costs

4. Other costs

Liability cover, professional indemnity insurance
Legal support
Marketing, advertising, graphic design

 

Download the checklist: the real cost of in-house IT

Conclusion

Costs discussed above are usually covered by the client organisation when using in-house IT services, although often not necessarily by their IT department itself. For this reason they are often missed in cost analysis when the price of in-house and outsourced IT services is considered.

When deciding on outsourcing, many of these costs will be passed on to the IT outsourcing company and cost savings often also bring time savings. For example if you are looking for a new Java developer for your in-house team, you need to consider many more costs beyond their wages and workstation: recruitment costs, training costs, staff benefits, software licences, their tea and coffee, holiday and sick pay, etc. This also means time spent to search, interview, recruit, train and serve the new employee. By deciding to outsource, the costs and associated time spent on the new employee will not be your worry.

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