Outsourcing software is expensive, a myth?

I have written about outsourcing myths before but today I shall focus on a prevalent myth floating around business circles that outsourcing software development activities is much more expensive compared to hiring in-house teams.

Having served as a CTO of full time-employee teams and now a CEO of a company that makes a living providing turn-key and team augmentation software services, I was shocked to learn how close these two options actually are in terms of pricing. To get your attention, will you believe that the same mid-level software developer hired full time in Stockholm costs the employer about 85,500 EUR yearly versus 90,300 EUR outsourced to us? And if we go down to the hourly rate, we are talking 49.7 EUR vs 52.5 EUR. You are probably as surprised as I was when I first did the calculation.

Of course, numbers are always based on certain assumptions and I will list those. At the same time, they are not applicable to any situation or any market. Since we do most of our business in Sweden, this is what I will take as the foundation for the calculation.

Assumptions

1. Average gross salary for a developer in Sweden is 53,100 SEK. We think that's a fair comparison to our mid-level developer rate. To calculate the total cost of salary to the employer we used the state calculator.
2. Additional benefits and costs are estimated at additional 8% on top of the gross salary (pension plan, insurance, wellness, laptop, phone, etc).
3. To calculate the vacation pay, a sum paid out for the number of days off an employee receives as part of the package, a calculator was used.
4. Average EUR/SEK exchange rate of 11.4116 was taken.
5. The average number of working days that the employee delivers value is 215. In 2025, there will be 249 working days, average number of days off in IT in Sweden is 27 and the average number of sick days in Sweden is 6. Another day is taken out on account of developer education (conference, meetups, courses, etc). That ends up being 215.
6. Keeping developers' skills sharp is more important than ever today. I estimated 10k SEK yearly ensuring developers stay up-to-date.
7. Hiring developers and giving them office space is expensive too, so estimating 10k SEK yearly per developer I believe is conservative enough.
8. Sweden has incredibly generous maternity and paternity leaves but we'll ignore those here.
9. No ESOP or profit-sharing scheme was included with the in-house calculation.

Cost Breakdown

Let's start by estimating what an average mid-level developer costs in Sweden. We are trying to calculate the total cost for the employer here so that we can compare it to the total invoicing amount of outsourcing.

The monthly costs come to about 6,449 EUR (gross salary, social contributions and 8% additional benefits). Yearly costs — developer education, HR & office, and vacation pay — add roughly 8,091 EUR. Totalling yearly plus twelve monthly payments gives about 85,478 EUR, or a daily rate of 398 EUR and hourly of 49.7 EUR across the 215 value-delivering days.

Finally, let's take the 215 working days and multiply it by our average daily rate of 420 EUR for a long-term (longer than 6 months) mid-level .NET developer to get a yearly cost for a comparable team member. It's important to point out we only charge for days we work on your challenges. This comes out at 90,300 EUR or 1,030,467 SEK. So there we have it, 90,300 EUR for a well-educated and meticulously trained certified developer armed to the teeth with best practices versus 85,478 EUR for a new hire. Seems both options are in the same ballpark.

Conclusion

Now that we have taken the price out of the equation, we can finally focus on what the real value proposition is. I often compare software agencies to pizzerias: there are a lot of them out there but there is always room for another really good one. We try really hard to be one that our clients always come back to. We love what we do and it shows.

When done right, professional software services and solutions we offer can always match an in-house team, but more often, we complement those with skills and experience not contained within the team. Working on different projects and tech stacks along with our office-first policy enables us that any team joining the client delivers the collective knowledge and experience of the entire company, thus providing maximum value at a very competitive price.

So, instead of looking at outsourcing as an expensive option, businesses should consider it as an investment. An investment that offers meticulous skill set, flexibility, speed, and even potential cost savings that come with these.

As my math professor liked to put it, Q.E.D.