The Business Benefits of Offshore Software Development

Offshoring allows companies to access talented engineers at a lower cost than at home. Great! But what are the actual business benefits of doing that? Financially. Operationally. What do companies gain by investing in an offshore team?

What is offshoring, really?

When discussing offshoring, most people dive too quickly into specifics: you can build a bigger software team! You can save money! It’s safer than outsourcing!

All true, but we should slow down. What is offshoring? Fundamentally, it’s a way to increase a business’s output, and improve its technical expertise, without undue stress, hassle, or cost.

At its most basic, offshoring is simply expanding your business with a new team, with new (or complementary) skills. Aside from being geographically distant (which isn’t a major issue in 2019) it’s no different from hiring locally: advertise, recruit, work, reward – it’s the same process.

So if it’s the same process, then why are companies using offshoring? What are the real business benefits of offshoring?

1. Higher profit margin

A lot of companies and articles talk about "lower costs" when offshoring. We want to be a bit more helpful and specific.

Say you establish a 5-person development team in Bangalore, along with your 5-person team at home in New York. Now let’s look at two comparisons: first, a pure salary comparison between India and the USA, and then the total cost of doing business offshore versus in-house.

• Salaries only – If you hire the same team in Bangalore (same ranks, experience, and quality) then the salary difference will be substantial. Comfortably 3-4 times cheaper – but this comparison is too simple to be useful.
• Total cost – For our average client, the total cost of doing business here (including premises, administrative staff, legal work, payroll, developer salaries, insurance – the works) typically comes in at 50% the cost of your at-home developers’ salaries.

There’s no industry where skilled Indian workers cost more than in Western Europe or the USA. The differences in cost of living are just too substantial.

It’s everything else – offices, admin, and these things – which are most important. Handled correctly by your dedicated offshore partner, offshoring offers higher margins and, therefore,higher profits.

Why are these salaries so different?

We need to remember there are two sides to the story. Pound for pound, Indian workers are always cheaper than their British or American equivalents. But that’s been the case for decades; longer than decades.

So why do we suddenly want to cash in on Indian labour?

1. The quality of Indian workers has improved. Specifically in IT, engineers across India are getting the same education, training, and practical experience as Westerners. They’re incredibly capable, and that’s attractive to businesses.
2. Lower cost of living = lower salaries, period. It’s basic economics. Until India’s economy grows significantly compared to the west, the Rupee will be worth less than the Dollar. Therefore, salaries will remain smaller in India – regardless of the quality of service.
3. Engineering scarcity in the west – This is something we can’t afford to forget. In isolation, quality Indian engineers cost more than they used to. However, in Europe, the UK, and the US, engineers are very hard to find and extremely expensive. Because of scarcity. Part of why Indian labour is so "cheap" is actually because local labour is so expensive.

Read More about why companies use offshoring

At The Scalers, we help innovative global businesses build highly talented software development teams in Bangalore — the second largest tech ecosystem in the world.