I recently caught up with a technology entrepreneur whose startup had succeeded in creating innovative technology. He was justly proud of what they achieved, and he’s now partnered with a much larger company to sell and support their product all over the world. One important thing he learned in their three-year run? Building a software team is not what he’s good at.
It’s easy to understand why tech entrepreneurs want to hire and run their own software development teams. When you only compare the hourly rate of a consultancy to the hourly rate of a few employees, working with a consultancy looks to be a lot more expensive. What this comparison misses is the hidden—but very real—cost of recruiting, hiring, and managing employees.
Building a happy, productive team of software designers and developers from scratch is not an easy undertaking. If you factor in the chance that you might even fail in that challenge and consider the risk of that failure to your business, finding a reliable, long-term development partner looks pretty attractive.
(If you’re part of a larger company with a development department, check out “To In-source or to Out-source? 9 Questions to Ask Potential Teams.”)
The Do-it-Yourself Cost Differential
At Atomic’s current blended hourly rate of $140, each maker on a project costs approximately $5,300 per week. An entrepreneur might do some quick math and calculate that a year of having an Atomic maker on their team would be approximately 52 weeks * $5,300/week = $276,000/year, or $23,000/month—a lot more than they’d have to pay even a senior developer if they are hiring in Michigan. This makes the hiring strategy seem to be a no-brainer.
But in addition to the hidden costs and risks of building a team from scratch, the quick math above exaggerates the difference between hiring and contracting. Here’s a better breakdown.
The Cost of a Consultancy
When you hire a team from Atomic, you pay only for the actual time a maker spends on your project. While our Fixed Budget, Scope Control engagement model gives you predictability in your total project budget, we invoice our clients by the hour only for the work done on their project. This means our clients don’t pay for sick days, holidays, vacations, professional development, company meetings, training, lunch, etc. The yearly cost to have an Atomic maker on your project is approximately:
38 hours/week * 45 weeks/year * $140/hour = $240,000/year
The per month cost is then really only
$240,000 / 12 months = $20,000/month
The 38 hours/week in the calculation above reflects a 40-hour work week and various non-billable activities. The 45 weeks includes vacation, holidays, sick time, and professional development time.
The Real Cost of an Employee
According to PayScale data, and using Atomic’s benefit costs, the fully loaded direct cost of a highly-qualified senior developer in Michigan is approximately $160,000/year or $13,333/month. This does not include indirect costs such as staff support, occupancy costs, equipment, employee welfare (snacks, parties, perks), conference expenses, etc.
The difference between the two strategies is a surprisingly small $6,700 per month. The consultancy route costs only 50% more than the employee route. Factor in all the indirect costs, and the differential would be even smaller.
And of course, once your development needs are over, your development costs go to zero. Consultancies give their clients elasticity of supply to match their variable demand.
The cost comparison above is for a senior developer at the top of the market. The differential would be greater for a junior developer. It also assumes the startup shares our belief that greater value is created by makers working around 40 hours per week, not through pushing people to work an unsustainable pace.
Other Costs & Risks
Costs & Risks when Hiring
- There are direct costs to consider for hiring, onboarding, training, and team building.
- With the market for skilled designers and developers as tight as it has been for the last seven years, the assumption that a new company can hire qualified makers quickly—or even hire them at all—needs to be considered. There is an opportunity cost to delays in recruiting.
- Bad hiring decisions (made in desperation or through lack of good choices) can have huge costs.
- You don’t have the freedom to easily rotate in new team members, or to tap a greater brain trust of experience and expertise, both of which you get with a diversely-staffed consultancy.
Risks with Consultancies
Of course, hiring a consultancy isn’t without its own risks. A bad decision here can threaten the entire business. It’s for this reason that we recommend focusing on people, process, company, prior work, client references, and reputation to select a vendor. (Unfortunately, most Request for Proposals (RFP) focus on the details of the work being contemplated.)
You also must have the proper legal agreements in place to ensure that you own your IP and the artifacts (like source code) that you pay to have created.
A Hybrid Approach
Of course, companies that rely on software for their business can’t contract out all software development. We advise our startup clients to make an early hire, and embed them in our team during the creation of the first release of the software. We’ll even help our clients vet candidates, something we know a lot about.
This hybrid approach allows our client to hire a less-experienced developer and have them trained in our process and practices, feel a sense of ownership of the code base, and be highly responsive to the company’s needs after the team finishes the heavy lifting of the first release.
It’s important for every company to maintain institutional knowledge of its product, clients, and market. While that knowledge drives the creation of software, the source code itself does not embody this knowledge very well. Outsourcing software development therefore isn’t a risk of losing the “secret sauce.”
As my friend learned, not everyone has the inclination and skills for creating a happy, productive, high-quality culture of software development. If that’s not your thing, it might be better to rely on a partner and stick to your strengths. It’s a simple example of the economic theory of competitive advantage; both parties benefit when each does what they are best at.