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 500EUR yearly versus 90 300EUR outsourced to us? And if we go down to the hourly rate, we are talking 49.7EUR vs 52.5EUR. 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
Assumptions are a key part of the calculation so here they go:
- Average gross salary for a developer in Sweden is 53 100 SEK (see Appendix-1 below). 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 (see Appendix-2)
- Additional benefits and costs are estimated at additional 8% on top of the gross salary (pension plan, insurance, wellness, laptop, phone, etc).
- To calculate the vacation pay, a sum paid out for the number of days off an employee receives as part of the package, the calculator was used as listed in Appendix-3.
- Average EUR/SEK exchange rate of 11.4116 was taken, see Appendix-4.
- 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 (https://www.mitrefinch.co.uk/blog/time-and-attendance/sick-leave-uk-vs-europe/). Another day is taken out on account of developer education (conference, meetups, courses, etc). That ends up being 215.
- Keeping developers’ skills sharp is more important than ever today. Plus, I admit we love attending conferences with cool merch and stickers. All fine and dandy but it’s not a negligible expense anymore to the employer. I estimated 10kSEK yearly ensuring developers stay up-to-date.
- Hiring developers and giving them office space is expensive too so estimating 10kSEK yearly per developer I believe is conservative enough.
- Sweden has incredibly generous maternity and paternity leaves but we’ll ignore those here.
- No ESOP or profit-sharing scheme was included with inhouse 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. Let’s construct a simple spreadsheet for an employee cost:
SEK | EUR | ||
MONTHLY | |||
Gross salary – Brutto månadslön (1) | 53100 | 4653 | |
Social contributions – Arbetsgivaravgift (2) | 16244 | 1423 | |
Additional benefits and costs (8%) | 4248 | 372 | |
MONTHLY costs | 73592 | 6449 | |
YEARLY | |||
Developer education | 10000 | 876 | |
HR & Office costs | 10000 | 876 | |
Vacation pay (3) | 72333 | 6339 | |
YEARLY costs | 92333 | 8091 | |
TOTAL | |||
YEARLY + 12 x MONTHLY | 975437 | 85478 | |
DAILY | 4537 | 398 | |
HOURLY | 567 | 49.7 |
Then, to be able to come down to a comparable number and avoid comparing apples to oranges we need to take the number of days a developer actually delivers value to the employer/client which in our case is 215 based on the assumptions above.
That gives us a daily or hourly rate of an employee of 398EUR or 49.7EUR respectively.
Finally, let’s take the 215 working days and multiply it by our average daily rate of 420EUR for a long-term (longer than 6 months) mid-level .NET developer to get a yearly cost for a supposedly comparable (we’ll come back to this later) team member. It’s important to point out we only charge for days we work on your challenges. This comes out at 90.300EUR or 1.030.467SEK. So there we have it, 90.300EUR for a well-educated and meticulously trained certified developer armed to the teeth with best practices versus 85.478EUR 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. And that brings us back to my other myth-busting blog post from about a year ago: https://indigo.si/2023/11/24/myths-of-software-outsourcing-or-are-they/
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 comes with these.
As my math professor liked to put it, Q.E.D.
Would you like to find out more how you can entrust us with your digital products? Schedule a personal consultation with us.
Appendix – sources
- Average developer salary statistics https://statsskuld.se/lonestatistik/mjukvaruutvecklare
- Salary calculator https://statsskuld.se/berakna-nettolon
- Vacation pay calculator https://www.foretagarna.se/driva-eget-foretag/handbocker-och-guider/rakna-ut-semesterlon/
- Average EUR/SEK Exchange rate taken between Dec 4th, 2023 and Dec 4th, 2024 as listed by ECB: https://www.ecb.europa.eu/stats/policy_and_exchange_rates/euro_reference_exchange_rates/html/eurofxref-graph-sek.en.html