Benchmark Costs for Application Development

The need for application development and support is definitely existing, but it’s hard to constantly sustain it. Reviewing current pricing models and contracts as well as options for structuring external support or development, is an exceedingly complicated task. There are so many different options that it looks more like a jungle than a structured botanical garden.

Nonetheless, benchmarking is a useful way to get a sense of the baseline and your current standpoint. This allows you to assess the current situation and to define the next steps and measures.

As the market offers so many different possibilities that it is hard to maintain an overview, this article will make you familiar with some key topics to define your way forward.

Establish a common baseline and only compare apples to apples

To make benchmarking efficient and useful, various factors must be taken into account. Below some important points are listed and defined to help you better:

1. Understand and define what you need in the first place
2. Match these requirements and your current prices with the numerous offers from different vendors to see where you could do better

Do a comparison on Price Models
(per ticket or per day / hour)

Benchmarking prices is a tricky business and, if not done correctly, will probably lead to false impressions. Therefore, it is important at first to establish a common baseline, e.g. generic description of a function, applying assumptions, etc. Only after this prework you can start the calculation and translation of the results into objective measures.

To compare price models, a basic categorization should be used:

Price per Ticket

• What does a single ticket cost?
• What are the cost components of such tickets?
  (surcharges, translation if necessary, overhead costs, licences, etc.)
• If possible, this should be separated between used support levels!
  (Level 1, Level 2, and Level 3)

• You as a Customer buy a Service and have no issues with managing efforts
• The Supplier ensures that the ticket is handled and solved regardless of the needed effort of the ticket request
• It is easier to negotiate with Suppliers on Ticket ranges rather than individual efforts

Price per Day / Hour

• How much does a single day of a specific resource within a specified time range cost?
• What are the cost components of such pricing model?
  (surcharges, translation if necessary, overhead costs, licences, etc.)
• If possible, this can be separated to specific skill sets to get more granularity!
  (very similar to the separation of support levels)

• You as a Customer buy certain resources and can explicitly define what kind of skills do you want to have
• It is much more transparent and traceable what these resources are doing, because every effort is tracked and charged to you
• You have more flexibility to manage these resources and steer them into other directions or change the scope, if necessary

These pricing models, once defined and described, allow for a quick comparison of different offerings and thus the use of benchmarking efforts.

Check the best fitting options and prepare a good mix of Off- / Near- / On-shore resources

A very simple but important point is to check the current location of your applied resources. Each location has its pros and cons. Maintaining and improving transparency about the current use, combined with clarity about current and future needs, will allow you to plan and take actions.

However, the first step is to review your contracts and price lists to answer some questions:

• Which locations are currently used?
• Which locations are an option in your contracts but not used?
• What is the price of resources in those locations?

In general, all locations can be easily structured into three areas:

Onshore

• Onshore resources are typically located in the same country as your company or subsidiary or at least in adjacent neighbouring countries
• These resources are typically used for projects that require a lot of face-to-face interaction
• Other reasons are:
  • Advantage can be drawn due to speaking the same main language
  • Time allocation is not a problem and can be hold more flexible
  • Travel times play in most cases only a minor role
• This is usually associated with high labour costs, as the onshore plants are mostly located in 1st world industrialized countries

Nearshore

• Nearshore is not as obvious to classify as onshore or offshore
• Typically, Nearshore resources are defined by at least one of the following two points
  • Resources are located in the same time zone or in a time zone with very little deviation (1-2 hours)
  • Resources speak your native language at a high level
• It offers cheaper labour costs than classical onshore locations in North America and Western Europe and provides more flexibility for staffing

Offshore

• Support is placed on another continent, often with huge differences between time zones (e.g. India vs. US)
• Mostly placed in countries which offer large-scale support on common technology stacks (e.g. India)
• The main reason for choosing offshore is usually the advantage of lower than average labour costs and high availability of resources

After the transparency is created and you are clear about your needs and possibilities, you can benchmark your rate cards against different supplier and internal costs. This allows you to identify outliers, best-in class options, and areas with immediate needs for action.

According to a recent Gartner study from 2021, 64% (only 4% in 2020!) of leading IT executives see the skills shortage as the main barrier to setting up new development projects or applying new technologies. This clearly demonstrates that the battle for good resources is hugely important and, of course, goes hand in hand with rising prices.

Therefore, keep in mind that you should not rely and focus on only one option. Such decisions are not contradictory but should be sufficiently coordinated and used together. Only if you are open to new models and hire good employees from different locations, you will remain competitive and gain access to well-trained resources (e.g. Development team works from different offshore locations and you install an additional project manager onshore).

What are the main Cost Drivers of Application Development?

Application development services are composed of several aspects and the final cost depends on several cost drivers. The three most important cost drivers are listed in the table below. Since the cost driver itself should be more or less self-explanatory, no definition is added. Rather, it suggests questions that you should ask yourself in order to be able to classify and evaluate the cost drivers accordingly in your model.

An assessment of the current state for these three categories is a good first step in creating transparency. Benchmarking one's own organization with others only becomes possible when any information for calculations is available and comparable.

Compare the results, identify topics with high deviations and create an improvement plan so that it can be streamlined.

The importance of clearly defined role descriptions and skill profiles

* On the one hand, time ranges and location of resources are very clearly defined in practice and there is little room for interpretation. On the other hand, there are even more possibilities for the contract design for skillsets and experiences. Typically, resources are classified according to the following criteria:

1. Job-Description: Scope of work and functionalities

This is really straight forward and just means that there is a clear description of the tasks that should be done on a daily basis for a given resource.

2. Experience and Seniority

As before, this goes without saying, but it has a big impact on the pricing of individual resources. The more experience a particular resource has, the higher its seniority and the more expensive it will be for you to use it.

3. Special Knowledge

Special knowledge, skills etc. of course will cost more. Therefore, you should ensure that there are no hidden surcharges for specific technologies etc. If not avoidable you should definitely bring a cap in place that will disable raising costs in the future.

And please consider that none of the resources must master all technologies or working methods and unite them in one job profile. You should staff services with teams that bring different characteristics and experience and thus add additional value.

Exemplarily Costs comparison of 12 different regions

Now we have talked enough about the theory. Therefore, a table is shown below in which the daily rates of the same resources from 12 countries are compared with each other as an example.

Prerequisites and the importance of regional labor costs

Thereby also a subdivision of the respective experience is made. This is divided into a tier classification, which gives a seniority based on the experience in the respective area. Depending on the vendor and field of expertise, this classification may vary a bit, but in the end an approximate match will be found.

The resources compared in the following table should be seen as an indicative example of how large the regional differences in labor costs can be. Therefore, typical countries from all continents have been selected, which show the prices of the respective resource in relation to the low-cost provider.

The resource compared comes from the field of application development and maintenance and is used for generic development projects.

However, it quickly becomes clear that a distinction between the subject areas takes a back seat with regard to the analysis of a country's labor costs, as the values shift somewhat but the level difference remains.

Relative cost comparison for regions and a short example that will help understanding

Now that the general information to the following table is provided a short example should bring more clarity on how to read it. The table had to be broken down to 3 parts - the onshore, nearshore and offshore countries.

The offshore countries are the cheapest and set the basis for the price premiums in the others. A more detailed overview and analysis is given in the whitepaper.

In the table with the Offshore Countries the Tier 1 Application Development resource on the Philippines are highlighted in green with a value of 100% (be aware that India is not much more expensive and the labour pool is much bigger). This means that this resources are the cheapest of all the countries compared and forms the basis for the calculation of the others.

Now it was calculated for all other countries how much more you have to pay for the same resource. This is given in percent e.g. United Kingdom (UK) shows 680% for a Tier 1 resource. This means that for an example price of €50 in the Philippines, €340 would be due in the UK. To better illustrate this, these price increases are color coded from green, very cheap, to red, most expensive.

Legend & Scale

Application Development Resource

It is very clear that the same resources are much cheaper in emerging markets such as India or the Philippines than in traditional industrialized countries such as the US or Germany. In addition, it can also be illustrated that possible nearshore countries like Argentina for US or Poland for Europe already bring price advantages.

The same could be done for ticket prices, of course, which also depend heavily on where the working resources are located.

Conclusion

Even after the most thorough investigation and various price comparisons some questions will remain unanswered. This can simply be attributed to the overabundance of options.

However, a lot of uncertainty can be eliminated by getting transparency into your contracts after you are able to answer the following questions:

• What kind of price model fits your business the most?
• What kind of resources do you need and where should they be located?
•  What are the most important cost drivers and how can you keep them as low as possible?

That should help you cut through the price jungle and turn it into a well-tended, but large, garden.