Outsourcing software development: what does it really cost, and when does it pay off?

A finance director at a manufacturer has two quotes on the table for a new customer portal. The Danish one says DKK 600,000. The one from an offshore agency says DKK 210,000. The decision looks obvious, until he asks himself who will write the requirements, answer questions at seven in the morning, test the deliveries and put things right when a feature has been misunderstood. Those questions decide whether outsourcing becomes a saving or an expensive detour, and we work through them here with numbers.

What is outsourcing of software development?

Outsourcing means an external partner develops software for you. In everyday speech the word usually refers to development abroad to get lower hourly rates, although technically a Danish agency is outsourcing too. Three models are typically distinguished by distance, and then by whether you buy a project, a dedicated team or individual developers who join your own team.

The hourly rate is what appears on the front of the quote. What an hour delivers, though, varies a lot. It depends on experience, on how well the task is described, and on how much of the management sits with the supplier and how much with you.

What does outsourcing software development really cost?

The real cost is the supplier’s hours plus everything that moves over to your side of the table. These are the items most often missing from the first calculation:

• Specification. The further away the team, the more detailed the requirements must be.
• Internal project management. Someone on your side must prioritise, answer questions and hold meetings.
• Testing and acceptance. Deliveries must be tested by someone who knows the business.
• Rework. Misunderstood requirements are often found only at the demo and must be redone.
• Time zones. A question asked in the afternoon can cost a full day’s wait.
• Travel and workshops. A few in-person meetings at the start and at key milestones.
• Legal. Contracts, rights and data processing agreements across countries.
• Hand-over. If the partnership ends, a new supplier must get to know the code.

Worked example: one customer portal in three places

The finance director’s customer portal is estimated at 600 hours by an experienced Danish team. In the example we assume a nearshore team uses 20 % more hours and an offshore team 40 % more because of clarification and rework, and that your own time costs DKK 500 an hour. The assumptions are ours, so feel free to adjust them with your own experience.

The conclusion has two parts. Outsourcing can still be cheaper, even when the hidden items are counted. Yet the saving is far smaller than the hourly rate suggests: the offshore rate is a quarter of the Danish one, while the total is around two thirds. And nearshore and offshore end up almost level, because the lower rate is eaten by more internal time. What the calculation does not show is risk. The project takes longer, and the more links in the chain, the greater the risk it becomes one of the software projects that fail.

When does outsourcing make sense, and when does it not?

What we see in practice is that outsourcing works best for companies that already have a strong technical organisation and use developers abroad to scale it. For a smaller company without its own IT department, the management task often lands with the managing director or a busy finance director, and then the saving disappears in time and frustration. If you lack a technical lead, also read hire a developer or use an agency.

How do you ensure good communication with an outsourced team?

• Appoint one decision-maker on your side who can answer quickly and has the mandate to prioritise.
• Write requirements as user stories with acceptance criteria, so everyone knows when something is done.
• Hold a short demo every week or fortnight where you see working software.
• Agree a fixed overlap in the working day when both sides are online.
• Use shared tools for tasks and documentation that you have access to yourselves.
• Have a local technical adviser review the code and architecture regularly.

A good basis for all of these is a requirements specification describing purpose, users and features. We have made a requirements specification template you can start from, wherever development takes place.

Who owns the code and data when you outsource?

Under Danish law an external supplier as a starting point holds the copyright to the code it writes, unless the rights are transferred in the contract. That also applies when the supplier uses subcontractors or freelancers, whose rights must then be passed on as well. With foreign partners, the contract must also set out which country’s law applies and where disputes are settled. Have a lawyer review the agreement. Our guide on who owns the code has a checklist for exit and transfer.

Personal data is the second big issue. If developers get access to personal data, such as a copy of the customer database for testing, the supplier is a data processor and you need a data processing agreement. If the supplier is outside the EU and EEA, it is also a transfer to a third country, which requires a lawful transfer basis, typically the European Commission’s standard contractual clauses, unless the country is covered by an adequacy decision. The simplest route is often to test with anonymised data and host in the EU. Read more in GDPR for websites and apps and hosting data in the EU, and check the specifics with a lawyer or the Danish Data Protection Agency’s guidance.

Which red flags should you know in an outsourcing partner?

• The hourly rate is very low, but nobody can say who will actually work on the project.
• The team changes often, and you meet new developers every month.
• The code sits in the partner’s repository, and you only get access at the end of the project.
• There are no demos of working software, only status reports.
• The contract does not mention transfer of copyright or data processing.
• Every question is answered with yes, including the ones that should spark a discussion.

How to get started with outsourcing

When you talk to potential partners, you can send these questions in advance:

1. Who exactly will work on the project, and how long have they worked for you?
2. How and how often do you show working software?
3. Which hours in Danish time is the team available?
4. Are all rights transferred to us, including from subcontractors?
5. Where is the code, and where are the product and data hosted?
6. Do you have experience with Danish integrations like MitID, e-conomic and MobilePay?
7. What happens if we want to end the collaboration?

What is the alternative to outsourcing abroad?

The biggest argument for a local team is that the management, the risk and the understanding of the Danish market sit with the supplier. At Ceptiv we give a fixed price within 24 hours, so the risk of overruns sits with us. One senior team in Copenhagen handles design, development and integrations, you follow the project in our client panel, and you own the code and data. If you need a developer who covers the whole stack, also see what a full-stack developer is and frontend vs backend.

If you want to compare an outsourcing quote with a local fixed price, describe the project here. You will have a written proposal to set beside the calculation within 24 hours, and can see whether the saving holds up.