Outsourced Software Development has become an integral part of the modern business landscape. It allows companies to access all of the specialised skills they simply don’t have, reduce their costs, and speed up their product development. But in order to understand whether outsourcing is truly cost effective, it is important to assess return on investment (ROI). Measuring ROI requires tracking a number of key metrics to gauge the impact on your business goals.
Let’s take a look at the things that you should be doing to measure ROI on outsourced software development to ensure that it delivers the results you expect.
Key metrics for measuring ROI
It is important for businesses to track both qualitative and financial indicators. These are the essential metrics for measuring your ROI:
Time-to-market (accelerating product launches)
This is one of the main reasons companies outsource their software development – it speeds up product launches. This metric measures the speed with which an outsourced team can complete a project compared to if it was done in house. It is measured by:
- Tracking development timelines for projects that are outsourced and comparing to inhouse ones
- Calculating percentage reduction in time-to-market as a result of outsourcing
Cost Savings (comparing labour costs)
There are often significant cost savings to be made from outsourcing, with external or foreign labour costs often much cheaper than domestic rates. Businesses need to compare the total cost of outsourcing compared to in-house development costs.
- Calculate the total outsourcing cost of all aspects of the project
- Compare this to the cost of in-house development considering salaries, recruitment etc
Whilst outsourcing can save on salaries, software licence and infrastructure costs it can sometimes bring additional management overheads and communication costs, so make sure to keep this in mind.
Assessing project scope alignment and delivery
How well do outsourced teams meet the requirements and deadlines of a project? This is another important ROI. They need to be on time, in scope and have the desired project quality. If an outsourced team does not deliver on time or within the scope specified then ROI is negatively affected.
- Project management tools should be used to track both in house and outsourced team progress
- Milestones should be regularly compared as well as final deliverables against project specs in order to assess scope alignment
Quality of work (meeting or exceeding standards)
In software outsourcing, the quality of delivered work plays an important role. Poor or incomplete work can result in rework, delays, and customer dissatisfaction; all of which can affect profitability.
- Track defect rates, complaints from customers and performance metrics for outsourced products
- Compare quality of work between outsourced and in-house looking at both functional and non-functional requirements
When your outsourced development is high quality you should see an improvement in the success of the project. This will boost customer satisfaction whilst minimising costs for rework.
Financial and qualitative indicators for tracking ROI
There are also some important financial indicators you should consider when tracking ROI:
Cost of engagement (understanding total investment)
These are all of the expenses that pertain to the outsourcing, and they can have a significant impact on ROI so must be tracked properly:
- Total engagement cost should be calculated with associated expenses
- This should be compared to direct financial outsourcing benefits
When you track these costs, you ensure the business understands the full cost of outsourcing which can help determine if benefits outweigh costs.
Strategic capability (long-term impact on growth)
This is the long-term impact outsourcing has on your ability to scale, innovate, and adapt to changes in the market
- Assess how outsourcing can support long-term business goals
- Track key performance indicators (KPIs)
Outsourcing can give businesses a competitive edge, allowing them to scale more rapidly and innovate more effectively, thus contributing to long-term ROI.
There are a number of data points that you need to measure to check the ROI on your outsourced software development project. Be honest with yourself to make the most accurate calculations and therefore see exactly what your ROI truly is.
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