It Depends on the Opportunity...
As a Software Professional who's studying finance for my MBA, I thought I try to apply what I've learned to figuring out how to create financial model of when to outsource test automation. I've worked in the past with companies who have heavily outsourced, but also seen many companies bring their operations back on shore. But one thing is common, no one really knew how much they were saving sending things offshore, or bringing things on shore.
Assumptions
To perform this analysis, I used assumptions made in the market place, and about the productivity difference between onshore and offshore. Using some quoted figures from Compass Consulting which did a study back in 2009 (sourcingfocus), the key numbers I used from that study were, the 60% drop in productivity, and the 20% increase in management overhead. I've also used a 23.1% time to market difference for outsourced IT projects.
Calculations
Using Glassdoor for national averages (2016), I got the rate for SDETs in the US and Project Managers that need to put more time into the management overhead.
| Outsourced | In House US | |||
| Cost Savings: | (notes) | |||
| SDET Salary | based on $20/hr IT outsourced agency it rates | $40,000.00 | $109,000.00 | |
| FICA / Employment tax overhead | 20% | |||
| Productivity Difference | 60% | |||
| Project Mgmt Salary Onshore | $91,000.00 | |||
| Increased Costs due to Managment Overhead | 20% | |||
| $118,200.00 | $130,800.00 | |||
| Total Cost Savings | $12,600.00 |
As you can see, the average savings is roughly $12k for every SDET each year, for roughly the same quantity of output.
The next step of the calculation is the opportunity cost of the delay to market from the 23.1% slower time to market. To do this, I calculated the percentage of SDET's time related to total development time, then did a sensitivity analysis to find the break even point where the enterprise value of the project equals the cost savings.
| Opportunity Costs: | |||
| Percent of time project time taken by testing | 30% | ||
| Speed difference between in Offshoring | 23.1% | ||
| Percent time delay to market: | 7% | ||
| Enterprise Value of the Feature | $186,490.85 | ||
| Expected defferred sales from feature delay | $12,923.82 | ||
| Risk Free Rate adj rate | Based on 10yr treasury | 2.57% | |
| Time Value of Money of Delayed Sales | $12,600.00 | ||
| Estimated Savings | $0.00 |
Conclusion
So the answer to the question is, projects valued under $186k / SDET needed, you should outsource, projects over that keep in house.
I love to hear your thoughts and suggestions of how I can improve these calculations.
References:
Outsourcing all IT can lead to productivity drop, says Compass - News - outsourcing - sourcingfocus.com. (n.d.). Retrieved April 06, 2016, from http://www.sourcingfocus.com/site/newsitem/outsourcing_all_it_can_lead_to_productivity_drop_says_compass/
Fariñas, J. C., López, A., & Martín-Marcos, A. (2011, July). Offshoring, domestic outsourcing and productivity: A production function approach. Retrieved from http://www.leuphana.de/fileadmin/user_upload/PERSONALPAGES/Fakultaet_2/Wagner_Joachim/files/Farinas_Lopez_Martin-Marcos.pdf
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