How to Avoid Hidden Costs of Offshore Hourly Rates

offshore hidden costs

For many US companies, understanding the total cost of IT talent services has always been challenging, and is even more concerning now as budgets and resources have tightened in a post-COVID-19 world. But as the need for change and innovation continues to grow, companies are rapidly shifting focus towards outsourcing as a solution to assisting in digital innovation.

Procurement commonly compares hourly rates because it’s an easy comparison.  Well, not exactly.  But the issue is that the invoice at the end of the month for a committed amount of work is what matters, not what the hourly rate states.  Overtime, 45-hour billing weeks, etc. are ways offshore vendors distort billings and make your hourly rate look lower to win deals. So, how can you avoid additional costs associated with services provided by your outsourcing partner?

At SMC2 we find that many Global Insourcing Center RFPs ask for hourly rates as a selection criterion to support cost control or optimization.   Hourly rates themselves are easy to compare but do not accurately reflect the actual costs to deliver services or projects.  Fixed bids make an attempt at solving this issue, but are often laced with caveats and take a significant effort to understand scope.  

Also, many people believe that although the rates in India are lower, it takes more resources to deliver the same value as a US resource. Ratios such as 3:1 or 2:1 are often cited, demonstrating a lack of understanding of India’s technical capabilities and, more so, the opportunity to optimize under a global team structure.

SMC2 has solved this issue by focusing on value generation instead of billable hours.  Our teams are measured at the same level as their US counterparts in terms of productivity. This is expressed as 1:1 productivity.  We provide the necessary time each week to guarantee a US-full time equivalent of contribution.   

We commit contractually to meeting a company’s pre-defined productivity standard (hourly effort estimation, story points, or any other qualitative metric as fits within the client’s methodology).  Overtime, although incurred as a natural part of a software development lifecycle, is never billed from SMC2.

Here are the most common hidden costs in an hourly bill rate to be considered when evaluating your options:

Make sure the rate is not dependent on a 45-hour billable week.   This hides an additional 12.5% increase over the quoted billable hour.  

Understand how your vendor partner commits to a productivity level vs. just providing hourly expertise. Should it take 60 hours to do a 40- hour task? Many companies find that the traditional India IT services companies use 20 – 40% more resources because they incent billable hours, not value to the client.  See how we worked with Fossil to increase productivity

How many times has your service provider fixed the same problem vs. taking the time to solve it with root cause resolution? The reality is that eliminating the problem would reduce future billable hours.

SMC2 recently shared insight on the most common challenges seen with offshoring and outsourcing IT with SIG CEO and President Dawn Tiura on the Sourcing Industry Landscape podcast. Listen below. SMC2 will share more about their innovative approach to outsourcing and cost-savings strategies at the upcoming SIG Global Executive Summit.


Steven Stephan, SVP of Global Services and Co-Founder, SMC Squared

Steven Stephan is SVP Global Services and Founding Partner of SMC Squared, a leading provider of IT talent that focuses on optimizing offshore IT services for US companies.  With over 30 years of experience, Stephan has successfully led Fortune 50 technology teams both in India and the US. 

With an extensive understanding of the US/India synergies, including two years spent in Bangalore, he brings unparalleled passion, engineering discipline, and cultural intelligence to both SMC Squared and their US partners.