With its various innovative startups, Israel has become the new Silicon Valley, and Tel Aviv is one of the hottest digital centers. Besides, high-tech industries also concentrate in Haifa, Caesarea, and Jerusalem – a center of recent technological institutes.
Many companies, large corporations, and small startups face new challenges at the beginning of 2023. The job market in the IT sector has changed significantly over the past few months, and now, due to cutbacks, there are many developers in the market. Most Israeli tech firms are laying off juniors, HR, marketing, and sales staff, and shareholders are increasingly asking to move from growth to sustainability and cut costs.
It becomes clear why Israeli high-tech companies are worried about how to optimize the cost of maintaining employees. An excellent way to optimize the budget for companies and startups is to move some of the development to an outstaffing model. Let's look at this in more detail.
What Is An Outstaffing Model?
Outstaffing is a staff augmentation process where businesses engage software specialists from IT outsourcing companies to boost their existing teams. In this arrangement, the client company manages the outsourced developers completely while they continue to work at their current locations.
Key Components Of Outstaffing
Outstaffing allows you to hire dedicated developers who become an essential element of your team. You have complete control over coordination, direction, and task assignment for the outstaffed developers throughout the project. This indicates that you are crucial in guiding them to create measurable results.
Best Suited For
Outstaffing is perfect for startups and companies that seek developers with specific skills to work with their existing staff. Outsourcing works on a different hiring model and meets different business needs. Let's look at it in more detail.
What Is An Outsourcing Model?
Outsourcing is a contracting process in which organizations assign all software development obligations to an external IT firm. The contracted IT firm is accountable for hiring and administrating team members, performing daily work, and submitting project deliverables. With outsourcing, the hiring company need not maintain in-house IT capabilities.
Key Components Of Outsourcing
Outsourcing allows businesses to be more flexible when meeting their software development demands. In addition to having access to a worldwide talent pool of engineers, they delegate the whole software development lifecycle to third-party managed IT teams. Businesses have minimal influence over the functioning of their outsourced teams.
Best Suited For
Outsourcing is suitable for startups and companies that have precise, short-term requirements. For example, they want to turn an idea into an MVP in 6 months.
Why Has Outstaffing Become An Alternative To Outsourcing?
The primary reason the IT services market shifted towards outstaffing is the vast difference in prices set by outsourcing and outstaffing companies. By switching to the outstaff augmentation option, clients can save up to ninety percent of their software development costs. Look at the three main models for delegating IT services to comprehend their distinctions.
1. Low-control Outsourcing/ Fixed Price Model
Clients who choose a fixed-price model typically have strict standards for the final product and, therefore, can completely outsource it. There is no need to modify the technical assignment or introduce additional conditions, which means the client does not have to manage and supervise the development team.
This is typically the most expensive software development service. The contractor commits to the customer's terms, agrees to produce high-quality software on schedule, and must cover all potential risks in the pricing. You may spend up to $250,000 on a deployed website for your business created by a company with a fixed price model.
2. Classic Outsourcing
With a fixed-price approach, the vendor transfers the project to the customer immediately upon contract completion, whereas in classic outsourcing, the product is provided progressively via iterations.
For instance, the customer receives the design of the main page this week, followed by a layout the next week. After some time, the customer gets the whole website structure, and then, week after week, the programming team adds additional features to the web application.
The client can modify the final product's terms and conditions and is directly involved in its creation. According to traditional outsourcing, development can cost $100,000 to $200,000. The client can also directly affect the final pricing by accepting or rejecting the contractor's additional fees.
3. Staff Augmentation
When working with the fixed price model or classic outsourcing, you sell a service, while with outstaffing, your main assets are the time and expertise of your developers. When customers opt for outsourcing, they get a dedicated team working on a product – developers, QA engineers, designers, data specialists, SEO experts, project managers, SCRUM masters, etc.
By choosing outstaffing, the customer usually hires three to ten professionals with the specialized knowledge and skills to create a high-quality, competitive product. Depending on the duration of the contract and the quantity of hired specialists, the outstaffing service can cost $10,000 to $20,000. The cost is much lower than outsourcing because the core team working on the project is the client’s in-house staff, and their salaries are not considered.
To maximize their gross profit margin, outstaffing organizations typically focus on the international market, capitalizing on the disparity between the pay of specialists in various regions of the world.
Here are the average salaries of software developers in the largest cities of countries that are leaders in exporting IT services via outsourcing and outstaffing (source: https://www.levels.fyi):
Level | Ukraine | Romania | Poland | Israel |
Entry | $12 000 | $13 700 | $ 24 000 | $82 920 |
Middle | $42 000 | $37 200 | $54 000 | $137 827 |
Senior | $68 400 | $61 200 | $ 65 500 | $165 000 |
Countries of Central and Eastern Europe take a large share in the international market of IT services for several reasons.
These countries' technical professionals have extensive knowledge of new technologies and software development.
They typically have a strong knowledge of foreign languages, especially English.
In addition, the governments of these countries are aware that a significant part of their exports is IT services and create additional preferential conditions for IT companies and developers, notably reduced taxes. Israel has relatively high tax rates, with Corporate income tax (CIT) - of 23% and Personal income tax (PIT) - of 50%.
In one of our articles, we considered the tax rates in different countries. So you can compare taxes in Israel and the countries of Central and Eastern Europe to see where the taxation is more profitable. A reliable way to optimize your budget is to hire developers from Central and Eastern Europe.
An example would be Poland, which has one of the fastest-growing economies in Eastern Europe, which makes it an appealing destination for software development by international companies. The country has the most extensive working population in Central Europe, and Poland traditionally has a high level of English proficiency among developers and managers. Poland also has relatively low taxes, which we covered in more detail previously. Georgia and Ukraine are also countries with a lot of IT specialists. In Ukraine, for example, tax rates are significantly low, and the Ukrainian IT market operates on a private entrepreneurial model with a flat tax rate of 5%. These countries, along with other countries in Central and Eastern Europe, are excellent places to use the outstaffing model for Israeli companies and recruit qualified experts in these countries.
Why Businesses Decide To Outsaff And Outsource
Reduce Costs
According to a study, 59% of US companies outsource to external IT vendors to reduce hiring costs. Compared to those in developing countries, pay for experienced developers is significantly higher in the West, and companies can recruit competent developers with less money by outsourcing their work.
Fill Talent Gaps
Companies need developers with new skills as software development technologies advance. Outstaffing is a quick route to landing such developers without upskilling their internal team or going through a lengthy recruitment process. Also, finding particular IT expertise can take time and effort in some countries.
Improve Business Focus
Businesses might get sidetracked when they dabble in areas beyond their expertise. Outstaffing allows firms to concentrate on their core competencies rather than micromanaging developers. Meanwhile, outsourcing enables startup owners to focus on marketing, sales, and investor pitches rather than building code.
Free Up Internal Resources
Software development is resource-intensive. Besides paying for the developer's salary, companies must allocate a budget for workspaces, software licenses, and ongoing upskilling. With outsourcing, the offshore vendor will manage these overheads and the administrative tasks that come with it.
Increase Capacity
Companies growing rapidly might require assistance developing their software team to handle the rising workload. In such cases, they resorted to software development outstaffing to augment their team with offshore developers. As a result, businesses can scale effectively without being restricted by strict financial obligations or physical resources.
Conclusion
Outstaffing is one of the best ways to optimize development team costs for Israeli companies. Such optimization is important for investors and creditors in 2023, making doing more tasks for less money possible.
You can lower overhead expenses and hourly compensation by working with fully managed, outstaffed remote teams. This ultimately allows you to have higher ROI and streamlined revenue. In addition, there are no infrastructure costs, eliminating various additional expenses.
If you want to compare the prices for outstaffing specialists with your existing costs, please send us a request, and our managers will provide you with information.
Thanks to outstaffing provided by Global Teams, our clients save 20 to 35% on developing their digital projects.
Today, Global Teams has expanded to include over 150 Experienced Software Developers and other professionals in Ukraine, Serbia, Hungary, Poland, Moldova, Romania, and other countries in East-Central Europe. We have more than seven years of experience in mobile application development.
The goal is to connect business owners with the professionalism and expertise they need to staff their teams at the best possible price. Our experts understand your needs well.