Many companies face the choice of choosing the software development company for the development of the custom software, web or mobile application, outsourcing some of their IT tasks, or extending their tech team. They are busy with the question “How to choose a software development company?”. One of the factors that influence the decision is the price. Of course, the pricing of services in a software development company is important in your search for the perfect technology partner. But you have to ask yourself how you are going to determine that pricing over a certain desired lifespan or TCO (total cost of ownership). 

What is TCO?

Total cost of ownership (TCO) is a financial estimate intended to help buyers and owners determine the direct and indirect costs of a product or system.

Quite often, companies determine the price of custom software development based just on hourly rates. But it’s not entirely correct. It happens mainly due to difficulties in determining where costs will be incurred across the software development process. Analyzing all influencing factors will determine the Total Cost of Ownership and ensuring value is obtained from any proposed IT project. 

Factors that determine TCO for a software development company

  • Hourly rates. These vary for software developers in Dutch companies between 80 and 150 euros per hour depending on quality and seniority. For nearshore developers (Eastern Europe) rates of 30-60 euro per hour and for offshore software developers (India and the rest of Asia) rates of 20-40 euros per hour apply. 

  • Speed of software developers. ICT companies with real top dedicated teams can develop 10 times faster than those with less gifted developers. This also has to do with experience and with the use of specialists instead of generalists/"guys of everything.”

  • First-time right. Developing the right thing in one go or wasting time on features that aren't used in the end. A good IT company can help you develop the right thing in one go. In Agile software development, the project is broken down into sprints, and the team can focus on providing high-quality web development services and testing. Defects are found (and fixed) quickly. The new features are delivered rapidly and frequently, with a high level of predictability. This enables companies to release features to clients much quicker and create business value much faster.

  • Agile software development / limiting waste. An agile approach to software engineering ensures that you develop your product in small steps using customer feedback. This is proven to be the fastest and most cost-effective way of software or application development. The swift decision making and the feedback loop allow you to reduce product risk further and add value to the product.

  • Sustainable technology and architecture. Do not chase for too exotic or hip technologies; the risk that they will not be supported in a few years or that there are no developers to be found for them is considerable. Use modern, trusted technology.

  • Use of Open Source Components. Components with a large community of developers save a lot of time in development so that only the distinctiveness needs to be developed.

  • Vendor Lock-in. What costs do you have to incur in the future if you want to change your ICT company?

All of the above factors influence the price of TCO. They are necessary to consider when choosing the software development company to work with. 

Why is TCO an important concept while choosing the software development company?

The Total Cost of Ownership is a measure used to determine what the technology and systems cost to own, operate, and manage in business. TCO is such an essential analysis because it determines your ROI. Without TCO analysis, digital product creation can surprisingly cost business times higher than the estimated price. This difference in expenses can significantly affect a business, its ROI, and overall success and/or livelihood.

Understanding how much your digital product will cost you over time helps businesses make better buying decisions when deciding which software development company provides the best possible ROI. Not taking TCO into account when looking to start a partnership with software development companies can lead to a lot of unwanted surprises down the road.

Conclusion

In summary, you are best off with an experienced team of real top developers who develop software according to Agile methodology. The full report of benefits you can read in our Whitepaper “Benefits for clients to work with Agile development.” The hourly rates are important, but in the long term, you will profit more from the right approach to software development and the other factors described above.  Make sure developers choose a future-proof architecture and technology. Encourage them to use open source components to minimize standard work. Determine TCO and partner with the company that’s going to deliver positive ROI and shorten your path to successful and sustainable growth.

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