Figuring out how to hire low cost software developers in our business made all the difference in our ability to generate a profit every month. When we sold our Software as a Service (“SaaS”) company our total wages represented about 55% of our operating costs. Our budget for developers and engineers (including payroll taxes) represented almost one-third of our annual revenues, or 60% of our total wages. Even with these kinds of numbers we had a very healthy bottom line.

Let me break down the revenue and profit numbers for you:

Our SaaS Company

Sales 100.00%
Cost of Sales 5.93%
Dev & Engineers 32.19%
All Other Expenses 34.00%
Net Income 27.89%

As you can see the amount we spent on software developers and engineers was our single largest expense.  We had a decent executives salaries expense as well but as could be expected our software development team made up the largest expense as follows:

Title Cost
Project Managers 2.22%
Dev Manager 3.36%
Engineers 22.40%
CTO 4.21%
Totals 32.19%

As a business owner, or manager, you should always be looking for ways to lower your expenses. However, logic tells you to focus on your highest expense categories and see what can be done to reduce that category. As a SaaS company it was logical for us to put focus on reducing our software development costs.  This is what drove us to find low cost software developers.

Mix of US-Based and Low Cost Software Developers

We had 15 developers (not including project managers, testers and management) and 11 of those were outsourced with 4 being US-based professionals. Thus, 73.33% of our actual workers were outsourced from Eastern European (“EE”) countries versus 26.67% being US-based. However, from a cost standpoint the EE developers only made up 56.47% of our total budget, versus 43.53% for those 4 US-based resources.

This chart below is a breakdown of the % of US-based developers and low cost software developers from EE countries our company used.

# of Workers Country – Type* Level % of Budget % of Cost Subtotal Workers
1 EE – ID Mid-Level 4.73%
2 EE – ID Mid-Level 1.51%
3 EE – ID Jr-Level 2.34%
4 EE – ID Jr-Level 2.34%
5-7 EE – Team of 3 Senior Coders 17.52%
8-11 EE – Team of 4 Senior Coders 28.03%
Subtotal – EE 56.47% 11
12 US – Emp Mid-Level 7.87%
13 US – Emp Mid-Level 7.49%
14 US – ID Senior Coder 11.68%
15 US – ID Senior Coder 16.49%
Subtotal – US 43.53% 4

* ID = Independent Developers (i.e., not employees and not part of a managed team), Emp = W-2 Employees

The average cost for our low cost software developers was 47.12% of our average cost for a US-based developers. Thus, for each US-based developer I could hire 2.12 EE developers. Assuming I have a similar or the same level of success with the work product or output of my outsourced EE developers that I get with the US-based resources, I have a situation where it makes business sense to hire outsourced resources.

What If We Only Hired US-Based Developers?

I have done some historical analysis to see what our company’s profit margins would have been had we hired only US-based software engineers (using our actual average cost/resource) and here is what I found. First, let’s look at the new make up of our development team changing only the developer or engineer category:

Title Mixed US/EU All US-Based
Project Managers 2.22% 4.10%
Dev Manager 3.36% 6.20%
Engineers 22.40% 81.92%
CTO 4.21% 7.78%
Totals 32.19% 54.14%

Now we see that under this scenario our entire software development team budget represents 54.14% of our revenue (so for every $100 in licensing revenue, $54 goes to pay for our dev team.) Now let’s look at our company’s net income, the primary motivating reason why anyone would become an entrepreneur, and see the difference outsourcing made to our SaaS company.

Mixed US/EU All US-Based
Sales 100.00% 100.00%
Cost of Sales 5.93% 5.93%
Dev & Engineers 32.19% 54.14%
All Other Expenses 34.00% 34.00%
Net Income 27.89% 5.93%

As you can see, there is a real business case for making the leap into the world of outsourcing your software development needs. Every business owner who plans on developing software should explore this path further. And I didn’t even mention the fact that our exit from our SaaS business would likely not even been possible — and definitely not very attractive — had we been operating at only 6% net profit margins.