It has been many, many years since these have been true:
Outsourcing companies could maintain a team of engineers ‘on the bench’ ready for the next project. Even if they could afford to pay non-productive engineers, the global demand for talent would quickly find these idle engineers and steal them away. The cost to ‘entertain’ and protect a bench is simply too high for even the most premium outsourcing companies.
Companies can outsource their engineering to companies with lower labor costs and save money. Global demand has resulted in development centers surrounding every (even the most remote) engineering universities.
Additionally, fully remote work has created a floor price for most in demand skill sets. As a result, labor costs in Madrid, Kosovo, and Skopje are not significantly different. There are still local premiums for markets like New York, San Francisco, London, Munich, etc… but engineering salaries in Graz Austria are not significantly different from Maribor Slovenia.
Value over time
Outsourcing companies, today, specialize in talent acquisition, curation, and helping with the transition. Over time, this value for the client becomes less and less. The real long-term value, if we are honest, is the value of the individual engineers, not the company that delivers them to the team.
Full stack outsourcing companies attempt to be good at recruiting and equally good at helping companies through a transition.
The largest companies, and most costly companies tend to focus on being great at helping customers transition and being quality gate keepers to various talent suppliers. This talent comes from other outsourcing companies that suddenly find themselves with too little work for their team and agree to subcontract at low prices to one of these ‘prime’ outsourcing companies so they can retain the talent.
There are also the usual talent agencies and an occasional company that is explicitly set up to supply engineering talent through these prime partner outsourcing companies.
A few important things have changed since Covid:
- A larger percentage of engineers have tried remote work and prefer it.
- Companies prefer their engineering teams to be local, but know how to make remote work effective if necessary.
Poor quality engineers is a great way to make engineering teams slow and inefficient. As a result, the outsourcing companies with good reputations have been able to maintain large margins over what their engineers’ cost. Generally, this has been around 2x.
Ultimate engagement model
As the end of 2023 approaches, I wonder how sustainable those margins are. I don’t believe that Upwork and Fivrr style marketplaces are the future, but I can’t imagine that R&D managers will value engineering select and assistance with remote management to such premium levels. If I am right, does that mean premium outsourcing companies will become leaner?
Or will recruiter agencies and subcontract suppliers like us become alternative service suppliers to R&D teams?