When a company’s engineering or IT department needs to add talent, technology and HR executives have to weigh all of the options available to them, which can range from bringing on a local full-time employee to working with a temporary in-house or remotely based contractor recruited through a staffing agency.

According to several recent surveys, the associated cost of hiring one full-time employee in the United States can range anywhere from $4,000 to well over $7,000, depending on the industry in question — and those figures come under the assumption a company isn’t using an external recruiter to fill that role, which would then easily triple or quadruple the hiring costs.

When a company searches for, then brings on a new employee, the initial financial outlays can include online job site registration and advertising fees, HR managerial costs, employee background checks and pre-hire skills assessment test fees, general onboarding expenditures, and paperwork administration costs, generally depending on how a particular business manages its internal hiring process.

Outsourcing supplemental technical personnel comes with related costs as well, although when building an engineering team for a specific project or even simply bringing in a few temporary developers to hit a project deadline, recruiting remote software engineers through a staffing firm may cut down on expenses when compared to direct hiring. Let’s take a look at the expenses associated with direct hiring, as well as the expenses related to outsourcing, then discover the actual costs of engaging full-time staff versus working with onsite or remote contractors acquired via a staffing agency.

The Hidden Costs Associated with Hiring Full-Time Employees

While full-time employee recruitment costs can take a significant bite out of a company’s budget, those initial hiring disbursements only paint a small part of the overall budgeting picture as there are many other costs that are not readily apparent yet connected with hiring full-time staff. The real financial outlays associated with employing permanent software engineers and designers go far beyond estimated monthly compensation expenses or the budget allocated to recruitment efforts. Here are some of the hidden costs connected to hiring full-time employees that hiring managers should be aware of:

Hiring and Onboarding Expenses – In addition to the considerable expenses incurred during the recruitment and hiring process, an engineering or IT department adding full-time employees to its roster will likely have to onboard that staff. Onboarding, which means acquainting candidates with an organization's business processes, operational procedures and culture while simultaneously integrating them into an existing engineering team, comes with a wide spectrum of additional costs. Some of these expenditures may include the administrative fees connected to managing more paperwork (work contracts, NDAs, tax documents, orientation literature, benefits packages), and the funds spent procuring necessary IT equipment and office furniture.

Managers also need to take into account the possibility of temporary reductions in productivity stemming from the time and resources that have to be redirected toward familiarizing new full-time hires with how their particular organization administers its daily operations and maintains its internal business culture.

Employee Wages and Turnover Costs – If a company is hiring locally, it will have to offer competitive salary packages if it wants to recruit skilled job candidates. This unavoidable fact means software firms focused on direct hiring (as opposed to outsourcing) won’t be able to minimize expenses by contracting more affordable remote software engineers or designers working in nearshore or offshore markets.

By investing in robust onboarding and staff orientation procedures — which, as we've already discussed, are hidden costs unto themselves — companies can limit costly staff turnover. Even so, employee retention and high turnover rates are still significant issues in the technology industry, and can drain operational budgets and reduce productivity by taking up valuable time required to hire qualified replacements. According to LinkedIn, the software and technology industry has the highest turnover rate (13.2%) of all industries, which should certainly serve as sobering news for hiring managers working for US-based technology companies.

Increased Office Expenses and Employee Benefits – Part of the onboarding process includes requisitioning office equipment, furniture, and space for permanent staff. Depending on how a particular company operates, it will also have to budget for additional associated hiring expenses, which can include paying for office supplies, software licensing fees, retirement or pension contributions, business trips, health insurance, team building activities, parking spaces, gym memberships, plus, most importantly, a significant expenditure allotted for employee’s vacation and sick leave. All of these hidden expenses can quickly add up, likely far exceeding the general overhead set aside for recruitment and salary considerations.

Limited Access to New Talent – Another factor to consider when hiring full-time staff is that a tech firm will be self-limiting its own access to remote software engineers. By only hiring locally, often in a competitive job market, a company will not be able to take full advantage of onshore, nearshore or offshore talent that may be more qualified to work on its current projects. Budgets allocated for direct hires might be better spent on acquiring highly skilled offsite temporary resources that may not available (or affordable) locally. Many US-based IT experts can also insist upon more competitive compensation packages, commensurate with their expertise, and they will likely have plenty of job offers to choose from in the local job market.

Limited Hiring Flexibility – After an engineering or design team recruits and onboards capable professionals for a project, managers will then usually be under pressure to utilize those resources as much as possible to justify the costs of keeping them on the payroll even when the project they were brought in for comes to an end.

While a company might need to add a business analyst, a quality assurance engineer, or an application developer for a project today, they may have less of a need for these resources in the future. However, once a business hires someone, it could be difficult and costly to let them go, notably if there is a need to rehire the same staff again in a few months or a year for another project. Bringing on highly-skilled full-time staff limits the flexibility of hiring managers to reduce or increase technical personnel as various projects dictate because the funds for acquiring new talent will have already been allocated to pay for those full-time employees. Ultimately, this lack of staffing flexibility can diminish a company's productivity and market competitiveness.

The Predictable Expenses Associated with Outsourcing Talent

While engineering and HR executives will have to budget for capable technical resources regardless of their staffing approach, outsourcing and staff augmentation offer managers two key expense-related advantages that direct hiring can't provide:

The first advantage is that all of the expenses required to locate and compensate augmented staff are transparent and upfront. There should be almost no hidden costs when engaging outsourced talent. A technical staffing vendor can provide a client with a needs assessment, then create an augmentation plan that is in-line with their client’s budget, development timelines, and overall resourcing goals. An experienced staffing vendor will also handle the vetting and hiring process, employee contract administration, salary payments, pension contributions, and tax paperwork. Additionally, staffing agencies can manage and monitor communication systems between remote workers and clients, as well as set up and procure office space, workstations, and technical equipment for offsite employees as needed. By clearly defining these operational costs from the onset of a project, staffing expenses become much more predictable and reliable.

Secondly, by selecting a staff augmentation or outsourcing model, technology organizations can better manage their permanent in-house staffing expenses. This approach can help them establish a firmer budgetary forecast by eliminating or reducing the hidden costs associated with direct hiring, as well as any fiscal ambiguities linked to acquiring or building new infrastructure for full-time staff that may or may not be needed (depending on the project pipeline) down the line. In other words, management teams can better dedicate their limited resources toward supporting the existing full-time staff they rely on the most by outsourcing software development tasks, as needed, to remote contract engineers, thus decreasing their general staffing and overhead expenses. A well-planned outsourcing strategy can help keep line managers from wasting the time and resources they would generally spend on managing additional full-time employees, or cover the hidden hiring costs that can quickly inflate a company’s personnel budget.

Should a Company Hire Directly or Outsource?

Every organization's situation is different when it comes to how they approach project resourcing and procurement. Irrespective of a company's size, hiring managers will have to ask themselves which staffing/operational factors they value the most in regards to running their departments successfully. If an established software firm anticipates a need for an engineer versed in a specific programming language or a skilled creative professional to fill a design leadership role for years to come, it might make sense to hire full-time employees for those positions. However, for most small to midsize businesses, outsourcing often makes much more financial sense.

Apart from reducing hidden staffing costs and providing HR managers with greater budgetary transparency, staff augmentation offers other benefits and advantages as well. Some of these advantages include limiting the costly downtime linked to employing full-time staff when their expertise isn't always needed, the ability to quickly scale up or down remote development teams without having to go through an expensive hiring or laying off process, and the ability to work with a trusted vendor capable of managing remote staff. Outsourcing can also increase productivity and help sustain workflow on a tight deadline by giving managers increased access to a worldwide talent pool of seasoned designers, project managers, and software engineers around the world (allowing a company to work around-the-clock if required).

Once a company assesses all of the business considerations that drive its IT project portfolio or product development strategy, and the budgetary constraints it's under to staff up for a project, outsourcing often emerges as the most viable, cost-effective approach available. Staff augmentation tends to look especially appealing after engineering and HR executives become better familiarized with the hidden costs that generally come with full-time employees, along with the disruption those costs can wreak upon a tightly-managed workforce budget.

While there are obviously at least some differences in every company’s situation, a reasonable conclusion could be made that a business that partners with a reliable IT staffing vendor to contract vetted engineering or creative design talent will likely recoup operational dividends down the road, which should likely help increase a company’s productivity and profitability.