Understanding Average Daily Rate (ADR) in Outsourcing
Balancing Cost and Quality – or – Masking Real Costs?
Working with offshore countries and remote teams, in development or in operations isn’t new. It’s been used as a means to reduce cost, attract more or better talent, outsource specific services or simply to try and solve current IT complexity.
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One of the key financial metrics often used in these contracts is the Average Daily Rate, or the ADR. On the one hand, it’s a metric that makes cost very predictable for the buyer. Costs are simply the number of days worked (or number of FTE’s * average number of days per month) * ADR. So, with a team of 8 and an ADR of € 800, your monthly cost is around ~20 days * 3 FTEs * €800 or about €48k.
The downside of an ADR is that it’s often used to create a mix of people with different locations (onshore/offshore) and experience (junior – senior), a mix which isn’t always transparent. The higher the negotiating pressure pushes price, the cheaper the mix of people has to be: more offshore, and more junior.
How exactly does blending high-cost onshore senior people with cost-effective offshore talent affect your ADR, and what does this mean for your project’s success?
A balancing act
Balancing quality and cost is a very delicate balancing act in tech outsourcing. You want to minimize your costs, which are already high enough as it is. Development and operations are expensive. On the other hand, in this digital world, the quality of tech is everything. You cannot drop the ball.
The underlying assumption with ADR is that you need to have a mix of expensive onshore people with cheaper offshore people. You need the expensive onshore team for their brains. They’re better at communicating, often on-site at the client and will be responsible for the overall delivery of the contract. The offshore team will do the bulk of the actual work.
But… what are you actually paying? Here’s an indicative example of the rate differences between offshore and onshore teams in consulting (Big-4, IBM, Accenture, etc.):
As you can see, those onshore rates are quite hefty. It’s much more than you would pay a similar freelancer, but this is the cost of working with these large organizations. In outsourcing contracts, this cost is offset by the much lower rates in offshore countries.
Risks & Opportunities
Understanding how ADR works is a first step. There are a couple of mechanisms to understand:
Risk 1: The Pyramid: In addition to the onshore / offshore mix, there’s also the pyramid that’s being watched. For every team lead / senior in your offshore team, there will be on average 2-4 juniors. You will see them on paper, but more often than not – they will never appear on a call with you. They can be quite junior, still being trained, and their communication and tech skills are likely to be below your expectations. And €175/day may not sound like a lot of money – you’re still paying for them!
Risk 2: The Selection: In most cases, you have a say in the senior people in your team. If you don’t like someone, or they’re not performing – you can ask for a replacement. On the offshore team, you will often not see who’s doing the work. You won’t know their skill levels. On review calls with your offshore team, you will only meet the team leads and their managers.
Risk 3: Cost Increases: Inflation in the Western world has been high these past 2 years, but on average is around 1-2% per year and stable. Wage increases here are often in line with inflation. If you compare that to India for example, salaries have increased on average by 10% annually for over 10 years! The gap between offshore and onshore rates is closing, rapidly.
Knowing how this often works, there are some opportunities.
Opportunity 1: If you’re really focused on cost, reconsider if you really need onshore people in this mix. In my experience, senior people in offshore countries are at least as experienced if not better in comparison to their counterparts here. Build your team 100% offshore – directly managed by your own team.
Opportunity 2: Hand-pick your team. Any team needs a mix of senior and juniors. However, when you handpick them – you can select on other criteria such as communication skills, ambition to learn & grow, eagerness, etc. And, why wouldn’t you? When you’re hiring someone new on your internal team, you would not even consider not having an interview.
As an additional benefit, by building a personal connection with every member of your offshore team, you’ll inspire them to do their best for you.
Where to go next?
Over the years, I have seen and managed quite a few outsourcing contracts with offshore teams. I’ve made all these mistakes myself. If I were to do it again, I would interview and handpick every single person on my team. Looking back with what I know now, we probably paid too much, and could have delivered a much better service at a lower cost. Also, we signed outsourcing contracts for 5-7 years. It’s necessary to provide sufficient incentive to the outsourcer, lowers costs and makes them more predictable, but to be honest – the world is going to be completely different in 5-7 years.
Where to start?
Plan your team: If you’re running an existing service and planning to change it, you’ll know the kind of team you need, the number of people, the types of roles and their seniority. If you don’t, start small – learn and grow. Requirements change over time, demand rises and falls. Create a solid core team with a flexible shell for when you need to ramp capacity up or down.
Hire: Next, start hiring. First, hire your seniors – the overall manager and your senior team leads. Get them involved in hiring the more junior people on your team.
Regular Monitoring and Adjustment: Continuously monitor your team effectiveness to ensure it aligns with your goals and budget.
Cost-Benefit Analysis: Regularly assess the costs and how your team is performing. Ensure that your costs are in line with the quality you expect. If your team is idling, or you’re not meeting deadlines or service levels – you’ll need to adjust.
There are a lot of myths that have grown over the years in outsourcing, most of which aren’t true.
Myth 1: “Lower ADR always means a lower overall project cost.” Reality: A lower ADR without a focus on hiring the right people with the right set of skills will often lead to compromises in quality or project delays, which ultimately increase costs.
Myth 2: “Offshore people are not as good as onshore, but necessary to balance out costs.” Reality: When managed correctly, offshore teams can provide high-quality output, at the same level or even higher than an onshore team could.
In summary
ADR is a crucial metric in tech outsourcing, offering a strategic viewpoint on balancing cost with quality. But, on the one hand it’s being used to “mask” the very high costs of onshore teams. On the other hand, inexperienced offshore people are used to compensate for more expensive people, whilst they may not be able to carry their own weight (yet). By taking control over the entire team composition, and every member of your offshore team, you’ll achieve much higher quality, at a lower cost.
Not sure where to start? Let’s discuss my experiences and your challenges in more detail. I’m more than happy to share what I’ve learned in outsourcing over the past 20 years. Contact me for a personal in-depth discussion!
