The cost of employing a dedicated development team is typically one of the most significant expenditures a company will incur, aside from marketing, according to Andrew Vakulich, delivery manager at Chudovo. That expense will compete with other ways to invest capital, such as hiring new people, introducing new products, or maintaining cash savings.
A precise calculation of return on investment (ROI) transforms the decision-making process from a gut feel to a fact-based point that stakeholders can argue. Where those numbers reflect a positive (or at least justifiable) return, approvals become immediate, and performance milestones much easier to monitor. When the math shows that the return is weak, you can save time, money, and political capital by reallocating the funds to other areas.
What a Dedicated Development Team Really Means
A dedicated team is a group of engineers (and frequently QA, UX, DevOps) outsourced under a single vendor and completely devoted to your project during a particular period. Engagement models are different:
- On-site – Your team will be stationed in your office.
- Near-shore – Same or neighboring time zone, remote.
- Offshore – Remote with a greater time zone disparity, generally cheaper rates.
Under most arrangements, you pay a monthly all-inclusive fee that covers salaries, taxes, equipment, HR, and vendor margin. The vendor handles recruiting and administrative tasks; a product manager oversees your day-to-day work.
Define ROI for This Context
For software development services, the classical formula is applicable:
ROI = (Net Benefit ÷ Total Cost) × 100
Net Benefit = Monetized Benefits – Total Cost
Select a measure period, typically 12 or 24 months, to align with the company’s internal budgeting efforts. ROI does not remain fixed: a negative number in one quarter can become positive in a subsequent quarter when some released functionality starts to generate revenue or achieve cost savings. Take ROI as the living metric you visit at significant release gates.
Map Every Cost
Begin by making a comprehensive list of what you will spend, and putting those things into three categories:
- Direct costs – These appear on your vendor bills or purchasing ledger, including the monthly team bill, developer laptops, paid API access, and any specialist software licenses. Record every line as it comes, so you have a pristine paper trail of cash out the door.
- Indirect expenses – Less physical but equally acknowledged: the time the product manager takes out to manage the remote team, and hours of legal or finance work with contracts, payments, and internal DevOps assistance. Keep track of them with a timesheet or allocate a fair percentage of each worker’s pay to the project, in addition to their regular pay.
- Transition or hidden costs – Costs that get between the cracks when you are not paying attention: overlap time when an old supplier transfers work to a new one, recruiter fees when you back-fill, internal jobs, or holidays required in a jurisdiction other than the main one. Hold these as averages based on historical projects and incorporate them into the model, along with the best-, expected-, and worst-case scenarios.
Accounting for all costs – visible, hidden, and indirect – helps set a clear minimum return your project must achieve to be worth the investment.
Identify and Monetize Benefits
The benefits can be categorized into three buckets:
Revenue Uplift
The faster the launch, the earlier the subscription or transaction revenue. Added features increase upsell and conversion rates. Use the historical revenue per user, multiply it by the number of projected users, and then multiply the result by the acceleration in months.
Cost Avoidance
You avoid local hiring expenses, staffing overhead, workforce taxes, and office rent. Estimate by comparing your vendor invoice with your fully loaded internal rate (salary + 30-50% burden).
Quality-Driven Savings
A lack of defect outage penalties and reduced support ticket volumes contribute to fewer production issues. Improvements in churn rates and client refunds also translate into clear financial value.
Step-by-Step Calculation
Set a Proper Period
Select 12 months in the presence of clear releases on the roadmap or 24 months in case of ROI, driven by the more extended period of revenue gain.
Aggregate Costs
Add all the cost types for the same period. Consider that there are vendor charges totaling $10,000 per month and overhead totaling $2,000 per month. Total Cost for 12 months = $144,000.
Aggregate Benefits
- Uplift in revenue: New features generate an additional $40,000 per month starting in the 4th month.
- Cost avoidance: It would have cost the organization $180,000 a year to hire internally
The benefit of 12 months → $40,000 × 9 = $360,000 (starting from month 4)
Aggregate benefits → $360,000 + $180,000 (cost avoidance) = $540,000
Calculate Net Benefit
$540,000 – $144,000 = $396,000
Calculate ROI
100 * ($396,000 / $720,000) = 55 %
Perform Sensitivity Checks
Re-compute with reduced revenue or increased cost of defects to put the assumption set to the test.
Mini-Case Study
Company context: A medium-sized SaaS company with an ARR of $8 M seeks to integrate a native mobile app.
Decision: Management of a one-year near-shore contract with a 5-person team.
Inputs:
- Vendor fee: $35,000/month
- Indirect expenses: $3,000/month
- Projected mobile additional ARR: $1,200,000 in year 1 (starts month 6)
- Cost avoidance: $200,000 (local hiring, growth of an office)
Calculation:
- Costs: ($35 000 + $3 000) × 12 = $456,000
- Benefits: ($1,200,000) × 0,5 (because it starts in the middle of the year) + $200,000 = $800,000
- Net benefit: $800,000 – $456,000 = $344,000
- ROI: ($344,000 – $456,000) × 100% = 75 %
Insight: A 1 percent positive ROI would make sense with a strategic posture, or maintaining patient loyalty; yet management ought to drive vendor rates up, or expand scope to increase returns.
Beyond Simple ROI
In many cases, one percent is never telling the whole story. Track:
- Payback Period – how many months to pay back the initial cost.
- Internal Rate of Return (IRR) – Cash-flow based rate of return computed on an annualized basis.
- Team Velocity and Defect Density – Operational KPIs that indicate future financial sway.
The metrics confirm ROI assumptions and identify early drift.
Common Pitfalls and How to Avoid Them
Forgotten Ramp-Up Time
New teams should be onboarded within 2–4 weeks; allocate time in the pads accordingly.
Management Overhead Under-Estimate
Consider allowing 15-20 % of every internal lead, according to his deal with the cost coordinator.
Mispricing Quality
The cost of defects exceeds the cost of rework hours, encompassing SLA fines, brand damage, and customer attrition.
Binary Thinking
An initial short-term ROI is not a death sentence for an otherwise viable project, even if it yields a later strategic payoff; the numbers should be revisited quarterly.
Conclusion
The ROI of a specialized development team is straightforward and not difficult to compute. Count all the costs, convert benefits to dollars, and stress-test the total to ensure accuracy. A defensible ROI will enable you to defend spending, negotiate better deals, and lead the project with facts, rather than hope. Let the calculation be a living document, and you will always know when to invest in a dedicated team and when not to.