San Francisco: Hiring vs Outsourcing

Quick Summary - Should tech companies in Silicon Valley hire or outsource their software development team? San Francisco has the highest density of software developers and investors in the world.

San Francisco: Hiring vs Outsourcing | PerceptionBox

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There’s a lot to be said for “Location, Location, Location!” Being headquartered in Silicon Valley is a smart strategic consideration. Even in the midst of Covid-19, it’s a sign of prestige for tech companies to be headquartered in Silicon Valley. It’s an international tech hub practically hard-wired for two-degrees of separation with anyone who’s anyone. It provides tech executives unparalleled access to everyone and everything their company may need.

Everyone doesn’t need to be there though. It’s one of the most expensive cities in the world. These days, most software developers are telecommuting. Having everyone in San Francisco is like paying for a luxury hotel suite in Dubai while being stuck in Motel 8 accommodations.

Salaries of Software Developers in San Francisco

Software developers have been telecommuting for decades, just usually not all of the time. This gives companies something to think about. What’s the difference between a remote employee and a freelancer? Is that difference worth the cost? Do you realize the disparity in costs of having employees vs. outsourcing development teams? Do you understand the reasons for that disparity?

I’m not trying to be obtuse – the simple fact of the matter is that the value of $1 is not the same everywhere. The following table illustrates how much more expensive it is to hire a software developer in San Francisco compared to the rest of the United States. We also compare it to the median wages of developers where we specialize in sourcing IT staff – Ukraine.


Figures from the US Department of Labor -

Chicago runs close, slightly under, the US national average for software developer salaries. In effect, a company could hire four software developers in Chicago for every three they hire in San Francisco. However, based on wages alone, one software developer in San Francisco has quite nearly the cost of three developers in Ukraine.

But, the cost of an employee is not limited to wages.

Extra Costs of Employing Software Developers in San Francisco

Every company is different in terms of the benefits they offer their employees. Even so, some extra costs are standardized and mandated by the laws of California and the United States. These include social security, medicare, unemployment insurance, and health insurance.

  • Social security (6.2%) – $8,741
  • Medicare tax (1.45%) – $2,044
  • State Unemployment Tax (varies by year) – $2,114
  • Health Insurance (Single) – $7,200 (estimated) or (Family) – $20,500

Adding these basic legal requirements increases the cost of employment to $161,000 for single developers or $174,500 for developers with families.

Attracting software developers in San Francisco ordinarily means offering more than the absolute minimum in employee benefits. Some combination of dental plans, life insurance, health clubs, gyms, 401-k plans, stock options, free daycare services, free lunches, and other fringe benefits are often part of the equation. These are highly variable, but also need to be factored into employment costs.

You also need to add in overhead costs. Will you require your software developers to work in the office? If so, based on a US average of 150 square feet per employee and typical $80 per square foot rate in San Francisco, that’s another $12,000 per year per employee. You’ll need to furnish the computers, hardware, and furnishings they require. Add utility costs, consumable supplies, and insurance for your office. Finally, there’s additional overhead to factor in on a pro-rated basis for your human resources team, legal staff, accounting and payroll.


One Employee vs a Software Development Team

All of these costs add up. The bottom line is that for each software developer you hire in San Francisco, you could have a team of four outsourced developers working for you. This will stretch your funding runway. This will show investors that you intend to be smart with their money.

Is there a qualitative difference? According to SkillValue, Where to Find the Best Developers in 2019? US software developers ranked #27 globally with a technical rating of 84.59% on 550 technical assessments. In contrast, Ukrainian software developers ranked #5 globally with a rating of 93.17. Indeed, most of Eastern Europe has very high technical proficiency ratings.

Why Then the Dramatic Wage Variation?

Several reasons apply, with Purchasing Power Parity providing the best overall explanation. It’s often popularly known as the Big Mac Index or why the same burger can cost $8, $5, or $3 in three different cities. It’s based on a basket of goods, like a gallon of milk, a loaf of bread, etc. We’ll cut to the chase with the biggest line item.

According to Zumper, today, the average monthly rent in San Francisco comes to $2,195. In comparison, the average rent throughout most of Ukraine is around $300. So, about $1900 per month or $23k per year is removed from the equation straight away. Broadband internet access in Odessa, Ukraine is less than $10 per month. Tell that to Verizon! Can you hear me now?

Healthcare in Ukraine is notionally free – though not entirely the case in practice. In the United States, the costs of an MRI in three different hospitals within a 12-mile radius ranged from $700 to $1200 to nearly $3,000 – using the same model of scanner. In Ukraine, the same MRI runs about $30. A run to the dentist to fix a cavity? About $25-30.

We could do cost comparisons all-day long, suffice that making $1800 in Ukraine is like making $8000 a month in San Francisco.

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Silicon Valley is an Entrenched Labor Market

More software developers (250k) work in the State of California than the next three highest-ranked states combined – Texas (110k), New York (79k), and Washington (78k). Nearly 60% of them (148k) are concentrated between San Francisco and San Jose, creating an entrenched labor market. This is a simple extension of supply and demand.

Lastly, a standard work year is based on 2080 hours in the United States. Please note that work hours per year can vary by country. In many Western European countries, work hours are significantly lower, with Germany having the lowest (34.8 hours per workweek) – 13% fewer hours. So, when you see wages in some countries being lower, understand that could owe to reduced hours per workweek. Ukrainian developers are accustomed to 40+ hour work weeks, so you get a 1 to 1 comparison.

You can outsource to augment your in-house team, so you can enjoy the best of both worlds. If you’re a tech company in Silicon Valley, you have the choice of hiring one software developer or an entire team of 4 software developers.


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