Sourcing: What Influences Pay
For a while I have been considering re-coining a term: “Sourcing“. People have ideas of what “Out-Sourcing”, “Near-Sourcing” and “In-Sourcing” is (links to definitions below). The good thing about the industry where we are is that location is not as important as capabilities. And as long as we concentrate on Capabilities, we can only move up from there.
One question people ask me very often is: “Do you hire people overseas for cost saving reasons?“. To what they normally answer: “I hire people wherever I can find them. Do you know a good candidate?“. (Of course, people know how demanding I am so they are usually afraid of suggesting me a candidate). Other people ask the questions of: “Do you save money by hiring people overseas?“ “Is it better to hire locally?” “How do you communicate?” “What about working hours?”
In the modern world, the cost of labor is becoming level across the world. Sure, there are still some differences, but the more we understand them, the more we can help level the playing field even more. Still, we have to pose the question: What causes someone to pay X for someone in the USA and 1/3 X for someone overseas? First of all, you would be surprised how that equation has changed. Years ago it used to a ratio of 10:1. Nowadays I even see ratios of 1:1 for very specialized resources of which there are only a handful in the world.)
As a guideline, pay increases or decreases due to a variety of factors. Sure, market rates provide some influence, but I try to keep the base price calculation level across the different countries from where we source talent, regardless of the local economy there. The factors taken into consideration:
- Core Competency – Both in terms of skills and of experience/know-how that allows you to work faster. This is the most important determining factor. The one that causes variations of up to 1:3 among the workforce. Updated skills, mastering tools, and doing the most with the least.
- Real Amount of Work Per Hour – How much facebook vs. how much code. Some people work more comfortably than others.
- Ability to Interact – I work in Eastern Standard Time (New York time). The more you can communicate in the right timezone the more valuable you become. Some of my providers have adjusted their sleeping habits to match the greater team working hours – and that is taken into consideration.
- Language Abilities – I am not great at English so I do not expect perfect language skills. Yet, I expect someone to be able to do a presentation, inspire, convince, and gain respect. No problem if he/she can’t. People can always code well. And Writing skills are mandatory: as a big portion of what we do is design, test plans, and other important documentation.
- Ability to Face Client – Can the person meet the client face to face and work on the client premises? If the person can’t do that, he/she becomes less valuable – even if they live next door. Some people do not like to take 10 hours of unpaid time to meet a client in California. (Travel time is not customarily compensated in the US, although most travel expenses are). That means they are not as valuable. Travel Costs is also a calculation here. If I have to pay for someone to travel around the world that means the savings come out of somewhere.
Something to be aware is that the sword cuts both ways: Many Americans are losing their jobs in other companies because they fail to prove themselves better in the areas that should have been a given for them: Americans who do not like to travel or who have perfect street English but terrible written communication skills. And most importantly, those that have rested on their laurels and stopped learning new technologies the moment they graduated from College. It is not only that the cost of overseas resources is increasing year over year. It is that the cost of mediocre resources in the US has already got below top-notch overseas resources costs, and will continue dipping.
Some definitions:
- Sourcing – Finding the right resource for the task at hand. (Wikipedia has an article, but I am not sure it covers my meaning).
- Out-Sourcing – Delegating outside organization, but in modern times sometimes used interchangeably with Off-Shoring (delegating to teams overseas, possibly at lower salary economies).
- Near-Shoring – Similar to Off-Shoring, but closer. In the case of the US that would be in Canada, Mexico or other close countries. Convenient due to the same timezones.
- In-Sourcing – Delegating operations to internal resources.









