How to Reduce System Development Costs

In system development, there are processes such as requirements definition, design, and operation & maintenance, each of which incurs various costs.

Unexpected troubles may arise during development, leading to additional work and exceeding the planned budget.

Those responsible for cost management in system development may think, "I want to eliminate as much unnecessary cost as possible to ensure smooth project execution."

In this article, we introduce cost reduction methods for system development.

We have also summarized essential information such as cost calculation methods and breakdowns that must be understood to reduce costs. If you are considering reducing system development costs, please refer to this guide.

Akira Shimazoe

CEO of Solashi Japan LLC. Engaged in the development and operation of internal systems at Suntory. Founded Yper Inc., serving as CTO and CPO, contributing to product launch and growth.

Main Costs and Examples in System Development

First, let's look at the types of costs incurred in system development. The main costs can be broadly classified into the following three categories:

System Development Costs
Project Management Costs
Other Indirect Costs

Each of these will be explained below.

System Development Costs

System development costs refer to personnel expenses incurred in system development work.

System development involves numerous tasks, such as design, programming, testing, and document creation. Engineers and programmers divide these tasks among themselves to advance development. The larger the development scale, the greater the workload for members, leading to increased system development costs.

Additionally, system development costs vary depending on factors such as the engineer's skills, position, and the size of the company they belong to.

Project Management Costs

Project management costs refer to the personnel expenses incurred by project managers who oversee progress management and quality control of the entire project.

To ensure smooth project execution, it is essential to have not only engineers but also personnel responsible for overall project management.

Management tasks include not only tracking task and schedule progress but also ensuring quality control and managing change requests. Personnel expenses are required to carry out these tasks.

Similar to system development costs, project management costs also vary depending on the project's scale. Furthermore, the difficulty level of the project influences the scope of management and development workload, causing project management costs to fluctuate.

Other Indirect Costs

Other indirect costs refer to office rental fees, equipment purchase or rental costs, and transportation expenses for project participants.

Additionally, contingency funds for unexpected troubles may be included in indirect costs, and the specific items covered vary depending on the project's nature and structure.

Therefore, it is crucial to clearly define the necessary expenses in advance and minimize unnecessary costs to ensure project success.

Breakdown of System Development Costs

System development is generally carried out in the following sequence, and various costs are incurred at each stage.

Requirement Definition
Design
Development
Testing
Deployment & Implementation
Operations & Maintenance

Here, we will explain in detail the breakdown of costs incurred during system development.

Additionally, we will introduce the cost ratio for the entire project as a reference. Please note that the ratio may vary depending on the development details, so use it as a guideline only.

Requirement Definition Cost

The requirement definition cost refers to the cost incurred during the initial phase of system development, known as the requirement definition phase.

In the requirement definition phase, the aim is to clarify the system's objectives, development direction, functions to be implemented, delivery date, and budget.

The requirement definition cost fluctuates depending on the scale and complexity of the core system but typically accounts for about 5% to 10% of the total development cost.

In offshore development, where system development is outsourced overseas, the cost can sometimes reach up to 20%. This is because Japanese consultants may be involved in the requirement definition process. The cost is affected not only by the personnel unit price but also by the fact that development costs in countries outside Japan may be lower.

The requirement definition is generally conducted by the client company. The requirement definition cost only arises when the task is outsourced to a development company. Therefore, it is not always included in the estimate.

Design Cost

Design cost refers to the expenses incurred during the design phase of system development. There are two stages in the design phase as follows:

Basic Design	Summarize the structure and overview of the entire system
Detailed Design	Summarize information such as implementation methods and data structures

Organizing the detailed information of the system at this design stage contributes to the overall quality and efficiency of system development.

Design costs are generally calculated as around 10% to 20% of the total development cost.

Development Cost

Development cost refers to the expenses incurred during the main development phase of system development.

In the development phase, various tasks such as writing code based on the design and implementing the functionality to make the system or application operate are carried out.

Development costs include personnel expenses for engineers, programmers, designers, and others. The development cost typically accounts for 40% to 50% of the entire project, and in some cases, it may reach 60%.

Testing Cost

Testing cost refers to the expenses incurred during the testing phase of system development.

In the testing phase, the developed system is checked to ensure that it operates correctly. This helps improve the system's quality and prevents system errors or bugs.

The proportion of testing costs relative to the entire project typically ranges from 5% to 15%.

Deployment Cost

Deployment cost refers to the expenses incurred during the deployment phase of system development. In the deployment phase, the following tasks are performed:

Providing the system that has passed the testing phase to the field
Explaining the system's operation and usage precautions to users

As a result, various costs such as system installation and setup, hardware and software license fees, etc., are incurred. Deployment costs typically account for about 5% to 10% of the total project cost.

Operations & Maintenance Cost

Operations & maintenance cost refers to the expenses incurred after the system is released.

For example, costs related to system monitoring, routine maintenance tasks, handling system failures, and system improvements or proposals are included. Operations & maintenance costs typically account for 5% to 15% of the total project cost.

However, since operations and maintenance costs are ongoing expenses, they may fluctuate over a long period of operation.

For example, if requirements change over time and additional features are added, separate development estimates may be required.

How to Calculate System Development Costs

Various costs are incurred in system development, and the majority of these costs are related to system development itself, with personnel costs making up the bulk of the expenses. The personnel costs in system development can be calculated using the following formula:

Personnel cost of system development = man-months × man-month unit cost × development period

Man-month refers to the amount of work required for one person to perform tasks for one month. For example, if five people are required to develop a system in one month, it is referred to as "5 man-months".

The man-month unit cost refers to the monthly cost per person. The development period refers to the time required to develop the system.

For example, if five engineers are involved, the man-month unit cost is 500,000 yen per person, and the development takes three months, the personnel cost for system development is calculated as follows:

5 people (man-months) × 500,000 yen (man-month unit cost) × 3 months (development period) = 7.5 million yen

Four Factors That Increase System Development Costs

System development costs often increase due to the following factors:

The development period becomes longer
There are many testing processes
Development work is carried out for each device
Lack of alignment in estimation and requirements understanding

Let's take a look at the factors that cause system development costs to increase.

Development Period Becomes Longer

The longer the development period, the higher the system development cost. It is not uncommon for additional development or design work to arise during system development.

As additional work arises, the development period lengthens, and the required man-hours increase, leading to higher costs.

To keep system development costs in check, it is effective to anticipate cases where costs may increase, plan the development schedule accordingly, and finalize the details of the requirements definition in advance.

Conducting Unnecessary Testing Processes

In the entire system development process, testing typically accounts for around 30% of the work. The main factors that cause testing costs to increase are as follows:

The testing scope is misaligned
The amount of testing work is disproportionate to the implementation work
Insufficient testing resulting in undetected bugs

One solution to avoid unnecessary testing is to use automated and optimized testing tools, which can help reduce costs.

Development Work for Each Device

There are various devices used to access systems and applications, such as computers, smartphones, and tablets.

If development work is carried out for each device, the development costs will increase proportionally with the number of devices.

To reduce costs, it is effective to manage the system’s data, screens, and content centrally using a CMS.

This allows the display of layouts suited to the accessing device, eliminating the need for development work for each device.

Lack of Alignment in Estimation and Requirements Understanding

It is not uncommon for the development scope to expand before or after defining the requirements. The following factors contribute to this:

Many pieces of information that were not recognized during the proposal stage are added later
A system construction method that does not fit the characteristics of the company's business area is adopted, requiring extensive customization of most functions
The goal of system development becomes unclear

If the objectives for each phase of system planning are not defined in advance, additional tasks may arise, leading to increased costs.

Three Key Points to Reduce System Development Costs

To control system development costs, it is important to keep the following points in mind:

Organize the necessary information and then define the requirements
Assign members with the appropriate skills
Streamline project management

Let’s explain each point in detail. By understanding and applying these points, you can take steps to reduce costs effectively.

Organize the Necessary Information Before Defining Requirements

To move forward with system development, it is necessary to first organize the following information:

Who within the company will use the system, and in what format
What kind of environment will the system be used in
Is there an existing system, and how is it currently being used
Are there plans to expand the system in the future

If the information is not organized, additional work or major revisions may be required, leading to unforeseen costs.

There may also be cases where additional features are added, but their use is limited, making the development costs inefficient.

By organizing this information initially, it will become clear what challenges need to be addressed, which features are necessary, and which are unnecessary.

Once this is done, the requirements can be defined. Clarifying the direction of the system development will make it easier to reduce costs.

Assign Members with the Appropriate Skills

The composition of the development team also greatly influences the development costs.

If members are assigned to tasks they are not skilled in, their work efficiency will decrease, and more time will be required to complete the tasks, leading to increased costs.

By assigning members with the appropriate skills for each phase and clearly defining their roles, the overall efficiency and speed of the development team can be improved.

Streamline Project Management

Streamlining project management is also a key point in reducing system development costs.

To respond to sudden changes or issues, appropriate schedule management and risk management are necessary.

Using project management tools and communication tools is recommended to streamline project management.

By utilizing these tools, you can manage the project smoothly, shorten the development period, and ultimately reduce costs.

To reduce system development costs, it is recommended to utilize subsidies and offshore development.

Here, we will explain recommended subsidies that can be used for system development and the characteristics of offshore development.

Utilizing Subsidies

By utilizing subsidies available for system development, it becomes easier to reduce development costs. For example, the following subsidies include system development in their scope and are highly recommended:

Manufacturing Subsidy
IT Implementation Subsidy
Small Business Sustainability Subsidy
Business Restructuring Subsidy

Let's take a closer look at each one.

1. Manufacturing Subsidy

The Manufacturing Subsidy aims to improve the productivity of small and medium-sized enterprises (SMEs) by supporting service development and production process improvements. Officially, it is called the "Manufacturing, Commerce, and Service Productivity Improvement Promotion Subsidy."

For more details, please refer to the following article:

2. IT Implementation Subsidy

The IT Implementation Subsidy supports small and medium-sized enterprises and small business owners in improving labor productivity by subsidizing the introduction of IT tools such as software and services.

3. Small Business Sustainability Subsidy

The Small Business Sustainability Subsidy is a program that supports small business owners in their efforts to develop new markets and improve productivity. Applications must include a "Business Support Plan."

4. Business Restructuring Subsidy

The Business Restructuring Subsidy supports small and medium-sized enterprises in their efforts to restructure their business operations.

Our company, Solashi Co., Ltd, also introduces various companies that can assist with subsidy applications. If you are interested, please feel free to contact us.

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Utilizing Offshore Development

Offshore development refers to outsourcing system and software development tasks to overseas development companies.

The main outsourcing countries are developing nations. Since labor costs in these countries are lower than in Japan, offshore development can help reduce costs.

For more details, please see What is Offshore Development? Basic Knowledge, Benefits, and Measures to Avoid Failure.

Offshore development includes two main models: "Lab-based development" and "Contract-based development." Among these, lab-based development allows securing engineer resources for a certain period, enabling the establishment of a dedicated engineering team outside the company.

In contract-based development, additional costs and estimates occur with each specification change. On the other hand, in lab-based development, there is no need for repeated estimates, as adjustments can be made by modifying the development period.

If the project specifications are not finalized at the contract stage, opting for lab-based development can help reduce development costs.

The Vietnamese offshore development company Solashi Co., Ltd specializes in lab-based development. If you want to develop a system cost-effectively and flexibly, please consult with us.

Benefits of Offshore Development

The three major benefits of offshore development are as follows:

Expected Cost Reduction in Development
Ability to Secure Skilled Engineers
Strengthening the Development Structure

Let's explore each of these benefits in detail.

Expected Cost Reduction in Development

By utilizing offshore development, companies can outsource work to overseas development firms, where labor costs are lower compared to Japan. Around 20% cost reduction on average is expected.

However, the labor cost of overseas engineers is on the rise, and with the recent depreciation of the yen, the cost difference between domestic and offshore development has been shrinking.

For greater cost reduction, mid-to-long-term projects or large-scale projects are more suitable. Short-term projects tend to have a higher proportion of communication and project management efforts in the overall process.

Additionally, unit costs vary significantly depending on the outsourcing country. Vietnam and the Philippines are particularly popular destinations for offshore development. Since engineer rates differ by country, it is advisable to request an estimate in advance.

For reference on development costs by country, check out "Offshore Development Costs | Country-Specific Rates and Cost-Saving Strategies".

Ability to Secure Skilled Engineers

Offshore development increases the likelihood of securing skilled engineers.

For instance, Vietnamese engineers are known for their high technical proficiency. This is largely due to national policies that promote IT education, creating an environment that fosters outstanding IT talent.

Previously, many offshore teams were only capable of handling front-end tasks such as HTML and CSS. However, today they are proficient in programming languages like Java, C#, and PHP, as well as frameworks like Vue.js, Rails, and Laravel.

There are also engineers capable of working with cutting-edge technologies like AI, blockchain, and NFTs.

Since many countries invest heavily in IT skill development, offshore outsourcing provides access to a pool of highly skilled engineers. This ultimately facilitates faster project execution.

Strengthening the Development Structure

Offshore development can help strengthen the development structure.

When hiring engineers in-house, companies must prepare the necessary development environment themselves, which includes securing workspace and setting up computers—leading to additional management costs.

For large-scale development projects, a substantial number of engineers need to be recruited, increasing both management and hiring costs.

With offshore development, these cost burdens are eliminated. While domestic outsourcing firms offer similar advantages, their fees tend to be high. Due to the high monthly unit cost per engineer, many companies opt for a small but highly efficient development team.

Offshore development allows for cost-effective project execution while maintaining a robust development structure. It is possible to assemble a team that includes lead engineers, system engineers (SE), bridge SEs (BrSE), and QA personnel at a lower cost than in Japan.

For Cost-Effective System Development, Trust Solashi

If you are looking for cost-effective system development, consider partnering with Solashi Co., Ltd.

Our company enables agile development through a lab-based model, allowing for small-scale project starts while maintaining speed and efficiency. Additionally, we can assist in upstream processes such as requirement identification and definition, offering development methods that minimize costs.

We also provide continuous support services and IT implementation consulting. Our engineering team consists primarily of graduates from top-tier institutions such as Hanoi University of Science and Technology, Vietnam National University, and Foreign Trade University.

If you are considering cost reduction in system development, feel free to reach out to Solashi Co., Ltd.

Akira Shimazoe

Representative of Solashi Japan LLC. Born in April 1989 in Fukuoka Prefecture. Graduated from the Graduate School of Information and Mathematical Sciences at Osaka Prefecture University. Joined Suntory System Technology Co., Ltd., an IT subsidiary of Suntory Holdings, in 2014. Broadly responsible for the development, operation, and implementation of vending machine delivery management, efficiency improvements, and sales management systems. Founded Yper Inc. in 2017, serving as CTO and CPO. Contributed to the launch and growth of the app-linked delivery bag "OKIPPA." Selected for Toyo Keizai's prestigious "Amazing Venture 100" and Forbes' "Forbes 30 Under 30 Asia 2019."