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The Incredibly High Cost of Saving Money on Outsourcing

by: Robert E. Gelinas
Summary

Everyone is under pressure these days to cut costs, but saving money isn’t worth it if you cut your own throat in the process. Find out how to avoid making a very dangerous financial mistake.

Body

IT consulting jobs
 
 
 
Everyone is under pressure these days to cut costs, but saving money isn’t worth it if you cut your own throat in the process. Find out how to avoid making a very dangerous financial mistake.
 
Outsourcing is supposed to save you money. Right? This is especially true when it comes to outsourcing mission critical work like software development, typically done offshore, with companies who enjoy very low labor rates. Why pay a software developer $80,000 to $150,000 a year, when you can get one overseas for $40,000 or less? That math gets especially attractive when you need a lot of them. At least the promise of big savings is supposed to be the idea. Unfortunately, the saying “Outsourcing will save you money,” is a lot like the old adage of, “Practice makes perfect.” They’re both half-truths.
 
The real truth is: “Only perfect practice makes perfect.” If you repeat the same mistakes again and again, practicing something wrong for any amount of time won’t make it right. Similarly, only outsourcing with the right partner will save you money in the long run. Pick the wrong one and you’ll pay dearly for that decision.
 
The Parable of the New House
 
Once upon a time a man wanted to build himself a new house. He had a good idea of what he wanted, how many rooms, the style, basic space requirement
 
s, and specific amenities. However, when he talked to a few builders, he was shocked by how much they wanted to charge him to build his new house. He only wanted to spend $100,000, but the lowest bid he received from a reputable builder was well over $300,000 to get exactly what he wanted.
 
He theorized that the real problem was that all of the builders’ workers were probably union workers and union wages were sure to be the basis of the high construction costs. So he decided to attempt to “save some money” and go another route. He bought his own “Home Architect” program for his PC and designed the house himself. The program produced blueprints and a materials list. He shopped for the cheapest materials he could find, and even “recycled” some materials he was able to “find” here and there in the neighborhood. He tore down his old house with a rented excavator. He moved his family in with a relative while the project was going on. He hired his brother-in-law who was recently out of work, but used to be a general contractor many years ago to actually oversee the construction. Cheap labor was actually pretty easy to come by – i.e. his brother-in-law would pick up a crop of day laborers in front of the Home Depot every morning, and off they’d go to work on the new dream home.
 
Needless to say, several months later, far longer than the man thought it would take to build his house, he didn’t get exactly what he’d imagined in his mind. He’d spent far more than the $100,000 he’d budgeted—why, he spent almost as much as the builders he had originally spoke with told him it would cost. Most of that was attributed to going back and fixing problems that arose, redoing work that wasn’t right, correcting mistakes. And it looked a mess.
 
To this day he and his family still live with a relative, saving money to try and rebuild later. You see, the city had the house he built condemned and torn down, and he was heavily fined for lack of all the proper permits and violations of building codes.
 
When asked by a friend why he was so foolish to waste so much money and put his family through such terrible inconvenience, he replied: “Well, the guys building my house only cost $5.00 an hour! I was saving money!”
 
The Short-Sighted CIO
 
Once upon a time a CIO needed a mission critical software application developed. It was going to revolutionize his company and give it a powerful competitive edge. He knew he didn’t have all the resources he needed to pull it off in-house, so he sought third-party help. The top outsourcing companies quoted him bids far in excess of what he’d budgeted. He was getting frustrated and stressed. Then one day, a friend told him to look into the idea of outsourcing the project to an overseas firm, somewhere in Asia. The friend made a point to tell him, “Just make sure you never pay more than $40,000 a year or $20.00 an hour for offshore work.”
 
Hey, those numbers fit into his budget perfectly! So he initiated a vendor search, instructing his staff to find a short list of offshore firms, but with the explicit instructions to make sure that developers didn’t cost him over $20.00 an hour. In practically no time, he was able to find several offshore development shops that would write code for him for only $16.00 an hour! That would even bring him in under budget by almost 20%. He was going to be a hero – and save money.
 
And so contracts were signed and the project began. Needless to say, many months later, far longer than the CIO thought it would take to develop his software, he didn’t get exactly what he’d imagined in his mind. He learned the hard way that $16.00 an hour developers aren’t System Architects, Business Analysts, and Project Managers that are critically needed to ensure that requirement are well-defined, the software gets architected and designed properly, and processes are set up to ensure project success.
 
He learned $16.00 an hour also didn’t get him senior developers, only very junior ones, many with barely a six-week certificate in basic programming to their credit and spoke little to no English. That hourly rate also didn’t afford him the best Quality Assurance testers to ensure the application was built right and functioned properly. In fact, when bugs were found, it took even longer to go back and retool the product to fix them. Some pieces had to be completely redone. What was supposed to take only six months took well over a year and still didn’t work right.
 
The company never was revolutionized. In fact, their biggest competitor beat them to market with a product very similar to what they were trying to build, but did it six months faster and captured a leadership position. The CIO was summarily encouraged by his CEO and board to “seek other career opportunities,” which he did, deciding to take his brother-in-law up on a request to help him build a new house. He’d been a general contractor earlier in life, and figured he could apply all of his expert business acumen to turn over a new leaf in home construction.
 
Life Imitating Art?
 
These two characters described above are just fools, right? A real CIO or other senior technology executive would never be that stupid, would they? Unfortunately, it happens every day. Many senior executives make incredibly myopic decisions on the vain promise of saving a buck, which usually ends up costing them dearly—and often in more ways than one.
 
Which is cheaper? A software developer that costs $16.00 an hour, but who takes a year to complete a project; or a software developer who costs $25.00 an hour, but who can complete the same task in six months? Let’s see: 52 weeks in a year, times 40 hours a week, times 16 equals $33,280. But 26 weeks, times 40 hours a week, times 25 equals, $26,000. Wow, the developer that costs 36% more per hour actually was 28% less expensive when it came to the actual deliverable price. How is that possible? Oh, yeah, productivity matters, not just activity.
 
Quality matters, too. Why did it take the cheaper guy twice as long as the more expensive guy? Is he just a slower typist on the keyboard? Probably not. More likely, the more expensive guy had greater experience, needed less time to solve problems he’d encountered in the past, made less mistakes, and therefore eliminated a lot of extraneous QA and bug fix time. Ergo, guys who know exactly what to do and get it right the first time can be far less expensive in the long run.
 
Process and tools matter as well. Is the cheaper guy using a mature development process and state-of-the art tools like the more expensive guy? Does the cheaper guy have access to proper revision control, regression testing, integration, and all of it overseen by seasoned technical leads and project managers? And if he’s working offshore, how are his communication and language skills? Is he getting ongoing training like the more expensive guy? Not likely.
 
But don’t misunderstand – there’s still good money to be saved with offshore firms. A US-based developer might cost from $50.00 to well over $100 an hour to employ. So finding a good offshore development firm who charges even in the $30.00 to $40.00 an hour range can still represent a dramatic savings over hiring domestically. Plus, “renting” instead of “owning” development resources can represent a much lower HR and management burden, and be especially convenient if a large team is only needed for fixed window of time, not long-term.
 
The point is that when you’re comparing US labor costs to offshore, the savings will always be pretty dramatic. But when you start comparing offshore to offshore, you must realize that the less you pay in terms of an hourly or monthly rate for a resource, the more you’re not getting. What are you giving up to get the better rate? What hidden compromise are you making? Productivity? Quality? Expertise?
 
These are but a few of the factors that can cause many a senior executive to be “penny wise and pound foolish.” When it comes to choosing an outsourcing vendor, the idea of “Total Cost of Ownership” (TCO) is paramount. What does it really cost for the project to succeed and the ultimate deliverable to be fully realized? And what’s the cost of product failure after it’s been delivered in terms of ongoing support? TCO requires a lot more for you to consider than just underlying labor rates. And there’s one more thing to keep in mind.
 
There an old story told about Henry Ford and his assembly line. Allegedly, he had an engineer who had designed a very important machine and who faithfully maintained it for many years. After the engineer retired, one day the machine stopped working. The engineers on-hand tried in vain for a long time to repair it, but had no luck. It is said that Ford himself ended up calling the old engineer out of retirement to come in and try to fix it. The old man agreed. He came in, opened a covering on the machine, and being a small man, he physically crawled inside it, tinkered for about ten minutes and then reemerged. The machine fired back to life to everyone’s delight. The man then proceeded to present Ford a bill for $10,000, a fortune for that period in time. Ford was outraged. “How can you charge me this much for ten minutes of work?” he demanded. To which the old man replied, “I charged you one dollar for my time, Mr. Ford. And $9,999 for knowing what to fix.” Ford paid the bill.
 
Just realize that if all you’re paying for is someone’s time to build something for you, and yet you choose to do so with no consideration of productivity, quality, process, tools, and ultimately knowledge and expertise, then that’s probably all you’ll get—a lot of time spent with very little to show for it.
 
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Robert E. Gelinas has been a senior executive in the IT industry for over twenty years, and in addition to his extensive technology background is also an internationally published novelist and public speaker. His most recent works include The Mustard Seed and Anticipation (ArcheBooks Publishing). He s also a contributing author for ExecutiveBrief, technology management resource for business leaders, providing tips, techniques, and action plans that companies can use to better manage people, processes and tools – the keys to improving their business performance. For more information please visit: http://www.executivebrief.com.
 
 
 

Author Details

Robert E. Gelinas
Technology Executive, Author & Novelist

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