Outsourced Software Development: A Net Money Saver

Comparing the real net cost of in-house software development with using an outside partner

Over 20 years ago, in a meeting with a business unit manager at a Fortune 100 company in New Jersey, I was describing how our company could develop quality software efficiently and on time. The manager grilled me on our software approach, and how we managed projects, and seemed satisfied with my answers. The dreaded moment came when he asked, “And what’s your hourly rate?” I gulped. At the time, I feared this question because I always expected the client to regard it as much higher than a staff member salary. I answered, fully expecting pushback. To my surprise, the manager replied, “Ok – that’s good – that’s less than our burdened internal rate.”

The real cost of in-house staff

This response is no longer surprising. The more I looked and listened, the more I understood this perspective. The full cost of a staff employee is far more than just a salary. It can nearly double once you add in all the additional costs that accrue to a staff member. Costs such as:

• • Health and life insurance
  • Disability coverage
  • Bonuses
  • Paid time off
  • Educational benefits
  • Other company-paid benefits
  • Office and desk space
  • IT resources
  • Software licenses
  • Some portion of a manager’s time

These costs may not show up in a department budget (although frequently they do), they are no less real. A few years ago we surveyed our clients and revealed an average overhead cost of anywhere from 70-75% on top of base salary.

The proof is in the profits

In the years that followed that memorable meeting, I began to accumulate a set of inputs that allowed me to study cost-effectiveness in more detail. Recently, I created a model that examines a hypothetical project and compares the net impact of hiring new staff with using an outsourced software developer like Syncro. This scenario corresponds to most of our projects where a client does not have sufficient in-house staff to meet a deadline for delivering a new or enhanced product. While this analysis was performed with software development in mind, it probably applies to other disciplines as well.

It requires a bit of re-calibration to really examine the impact of the model. As Engineering Managers, we are used to focusing on the task at hand – getting it done and tested, having it work correctly, reflecting marketing needs, and being ready to ship a first release when the actual product is ready. But when we take a step back (or “up”), we are reminded that the product provides profit contribution – and profit, after all, is why we develop and market our products. And really, what CEO would not be thrilled to know his engineering team is making decisions based on maximizing profit?

By looking carefully at the overall costs and profit contributions of a development effort, a few things become very clear:

1. It’s not the cost – it’s the profit

It’s not about the cost per hour, or even the overall cost of software development. I don’t mean to imply that cost is immaterial – it certainly is not. But when considering options that may include hiring new staff and thereby delaying the project vs. using a quality outside developer who can put together a team quickly, those cost differences can become insignificant. It’s really about which option gives us the best profit contribution. Read on…

2. Time is a critical element, especially where it impacts ship date

Simply stated, completing product development more quickly will allow your company to ship the product sooner. Shipping means sales, and the positive cash flow from product sales can more rapidly offset the negative cash flow associated with the development effort. The sooner we ship, the sooner our profit contribution goes positive, and we may benefit from increased market share as well.

Researchers from Babson College, writing in the MIT Sloan Management Review, discovered that on average, when using internal resources (whether re-assigning or hiring), it takes up to five months until an individual is fully up to speed for the assigned task. It follows to say that for a team to reach full strength, even more time is required to develop multiple communication channels and to establish roles and working hierarchies. This would result in a total delay time of about six months. If you could cut that down to, say, ­one­ month, that would mean shipping sooner and seeing cash flow change direction. To do that you would need a proven team that:

• • • can apply 100% productive effort to your project from day one,
    • has integral engineering management,
    • consistently produces a high quality output,
    • communicates clearly and accurately, and
    • effectively manages the myriad details required to keep a development effort on track.

By using a quality outsourced software developer, this is entirely possible. The right firm can assemble a team fairly quickly, often in less than two weeks, and can provide project leadership and executive-level oversight. But a quick start is only part of the “profit recipe”. Stay with me….

3. Having flexible resources is key

The ability to quickly increase resources when needed and decrease resources when not is an important driver in maximizing profit contribution. We all know what happens when testing is complete, a ship date is reached, and the development team suddenly has no more code to write. Yup, productivity drops. Staff may be reassigned but that takes time. To be safe, we usually want to keep everybody right where they are. In a few months when feature requests and bug fixes get scheduled, we’ll need that staff available, and they’ll again be fully productive. In the meantime, semi-idle staff represents a non-zero “trailing” cost – a cost that hits our profit contribution. Having the ability to control the “resource spigot” on short notice is a significant driver for managing costs. Fortunately, that’s exactly what the right outsourced software developer can provide.

The Bottom Line for Outsourced Software Development

Going “outside” with the right provider yields maximum profit by:

• • Vastly reducing time to start
  • Providing a proven team resulting in quality output
  • Delivering the completed product sooner
  • Incurring costs for only actual productive time.

So what happened at the meeting in Jersey years ago? We began a relationship that led to many development projects. And as I refined my presentation in the years that followed, I adjusted my value proposition to include not only quality and timeliness, but also cost-effectiveness and, no kidding: profit contribution. Using a top-quality outside developer just makes sense.