Over 20 years ago, in a meeting with a business unit manager at a large telecom lab in New Jersey, I was describing how our company could develop quality software efficiently and on time. The dreaded moment came when the manager asked, “What’s your hourly rate?” At the time, I feared this question because I regarded our rate to be higher than a staff member salary. I expected push back. To my surprise, the manager replied, “That’s good – it’s lass than our 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 more than just a salary. It nearly doubles once you add in:
- Health and life insurance
- Disability coverage
- Paid time off
- Office and desk space
- Network resources
- Computer and software licenses
- Some portion of a manager’s time
A recent informal survey of our current clients revealed an overhead cost of anywhere from 60%-70% 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 Medical. 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 and thereby delaying the project or 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.
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 net impact 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 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, on month, that would mean shipping sooner and seeing cash flow change direction. To do that you would a proven team that:
- Can apply 100% effort to your project from day one,
- has integral engineering management,
- produces a high quality output, and
- effectively communicates the myriad details 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 our “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. Productivity drops. Staff may be reassigned but that takes time. Usually, to be safe, we 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” yields maximum profit by:
- Vastly reducing time to start
- Providing a proven team
- Delivering the completed product sooner
- Incurring costs for only actual productive time
So what happened at the telecom lab years ago? We began a relationship that led to many development projects. 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 profit contribution. Using a top-quality outside developer just makes sense.
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