In today’s global economy, outsourcing is no longer a trend, its a necessity. To grow your business in markets across the world, tap into the local talent pool, be able to quickly staff peak engineering requirements or a sudden need, outsourcing is the right answer.
Most outsourcing projects today are not fixed price, deliverable based engagements. They are usually time and material based, with a commitment for 'X’ number of resources. This can be true for internal and external outsourcing. To ensure you are getting the most bang for the buck, besides looking at cost and technical skillset on paper, you also need to gauge additional metrics like productivity, team leader’s ability to deliver quality - on time, focused approach, etc. . All these factors eventually impact the project timelines and possibly product margins.
Let us consider an example. Lets say an engineer that does the work today has a cost factor of 100, we assume his productivity is our baseline (i.e. factor of ‘1’) and he or she is able to meet the time to market requirements aka schedule (i.e. factor of '1’). There are other overheads involved in a project - communication, travel, monitoring, management overlap, work hours due to time zone differences, etc. . Lets club these all together under a single head - Program Management. If the entire team executing on a project is in a single location, one can typically assume a Program Management factor of 5% or 0.05.
Using these metrics, the correct formula for calculating actual project cost turns out to be: ((Cost of engineering/Productivity)*Schedule + Program Management = ACTUAL COST
If we apply the above equation to our baseline, we get our actual cost as: ((100/1)*1) + 0.05 = 1.05 <- Actual Baseline cost
Now let us assume when we outsourced it, our cost factor of engineer came to 40 (versus 100). Huge Cost Difference, Right?
As the project progressed, we realized that the engineer was only 66% as productive when compared to our baseline engineer, which gives us a productivity factor of 0.66. As the project progressed further, we realized that the schedule was going to slip, maybe by 15%, something that we could absorb, but it gives a Schedule factor of 1.15. Assuming now the project is spread across multiple locations, Program Management cost is expected to rise from 5% to 15%. If we plug in these numbers into our actual cost equation, we get ((0.4/0.66)*1.15) + 0.15 = 85 <- Actual Outsourced Cost
So what on paper seemed like a huge cost difference, eventually turned out to be much higher, in fact, much close to the original cost.
Outsourcing is important as companies try to scale their business and spread across the emerging markets. But identifying the right outsourcing partner, and looking at metrics beyond simple cost and basic technical skills, are critical in ensuring success of the outsourced project and actually saving the company money!