Successful Software Development Outsourcing

Total Cost of Engagement?

What is TCE??And why do I care…

What is TCE?

• Total Cost of Engagement (TCE)– If you are budgeting for an outsourced software development

project – you want to know the total of all costs, beyond the vendor’s quote, for the engagement.

– You know what your internal staff costs and what it costs to recruit, pay staff overhead and related costs.

– You can quickly search job boards to see what hourly rates are for a given set of skills and experience in various areas throughout the country or the world but…

– You also know that the hourly rate of your outsourced resources aren’t all the costs you need to include for a realistic budget.

Leveling the Playing Field• You can get quotes from vendors easily, but be sure you

are comparing apples to apples– Staffing companies, depending on your specifications and

the availability of resources will have a price, but it will be different than a “full-service, software development” provider.

– The overhead, services, resources available, location and other factors will vary the end cost of each vendor.

– Your problem is not to eliminate vendors. Instead you need to be sure if you are not comparing apples to apples, you add the costs that will complete the picture for comparison and budget purposes.

What Does Your Project Need?• Separately from vendor quotes, do you need?

– IP protection? – Assurance that work will be completed regardless of resource availability

and other difficulties? – High levels of security? Proprietary technology? Etc. Everything has a cost…

• Do you know what you are taking on in terms of risk and costs in the case of each vendor you are considering? – What do you have to do to mitigate risks? What are the costs? They may be

different for each quote you have, but if you don’t consider them, you aren’t comparing apples to apples

• The key is to assign the costs of mitigation to the differences between quotes when the limitations of the offering impact your needs.

Where is My Team?• Assuming you are not planning to collocate your

outsourced team in-house – distance has a cost. – How complex is your project? Is it a new application?

Maintenance of an existing app? Is your in-house team involved? Each situation is different and can have different needs for team interaction.

– Offshore providers in Asia or Eastern Europe may have lower costs, but what are the travel costs, communication overhead, productivity costs, etc. ?

– Nearshore providers are better positioned to work in real-time with less overhead, but their costs may be higher per hour. Are they actually comparable with offshore?

6 Areas to Consider in Your TCE

1. Travel Costs– To start a project successfully, it is important to get at least key

members of the team together. • Build trust, clear operational issues, start knowledge transfer, etc. • The amount of time needed will be different depending on team size,

type of project, cultural affinity and other issues. • Consider visa costs and time delays, round-trip airfares, hotels, meals,

surface transportation, time to deal with paperwork and jet lag. • Consider the cost of lost productivity for yourself and your team in

your costs. It is not unusual to have to include up to a week of travel time in each direction for offshore locations.

• For longer engagements and special situations, it is wise to consider more than one trip.

6 Areas to Consider in Your TCE2. Risk and contingency management

– Release system: Is this an existing application? Is it part of a suite of applications managed by a release system? How do you merge your releases and data? Can you back out of a release seamlessly?

– How much time will the development team need to allocate to manage releases? If your team will handle the release, how will you handle issues after release without impacting ongoing development and productivity?

– Do you need to protect application data? Do you have plans to ensure that test data duplicates your live data characteristics?

– Do you release in phases to different data centers or clients? What is the risk that one phase will be different?

6 Areas to Consider in Your TCE

2. Risk and contingency management– Changes in Direction: Does your team and the

outsourced team practice with agile methodologies? Can they handle opportunities to change direction without a serious loss of productivity?

– Do you have plans in place to handle changes efficiently? Can they be handled in contract and project startup so there is an understood basis for making changes through the project without lengthy negotiation and planning?

6 Areas to Consider in Your TCE2. Risk and contingency management

– Response to Issues: Not all issues require a change in project direction. – Spot clarifications, technical decisions, etc. should be responded to

quickly so they don’t mushroom into bigger problems. – Direct communications in an atmosphere of openness and trust are key.

Every team member must understand they have the ability and responsibility to raise issues directly, seek clarifications and ask questions without repercussions.

– This level of communication takes planning and interaction. It has a cost but as a mitigation against larger issues, it more than pays for itself.

– Using layers of technical and operational intermediaries instead, raises costs much higher, increases the time to action, and lowers communication fidelity.

6 Areas to Consider in Your TCE

2. Risk and contingency management– Geopolitical Risks: Consider more than political upheaval –

catastrophic weather events and climate change are also issues to consider as part of your risk management. . • Political issues have hit locations (like the Ukraine) that were once growing

outsourcing centers. • Extreme weather is possible all over the world, but data centers in the

eastern seaboard of the US have been threatened several times in the last few years.

• Geopolitical risks can mean the loss of access or data for days or weeks and sometimes longer. Progressive backups of code can be automated to multiple locations, data centers can be setup to failover to other locations. These mitigations and similar actions have a cost, and they won’t replace staff, but they will help to get projects back online quickly in an emergency.

6 Areas to Consider in Your TCE

2. Risk and contingency management– IP Protection: There can be and generally is intellectual

property in any outsourced engagement. Data, business rules, methods and procedures, security and technical systems used can all be areas that need protection. • The first level of protection is in properly drafted contracts with

specific language to cover IP. • These should be backed up by international treaties and agreements

that provide a realistic basis for enforcement. • Security and the technologies that support it should be considered

and employed where it is required. These measures have a cost, but they are usually minimal compared to the exposure created by a loss.

6 Areas to Consider in Your TCE3. Knowledge Transfer– Documentation is only one part of knowledge transfer and when

it is relied on too heavily, it can create situations where it would be better to do without it. Users may not read contextual information and misunderstand information. Highly detailed documentation can be hard to maintain efficiently.

– Person-to-person knowledge transfer, when done in the context of the moment and with respect and honesty, is the best medium. But both parties have to make the effort to ensure questions asked and fully answered.

– Setting up meetings and systems that ensure knowledge transfer is open and direct takes time and has a cost. But without it, risks can become unmanageable.

6 Areas to Consider in Your TCE

4. Productivity Loss– When development teams do not have significant

overlapping work hours, work in different languages and terms, or their ease with direct communication is compromised, productivity can suffer significantly.

– In these situations, intermediaries are often used as a bridge to relay, translate, route or prioritize communications, but in most cases they only add to the delay, cause a loss of fidelity in the messages and create friction.

– In addition added layers of communication add to head count and have a real cost. Find ways to allow direct communication rather than creating barriers.

6 Areas to Consider in Your TCE

5. Team Attrition and Churn– The longer an engagement is, the more likely it will be to

suffer some team turnover. Individuals will get new opportunities, life events will cause them to have to move and other issues will require them to change their working situation.

– Understand that this will happen at some point and consider the cost of recruitment, training, knowledge transfer, and lost productivity while the new resource is brought up to speed. With that in mind, put in place the plans and agreements necessary to assure that the least amount of disruption occurs.

6 Areas to Consider in Your TCE

6. Management Overhead– Often, the response to dealing with the issues and risk

around outsourcing is to add more management to the project.

– Intermediaries, even when combined with very low base labor costs, add cost, friction and lower productivity. They lower team responsibility and create barriers to direct communication.

– Instead, enforce responsibility and team commitment with methodologies like agile and scrum. Don’t initiate overhead that takes it away fro the team.

TCE is a Moving Target

• Using TCE as a way to compare costs of various vendors and situations is of course important, but it is also a way to benchmark a project and ensure it doesn’t balloon out of control.

• Every team and project will have some unique aspects to its costs. This is just a starting point. Like the costs of your last project, they are recommendations of where to look at costs, not template.

Scio is a full service provider of nearshore-based software development services to our clients in North America. Please contact us for more information about our services and recommendations for your project.