A Fair Price
To make sure that IT organizations are paying a fair price while getting the project done thru fixed price engagement, IT organizations should also calculate how much are they paying per hour of effort to vendor based on their own estimate. For example, a simple high level calculation shows how IT organizations might be paying more than USD 63 per hr cost of the project. Once the vendor companies add cost for their management and fixed price premium/risk premium, the cost per hour for the project will go up beyond USD 63 per hr.
This exercise will help the IT organization in negotiating the price better with Vendor and also understand the true cost of executing the project. Cost per hour can be higher if we add other cost e.g. Project management, user training, rollout, and other internal resources within the IT organization. The build and unit cost is small compared to overall project cost where outsourcing is effectively utilized.
Our goal should to get the other task done more efficiently with reduced onsite ratio without sacrificing the quality. Looking at the table below, it is very clear that to get efficiency out of outsourcing; organizations have to look how to move some of requirement and design activities to offshore. One way to do is that to move low level design work offshore and ensure that people performing requirement and high level design rotate to offshore to make knowledge available at offshore.
% Effort distribution across
software life cycle Onsite Offshore Onsite Cost @75 per hr Offshore Cost @ 28 per hr Total Cost
Requirement Gathering and Design 30 100% 0 $ 2,250.00 $ - $2,250.00
Build & Unit Testing 50 20% 80% $ 750.00 $ 1,120.00 $1,870.00
System Testing and Implementation 20 40% 60% $ 600.00 $ 336.00 $ 936.00
Total Cost before buffer $5,056.00
Buffer @ 10% $ 505.60
Fixed Price Premium @ 15% $ 758.40
Final Cost to IT Organization $6,320.00
Cost per hour $ 63.20
IT vendors have grown at fast pace and faces high attrition
This would mean that someone who was working for an IT organization 18 months back might not be working after 18 months. When a new person comes on board, the person takes time to learn the application domain, environment and technology and essentially might not be even 80% productive as outgoing person for first 3-6 months? On top of this, IT outsourcing vendors face around 14-18% annual attrition rate compared with a very low attrition rate within USA in IT organizations.