Outsourcing Sounds Good -- But What’s The Cost?

By: Susan Peterson, M.B.A., PMP Copyright 2008, Susan Peterson, All Rights Reserved

Continuing the column series theme of outsourcing, let’s assume that you’ve decided that your project has some definite needs for expertise and/or skills that are not found or that are not readily available inside your organization. As mentioned in last month’s column, the base cost of an activity can be an illusive factor to accurately calculate. There are a number of considerations to assess when determining the “true” cost of performing work. In addition to the base cost, organizations that perform outsourced work will include at a minimum a profit margin and an overhead factor. A project manager who is considering outsourcing needs to be prepared with realistic assessments in advance of contractor negotiations. In this month’s column we cut through some of the “smoke and mirrors” that seem to accompany so many cost estimates and uncover the underlying factors that are major influences of project work costs. Think of the following narrative as a bridge etween accounting textbooks and grim reality.

Do we “have a clue” what it costs us to do this work in house?
Even when using the most sophisticated project accounting systems, it may be difficult to isolate typical costs for specific types of work. A good starting point is to define and document the tasks, the performance measures, and the “allowable” variances. Another critical component of this exercise is to assess areas of risk and to determine which risk areas will be transferred or shared as a part of an outsourcing relationship. Once all of this information has been compiled, an estimate of in-house hours and costs can be determined. Typically, this estimate will be higher than project sponsors want to acknowledge. A project manager needs to hold firm amidst pressure to eliminate tasks in order to “cut costs”. Providing an overly optimistic estimate of work required to an outsourcing organization invariably leads to additional charges and schedule extensions hen the actual hours overrun the false estimate.

What don’t we know?
There are those situations when organizations do not know all of the factors about the work that needs to be performed because the work has never been done in-house. Particularly if the work involves new or unproven technology, custom equipment, or specialized skills, project managers may feel unqualified to estimate the actual level of effort that is involved. In these cases some upfront research is necessary. While a project manager may not uncover all of the aspects related to a particular activity, he/she should obtain enough information to avoid being “blown away” by potential contractors that may inflate the effort, complexity, and investment necessary to perform specific work. It is also necessary that the project manager have a “healthy respect” for the actual challenges that are inherent in unfamiliar work.

Let’s “get real” about our expectations
One of the more prevalent areas of misunderstanding between organizations and contractors concerns expectations. While project managers may believe that specifications and requirements have fully documented every aspect of each activity and deliverable, there are unwritten expectations that are assumed. Often these expectations are based on the work culture of the organization. The bottom line about expectations is “don’t ake anything for granted”. Some areas that the organization needs to consider include the following:

• Project management -- What project management practices are used in-house? Is the project manager expected to oversee the contractor’s personnel, to be responsible for quality of outsourced deliverables, etc?
• Service levels -- How accessible do contractor management and personnel need to be (especially important in global outsourcing)? What turnaround is expected on interim decisions? Are a number of decisions made “on the fly”?
• Deadlines -- What does “completed” really mean for each deliverable?
• Unanticipated problems -- What degree of flexibility or agility is considered the “norm” in-house, meaning are problems “worked around”, solved, or ignored?

Readers will note that no traditional accounting principles were detailed in this discussion of project cost considerations. While there are numerous publications that address specific quantitative approaches, it is the realistic definition of work, risk, and expectations that must be determined before any cost numbers can be ffectively applied.

Susan Peterson, M.B.A., PMP, is a consultant who manages diverse programs and projects in both the private and public sectors for individual organizations and consortia. She also conducts enterprise assessments of project portfolio management practices. An overview of her program and project specialties is available at http://www.pmi-sd.org/Consultants. She teaches the Project Management Simulation capstone course in the University of California, San Diego, Project Management certificate program and is a member of the curriculum committee. She can be contacted at susanada@aol.com.