How Do You Measure the Price of Internal Application Development Against External?


    Just listened to my second Webinar of the week, this one hosted by Ciber and titled, “Global Distributed Delivery: A Framework for Deciding How and Where to Outsource IT Services.”

    The expert on hand was Joseph Feiman, a Gartner research VP, who shared some quite useful Gartner intelligence on a million-dollar enterprise-scale application development project. The point of the research into the project was to establish whether service providers with US-based labor could compete with service providers using offshore labor. Or, as one slide titled it, “When Can Indiana Compete with India?”

    It’s an apt discussion for Ciber to present, since this $950 million global IT services company has 85 offices in 17 countries — most of those in the US. Ciber has received a slew of press recently around the opening of two CIBERsites, one in Tampa, the other in Oklahoma City. These operations are intended to provide a US-based, competitively priced alternative to offshore providers. (But if offshore is what you want, Ciber offers that too.)

    So let’s look at Dr. Feiman’s numbers. At the end of this write-up, I’ll provide a rundown on the work he absolutely insists should be outsourced and the jobs that should stay internal.

    Assume a million dollar project that involves 37 full-time employees working for about a year.

    The project budget breaks down this way:

    • The capital budget is 15-20% of the total expense.
    • The development budget is 50-60% of the total expense.
    • Maintenance in year one is 20-35% of the total expense. (In years two and three it stays about the same.)

    That means about 80-85% of the total cost of ownership is dedicated to development and maintenance expense. “These are the labor costs,” as Dr. Feiman explained.

    The cost factors to be considered in a project of this scale are:

    • Application development project phases. (more below)
    • Efforts on a phase.
    • Billing rates.
    • Effectiveness (of technology, project management and business domain knowledge). (more below)
    • Communication (language and collaboration). (more below)
    • External market adjustment.

    He showed a slide with a breakdown by project phases and the percent of the work that could reasonably be expected to be handled on-site vs. offshore:

    • Analysis, 100% on-site
    • Design, 60% on-site, 40% offshore
    • Construction: 30% on-site, 70% offshore
    • Unit test, 30% on-site, 70% offshore
    • System test, 80% on-site, 20% offshore
    • Deployment, 100% on-site

    In other words, the most effective use of offshore service providers currently is in doing application construction and unit testing work.

    Communication encompasses language and collaboration, both having equal importance. Gartner gives a high score for communication to US internal developers as well as external service provider developers working on-site (.95); US developers working off-site through a service provider get a slightly lower score (.87); and Indian service provider developers get an even lower score, .78 if they’re working on-site and .46 if they’re working off-site.

    But Indian service providers make up for that gap in communication skills by their effectiveness.

    Effectiveness consists of several parameters, each equally weighted: technology (education, experience, certification, training and enterprise IT), project management (CMM certification, project process rigor, scalability, management tools and the existence of a project office, and business domain expertise (by business process, industry, country and enterprise business). Indian service providers score .70 here, while US service providers score .74 and US internal IT organizations score a dismal .46. (Before you get your red, white and blue knickers in a bunch, keep in mind that there are exceptions to these scores — Indian firms that don’t have a track record of great process or project management and US firms that do. The point is to measure effectiveness in your overall consideration of outsourcing.)

    When can Indiana expect to compete with India? According to Dr. Feiman and the results of the Gartner research, the “average” US company will save about 24% on large application development projects when it uses an external US-based service provider vs. doing it internally. It’ll save 43% when it conducts 100% of construction and unit testing at an offshore service provider. The cost, he says, is “directly proportional to the salary advantages of an offshore [external service provider].” The bottom line: external service providers are more cost-effective whether they’re domestic or offshore. Indiana can compete with India only if it’s handled by an external provider, and even then, you might want to consider a company with an offshore component for some aspects of the work being done.

    Now, onto what skills to keep and what skills to outsource:

    Dr. Feiman shared a quadrant (for which Gartner is well known). Running along the Y axis was “business knowledge.” Running along the X axis was technical knowledge. Those skills you’re advised to outsource “completely” are: graphic artist, web site designer and HTML author. Those you’re advised to outsource by “augmentation,” are: component developer, DBA and systems administrator. Those you’re advised to keep in-house are: business analyst and user acceptance testing. Those you’re advised to not “even think of outsourcing” are: business technology architect and webmaster. If you’re wondering where your future lies in the IT skills spectrum, take these recommendations to heart.

    The emcee of the event said Cyber would make a recording of the Webcast available within 24 hours.


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