offshore software development rfp
The Real Cost of Outsourcing
TABLE OF CONTENTS
? Introduction
? Cost of Selecting the Vendor
? Cost of Transition
? Cost of Managing an Offshore Contract
? Conclusion
Introduction
In this white paper, we will explore the total cost of outsourcing by uncovering the hidden figures that boost up your bill. There are areas where you will have to invest more than you thought in the beginning, issues where things like poor processes and productivity can eat away potential savings and places where you can end up spending just as much as you would do it without outsourcing.
The Cost of Selecting a Vendor (1-10%)
With any outsourced service, the expense of selecting a service provider can vary from 0.2 % to 2 % in addition to the annual cost of the deal. These selection costs include documenting requirements, sending out RFPs and evaluating the responses, and negotiating a contract. A project leader may be working full time on this, with others chipping in, and all of this represents an opportunity cost. There are also the legal fees. Some companies hire an outsourcing adviser for about the same cost as doing it themselves. To top it off, the entire process can take from six months to a year, depending on the nature of the relationship.
Even when there is an existing tie between the customer and offshore vendors, the expensive and lengthy step of vendor selection is a must-do for successful outsourcing.
At this stage, travel expenses enter the picture as well. A trip overseas helps CIOs get comfortable with their choice.
%Estimation: Expect to spend an additional 1 to 10 % on vendor selection and initial travel
costs.
Choose the best sourcing model
According to a study released by Gartner, many CIOs are still focused on short-term savings rather than longterm business success when establishing outsourcing relationships – and that it’s costing them in the long run.
Cost of Selecting the Vendor
? Putting together the RFQ/RFP
? Distributing the RFQ/RFP and
collecting the feedback
? Analyzing and short listing
? Due Diligence
? Management Sponsorship
? Decision to Outsource
In order to address these issues, the organization must know that they can choose from among eight basic sourcing models to best exploit established or future capacity, whether the organization gets its services from internal staff, external staff or through a partnership. You must take each of the following models into account before rushing to choose one vendor or another, or even before taking the decision to outsource.
8 SOURCING MODELS
• Internal delivery: The current status of most organizations’ IT or process operations
• Shared service or captive center: A centralized — onshore or offshore — service organization delivering IT services or business processes for an organization, also known as an “insourcing” organization
• Full outsourcing: A single contract with one provider for the full scope of services
• Joint venture: A separate service company built and co-owned with an external service provider (or other client organizations in case of consortium), which is expected to provide management and expertise
• Best-of-breed consortium: A group of external service providers, with a lead provider established for a large contract
• Brand service company: A way to share IT services (and often non-IT services and processes) to leverage the market, selectively outsource parts of the services and, in some cases, provide services to the market
• Selective outsourcing: Separate outsourcing contracts for selected IT functions or business processes, using a best-of-breed tactical approach and competitive deals
• Prime contractor: Provides management and integration of multiple service providers to derive a single or global solution or service In some sourcing arrangements — including multisourcing, transformational relationships and project work — an organization may want to consider additional options to get the services it needs. Specialists suggest several sourcing options sit below the sourcing models.
? The sourcing of technical or business skills
? The sourcing of a project or a part of it
According to a survey of 945 IT professionals, more than 50% of the respondents said they expected to see significant cost savings by outsourcing. Fewer organizations said their objective in outsourcing was to make companies more competitive in the market.(Gartner 2006)
? The sourcing of management
? The sourcing of an IT service
? The sourcing of a business process
? The sourcing of a business solution etc.
Organizations can choose from these sourcing options based on their tolerance for risk and their willingness to accept or transfer management responsibility for the delivery of services.
Selecting an External Service Provider requires personnel resources and access to data, key processes and procedures, generally for a short period of time. These resources are crucial to maintaining the schedule and meeting objectives. Develop and follow a formal, specific timeline for each step in the process. This timeline provides rigor, reduces costs, helps maintain enthusiasm, and provides for an overall coordination of the organizational and External Service Provider personnel who manage the process.
Too many organizations, however, focus only on selecting the lowest-cost source. Organizations must institutionalize an effective and efficient process that enables the source selection team to make the best value selection (which is often not the lowest cost selection).
Cost benchmarking to the current market?
If the price (regarding the in-scope, requested services) is not appealing enough for the client, a typical vendor reaction is to offer fewer services, reducing the scope. The offer will include only those services for which the vendor can provide the best results, and it will simply leave the rest — by default — under the client’s responsibility.
This causes two major problems for the client:
• The responsibility issue: The client must manage the overall service, being responsible by default for everything that will not be done by the vendor (i.e., not clearly agreed in the contract).
• The cost issue: The client will incur all costs associated in both doing everything that will not be delivered by the vendor (i.e., not clearly agreed in the contract) and managing on top of that the services delivered, the contract and the vendor relationship.
- Supplier delivery commitments
- Is cost/quality appropriate for services delivered, or distorted by supplier issues?
- Does outsourcing compare favorably against in-house service delivery?
- Are internal contract management costs and time appropriate?
The Cost of Transition (2-3%)
The transition period is perhaps the most expensive stage of an offshore endeavor. It takes from three months to a full year to completely hand the work over to an offshore partner. If company executives aren’t aware that there will be no savings—but rather significant expenses—during this period, they are in for a nasty surprise.
Costs of transition are typically bundled into the cost of the overall outsourcing deal. However, in the case of complex BPO involvig migration to new IT platforms and systems, which is more than labor arbitrage, Gartner sees separate contracts drawn up to cover these costs. Best practice is for a single comprehensive plan of activities to be created and used as the master plan for the entire transition. The greater the complexity, the higher the transition cost. Costs retained by the client must also be factored into the business case when contemplating an outsourcing deal.
CIOs must bring a certain number of offshore developers to their headquarters to analyze the technology and architecture before those developers can head back to their home country to begin the actual work.
Cost of Transition
? Transition project management
? Third-party consultant oversight (if outside verification and validation is needed)
? Communications (resources to write, manage and facilitate, as well as the potential use of public relations firms to communicate outsourcing deal/transition messages to the public)
? Human capital management (can include severance, outplacement, retention bonuses, “re-skilling” and hiring costs)
? Legal fees (interpretation of the contract, third-party contracts, established vendor contracts if an interface is needed with the new provider)
? Technical costs (development/integration costs to new interfaces, porting of code to new platforms)
And CIOs must pay the prevailing home country hourly rate to offshore employees on temporary visas, so obviously there’s no savings during that period of time, which can take months. And the offshore employees have to work in parallel with similarly costly in-house employees for much of this time. Basically, it’s costing the company double the price for each employee assigned to the outsourcing arrangement (the offshore worker and the in-house trainer). In addition, neither the offshore nor in-house employee is producing anything during this training period.
During the transition, the offshore partner must put infrastructure in place. While the offshore partner incurs that expense, the customer should monitor the process carefully. Often it can take longer than expected.
%Estimation: Expect to spend an additional 2 % to 3 % on transition costs.
Hidden Costs of Transition:
The Cost of Layoffs – Laying off employees as a result of your offshore contract poses other sometimes unanticipated costs. To begin with, you have to pay many of those workers severance and retention bonuses.
Layoffs can also cause major morale problems among in-house “survivors,” in some cases leading to disaffection and work slowdowns. Companies with experience in offshoring factor productivity dips and potential legal action from laid-off employees into the cost-benefit analysis.
%Estimation: Expect to pay an extra 3 % to 5 % on layoffs and related costs.
The Cultural Cost – One of the biggest impediments to offshore savings is productivity. You simply cannot take a person in your home country and easily replace him/her with one offshore worker. One reason for that is the home country workers’ comfort level with speaking up and offering suggestions. Another productivity killer is high turnover at offshore vendors. Attrition rates climb as high as 35 % in India, according to the National Association of Software and Service Companies. Turnover can cost an additional 1 % to 2 %. Finally, communication issues can slow things to a halt. Language and other cultural differences can cost an extra 2 % to 5%
%Estimation: Expect to spend an extra 3 % to 27 % on productivity lags.
The Cost of Ramp-up (ensuring Quality, processes and procedures)
Well-defined and accepted internal software development and maintenance processes are also key to making an offshore situation work. If a company doesn’t create solid in-house processes, the vendor will have to put more people onsite to compensate for your inadequacies, and they’ll spend all of your savings.
The ability to write clear specifications is also critical to achieving offshore savings. Creating a great spec package is costly and time-consuming. On a 1,000 man-hour project for example, the staff will spend 100 hours to create a spec package.
At the other end of the process is quality assurance (QA) testing, an area which must become more robust in an offshore arrangement.
%Estimation: Expect to spend an extra 1 % to 10 % on improving software development processes.
The Cost of Managing an Offshore Contract (6-10%)
Managing the actual offshore relationship is also a major additional cost. There’s a significant amount of work in invoicing, in auditing, in ensuring cost centers are charged correctly, in making sure time is properly recorded Each project manager oversees the effort. He audits the time sheets from the vendor and rolls the figure into an invoice, which then has to be audited against the overall project, which is then funneled to finance for payment.
Sometimes, managing the offshore vendor is such a big task that you have to assign someone to handle it on a half-time basis. The individual must make sure projects move forward, and develop and analyze vendor proposals against the RFPs when it comes time to bid out new work.
% Estimation: Expect to pay an additional 6 % to 10 % on managing your offshore contract.
Now let’s sum it up What we skipped in mentioning so far, are the well-known standard costs of outsourcing that every company will provide you. That is because we wanted to emphasize exactly on the “tricky” hidden costs that will give you a more realistic view on how much will outsourcing bite from you budget.
The IT research company, Gartner, provides us with the following standard figures in %age of what you must specify in the contract about payment.
Furthermore we add another table with what we have outlined on the previous pages. Therefore you can see that the real costs you pay for outsourcing is somewhere between 13-65% higher than you think in the beginning.
Conclusion
The estimation of costs it’s a crucial stage in deciding whether, how and what to outsource. You must take into consideration every single aspect that might boost your bill.
And what’s more important, instead of focusing on low cost when choosing an outsourcing partner, you will gain more by looking at the bigger picture, and scrutinizing if the firm has the necessary resources and the ability to deliver. The firm should be a part of the strategic decisions taken by the parent company and commitments should based on long-term returns that benefit the business as a whole rather than just saving on short-term costs.
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If you’re still on the fence: grab your favorite earphones, head down to a Best Buy and ask to plug them into a Zune then an iPod and see which one sounds better to you, and which interface makes you smile more. Then you’ll know which is right for you.
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Sorry for the huge review, but I’m really loving the new Zune, and hope this, as well as the excellent reviews some other people have written, will help you decide if it’s the right choice for you.
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If you’re still on the fence: grab your favorite earphones, head down to a Best Buy and ask to plug them into a Zune then an iPod and see which one sounds better to you, and which interface makes you smile more. Then you’ll know which is right for you.
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I’ll gear this review to 2 types of people: current Zune owners who are considering an upgrade, and people trying to decide between a Zune and an iPod. (There are other players worth considering out there, like the Sony Walkman X, but I hope this gives you enough info to make an informed decision of the Zune vs players other than the iPod line as well.)
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I’ll gear this review to 2 types of people: current Zune owners who are considering an upgrade, and people trying to decide between a Zune and an iPod. (There are other players worth considering out there, like the Sony Walkman X, but I hope this gives you enough info to make an informed decision of the Zune vs players other than the iPod line as well.)
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The Zune concentrates on being a Portable Media Player. Not a web browser. Not a game machine. Maybe in the future it’ll do even better in those areas, but for now it’s a fantastic way to organize and listen to your music and videos, and is without peer in that regard. The iPod’s strengths are its web browsing and apps. If those sound more compelling, perhaps it is your best choice.
Between me and my husband we’ve owned more MP3 players over the years than I can count, including Sansas, iRivers, iPods (classic & touch), the Ibiza Rhapsody, etc. But, the last few years I’ve settled down to one line of players. Why? Because I was happy to discover how well-designed and fun to use the underappreciated (and widely mocked) Zunes are.
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Zune and iPod: Most people compare the Zune to the Touch, but after seeing how slim and surprisingly small and light it is, I consider it to be a rather unique hybrid that combines qualities of both the Touch and the Nano. It’s very colorful and lovely OLED screen is slightly smaller than the touch screen, but the player itself feels quite a bit smaller and lighter. It weighs about 2/3 as much, and is noticeably smaller in width and height, while being just a hair thicker.
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The new Zune browser is surprisingly good, but not as good as the iPod’s. It works well, but isn’t as fast as Safari, and has a clunkier interface. If you occasionally plan on using the web browser that’s not an issue, but if you’re planning to browse the web alot from your PMP then the iPod’s larger screen and better browser may be important.
Hands down, Apple’s app store wins by a mile. It’s a huge selection of all sorts of apps vs a rather sad selection of a handful for Zune. Microsoft has plans, especially in the realm of games, but I’m not sure I’d want to bet on the future if this aspect is important to you. The iPod is a much better choice in that case.
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Sorry for the huge review, but I’m really loving the new Zune, and hope this, as well as the excellent reviews some other people have written, will help you decide if it’s the right choice for you.
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This is getting a bit more subjective, but I much prefer the Zune Marketplace. The interface is colorful, has more flair, and some cool features like ‘Mixview’ that let you quickly see related albums, songs, or other users related to what you’re listening to. Clicking on one of those will center on that item, and another set of “neighbors” will come into view, allowing you to navigate around exploring by similar artists, songs, or users. Speaking of users, the Zune “Social” is also great fun, letting you find others with shared tastes and becoming friends with them. You then can listen to a playlist created based on an amalgamation of what all your friends are listening to, which is also enjoyable. Those concerned with privacy will be relieved to know you can prevent the public from seeing your personal listening habits if you so choose.
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The new Zune browser is surprisingly good, but not as good as the iPod’s. It works well, but isn’t as fast as Safari, and has a clunkier interface. If you occasionally plan on using the web browser that’s not an issue, but if you’re planning to browse the web alot from your PMP then the iPod’s larger screen and better browser may be important.
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If you’re still on the fence: grab your favorite earphones, head down to a Best Buy and ask to plug them into a Zune then an iPod and see which one sounds better to you, and which interface makes you smile more. Then you’ll know which is right for you.
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This is getting a bit more subjective, but I much prefer the Zune Marketplace. The interface is colorful, has more flair, and some cool features like ‘Mixview’ that let you quickly see related albums, songs, or other users related to what you’re listening to. Clicking on one of those will center on that item, and another set of “neighbors” will come into view, allowing you to navigate around exploring by similar artists, songs, or users. Speaking of users, the Zune “Social” is also great fun, letting you find others with shared tastes and becoming friends with them. You then can listen to a playlist created based on an amalgamation of what all your friends are listening to, which is also enjoyable. Those concerned with privacy will be relieved to know you can prevent the public from seeing your personal listening habits if you so choose.
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Zune and iPod: Most people compare the Zune to the Touch, but after seeing how slim and surprisingly small and light it is, I consider it to be a rather unique hybrid that combines qualities of both the Touch and the Nano. It’s very colorful and lovely OLED screen is slightly smaller than the touch screen, but the player itself feels quite a bit smaller and lighter. It weighs about 2/3 as much, and is noticeably smaller in width and height, while being just a hair thicker.
Zune and iPod: Most people compare the Zune to the Touch, but after seeing how slim and surprisingly small and light it is, I consider it to be a rather unique hybrid that combines qualities of both the Touch and the Nano. It’s very colorful and lovely OLED screen is slightly smaller than the touch screen, but the player itself feels quite a bit smaller and lighter. It weighs about 2/3 as much, and is noticeably smaller in width and height, while being just a hair thicker.
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The Zune concentrates on being a Portable Media Player. Not a web browser. Not a game machine. Maybe in the future it’ll do even better in those areas, but for now it’s a fantastic way to organize and listen to your music and videos, and is without peer in that regard. The iPod’s strengths are its web browsing and apps. If those sound more compelling, perhaps it is your best choice.
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Hands down, Apple’s app store wins by a mile. It’s a huge selection of all sorts of apps vs a rather sad selection of a handful for Zune. Microsoft has plans, especially in the realm of games, but I’m not sure I’d want to bet on the future if this aspect is important to you. The iPod is a much better choice in that case.
I’ll gear this review to 2 types of people: current Zune owners who are considering an upgrade, and people trying to decide between a Zune and an iPod. (There are other players worth considering out there, like the Sony Walkman X, but I hope this gives you enough info to make an informed decision of the Zune vs players other than the iPod line as well.)
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Apple now has Rhapsody as an app, which is a great start, but it is currently hampered by the inability to store locally on your iPod, and has a dismal 64kbps bit rate. If this changes, then it will somewhat negate this advantage for the Zune, but the 10 songs per month will still be a big plus in Zune Pass’ favor.
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I’ll gear this review to 2 types of people: current Zune owners who are considering an upgrade, and people trying to decide between a Zune and an iPod. (There are other players worth considering out there, like the Sony Walkman X, but I hope this gives you enough info to make an informed decision of the Zune vs players other than the iPod line as well.)
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The Zune concentrates on being a Portable Media Player. Not a web browser. Not a game machine. Maybe in the future it’ll do even better in those areas, but for now it’s a fantastic way to organize and listen to your music and videos, and is without peer in that regard. The iPod’s strengths are its web browsing and apps. If those sound more compelling, perhaps it is your best choice.
The new Zune browser is surprisingly good, but not as good as the iPod’s. It works well, but isn’t as fast as Safari, and has a clunkier interface. If you occasionally plan on using the web browser that’s not an issue, but if you’re planning to browse the web alot from your PMP then the iPod’s larger screen and better browser may be important.
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If you’re still on the fence: grab your favorite earphones, head down to a Best Buy and ask to plug them into a Zune then an iPod and see which one sounds better to you, and which interface makes you smile more. Then you’ll know which is right for you.
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Hands down, Apple’s app store wins by a mile. It’s a huge selection of all sorts of apps vs a rather sad selection of a handful for Zune. Microsoft has plans, especially in the realm of games, but I’m not sure I’d want to bet on the future if this aspect is important to you. The iPod is a much better choice in that case.
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