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Four critical factors to consider before deciding whether to outsource a project.
Lauren Gibbons Paul, CFO Magazine
August 1, 2001
Chip Gliedman, research fellow at Giga Information Group, uses a four-pronged analysis when customers ask him for advice on whether or not they should outsource a particular project.
He begins by addressing four distinct categories — cost, benefit, flexibility and risk — and then wades into each one for a closer look. While the method in its entirety is too detailed to present here, a summary appears below, and the accompanying example provides some further insight.
For the first category, you'll need to create two boxes — one listing all relevant expenses for the project if it were to be handled in- house, and one estimating the costs if you were to outsource it. Here, place all projected costs relating to the project — hardware, software, personnel, consulting, and anything else you can think of, pro-rated where appropriate.
Gliedman recommends breaking out these separate cost categories and doing estimates for year one, year two, year three, and so on, depending on the estimated length of the contract. Then calculate total cost per year and, finally, the total cost for the whole project.
The second category itemizes the primary (or direct) benefits that you can expect from the outsourcing arrangement (things like direct cost savings, faster cycle times, higher system availability, etc.). For one of Gliedman's clients, the direct benefits of outsourcing included the ability to charge more for their product because of enhanced competitive position.
Assign a monetary value to each of these benefits. Items such as cost savings and reduced need for labor should be easy to quantify; things like faster cycle times will be more difficult, and Gliedman readily admits that some intelligent guesswork will come into play here, but says the difficulty in quantifying certain benefits does not render the exercise meaningless.
Write down all of the downstream (or indirect) benefits you expect from outsourcing. These are not direct benefits like cost savings, but rather, Gliedman says, options that are now available to you since you entered the outsourcing deal.
For example, if you tap a reliable ISP to host your Web site, you may gain the ability to run a TV ad on Super Bowl Sunday, or engage in some other marketing effort that may drive substantial traffic to the sight, and know your system won't crash if it gets flooded with traffic.
As another example, outsourcing may give you the option to redeploy internal employees to other projects. "This is all about the options you get as a result of outsourcing," says Gliedman. Put a dollar value on the options you would have if you decided to outsource. "We spend a lot of time on this category," says Gliedman, "because most people don't think of this at first."
The fourth category involves placing a monetary value on the certainty of your other estimates. "We identify the key risk factors, quantify their impact on the cost/benefit estimates, and then generate risk- adjusted costs and benefits," says Gliedman.
Key risk factors include what would happen if the outsourcer were to go out of business — hardly a far-fetched idea given the predictions of an impending shake-out in the ASP space — or the effects of employee resistance to adopting new business processes. Gliedman puts in a plug for consulting help here, arguing that, "We can create a distribution curve that says, 'If you were to do 100 projects like this, what would the range of outcomes be — high, low and mean?'" The idea is to try to determine how realistic your preceding estimates are.
It can be tricky assigning numbers to all of these things, but Gliedman says it can be done. What's more, it helps frame the outsourcing debate in a new way. "Once you get people arguing about the numbers, you remove the emotion that people get caught up in. Is outsourcing good or bad? The answer is, it depends on the numbers."