According to a report by Deloitte’s global outsourcing study 2020, majority of the companies opt to outsource their IT services to cut down costs. Outsourcing poses a huge advantage for businesses who wish to decrease overhead expenses or want to stop spending unnecessarily. As compared to outsourcing, in-house IT services is costly as it involves investment in hiring and software purchase (if required), which is absent for outsource services.
IT outsourcing isn’t new for companies, its a promising alternative for IT sector, and is a widely used option. Outsourcing requires a detailed understanding of an IT project, its timeline, budget, team, and more; which in turn helps analysts in performing cost benefit analysis for the same.
IT Project Outsourcing: An Overview
IT project outsourcing is a plausible solution for small or mid-sized companies, who don’t have the budget to hire a team. These companies can easily save their expenses on cost-of-hire, training, space, and much more.
Apart from saving costs, IT outsourcing is a preferred alternative because it opens up an array of options of who will be a part of IT project development; increasing talent pool access.
Additionally, when a company outsources a project, it collaborates with people that are specialized in delivering quality work with great efficiency. Thereby, decreasing the turnaround time for every outsourced project.
Furthermore, companies are least assured about innovation and fresh perspectives that experienced individuals bring with them, which gives a competitive edge over others. Companies have the leverage to pick any type of IT outsourcing model, starting with nearshore, offshore, or even opt of managed IT services, as per suitability.
Now, why to perform cost benefits analysis of IT project outsourcing? Its because it helps to scrutinize whether a project is feasible or not. Whether an IT project holds enough weightage to give revenues, sales, cut down costs, and deliver satisfactory product or not.
Cost benefit analysis is a sensible way in which businesses can take decisions. It offers basis of logic, rather than just instinct, to go ahead with an IT project outsourcing or not.
Why to Perform Cost Benefit Analysis of IT Project Outsourcing?
1. For Efficiency
Outsourcing increases efficiency of an IT project by partnering with expert and experienced software developers. Access to latest hardware, software, and processes bolsters productivity of an entire team.
Collaboration with experienced developers is a benefit, that helps to cut down costs in the CBA (Cost Benefit Analysis). Experts help to reduce liabilities and non-core tasks, thereby increasing assets in return.
Further, expenses go up with time, hence task delegation assures in-time delivery with no added expenses; boosting efficiency and productivity.
2. To Save on Technology and Infrastructure
Infrastructure or space requires investment, which also includes other amenities such as cafeteria, cubicles, enough space to equip all staff, etc. With IT outsourcing this investment is minimized to what is needed for a selected few heads of a company.
Further, an outsourced vendor has all the equipment, infrastructure, employees, and technology to run a project, along with licenses and familiarity with regulations. Thereby, helping companies to save a major chunk of money, which further adds on the the CBA list of benefits.
3. Quality Services
Outsourcing vendors put time and effort to get the job done right, which is superior in quality and low in cost, thus adding to the benefit of CBA. Quality services and products offered by vendors ensures timely delivery, bug-free software solution, and enhances customer satisfaction rate as well.
Outsourcing the project to a reliable IT recruiting and staffing partner also brings the added advantage of niche expertise which is difficult to replicate if you are building your own team from the scratch. Since the team already has experience working together on projects, they work together like a well oiled machine.
Quality software brings in more sales and revenues, hence ensure to check whether an IT project has the potential to be of high quality (for higher benefits in CBA).
4. Time Zone Benefit
Output deliveries are impossible to match if tasks are given out post working hours, or by the end of a shift. The team is done for the day and are out enjoying time out of office.
However, outsourcing to another country with a different time zone ensures of an output delivery. The day-night difference saves companies time, and eventually costs. Tasks get done without burdening the in-house team with overtime.
Steps For Cost Benefit Analysis of IT Project Outsourcing
1. Clearly Define IT Projects to be Outsourced
Its vital that the services or projects being outsourced are clearly defined, and workflows are understood by an outsourced team. Clarity on all steps helps to produce accurate cost analysis, and assures that all the services offered by an outsourced vendor matches with the outcome expectations.
Furthermore, consider evaluating resources, timeline, personnel required, constraints, and techniques needed for IT project outsourcing. Along with this, ensure that a business organization is well equipped to perform cost benefit analysis of IT project outsourcing.
While defining IT project to be outsourced, notify stakeholders, to gain their inputs. Its wise to include those who’ll be most impacted by the outcome of CBO in the process.
2. Calculate In-House Costs
The next step if to start looking at the numbers. Determine all in-house costs that can be averted by IT project outsourcing.
These include –
a. Hidden Expenses: These include crisis (Covid-19 pandemic), organizational changes, legal formalities, third-party risks, employee disengagement, etc.
b. Direct Costs: These consists of subscription fees on search platforms, training, payrolls, etc.
c. Indirect Costs: Team expansion, project delays, resources needed, etc.
Decision-making based on a cost benefit analysis should be focused on avoidable future costs, which for this step are expenses that can be eliminated by outsourcing a project. Prepare a list of all the in-house costs that can be averted if an IT project is outsourced.
3. Determine Total Cost of Outsourcing
With all in-house costs calculated, its time to determine outsourcing expenses. Start with the biding price of outsourced vendor. Company may include expenses for administering outsourcing engagement, such as evaluating and monitoring providers’ performance. A project manager or an analyst must consider all outsourcing costs, without underestimating or overestimating benefits.
Revenue opportunities can be calculated in outsourcing costs, which consists of –
a. Intangible benefits such as high customer satisfaction due to faster delivery or enhanced product features.
b. High sales and revenue from new IT product or increased production rate.
c. Competitive edge and market share gain.
4. Perform Analysis to Determine the Savings
With all the above data, its time to perform analysis. According to the timeframe of an IT project, this process is as simple as subtracting one from another.
Calculate total costs and benefits, and then compare both values. If benefits are higher than costs, then a project offers net benefit to a business. At this stage, consider payback time, how long will it take to reach the break even point (point in time where benefits have repaid costs).
Limitations of Cost Benefit Analysis
Cost benefit analysis of IT project outsourcing is best suited for smaller to mid-sized projects that don’t take too long to finish. For these projects, an analysis helps businesses to optimize cost benefit ratio for projects.
Large projects which take time can be problematic for CBA. Outside aspects such as interest rates, inflation, natural calamity, or crisis impact the accuracy of cost benefit ratio. In this case, calculating the net present value, discount rates, time value of money, and other metrics create complications for projects.
Other methods that complement cost benefit analysis for larger projects are NPV (Net Present Value) and IRR (Internal Rate of Return) , however cost benefit analysis helps to determine whether to pursue IT project outsourcing or not (or any other project).
Choosing an outsource service provider is a long-term commitment for every business, which brings with it numerous benefits in return; starting with minimal expenses on project development, strong knowledge base, and expert team members. An outsource service provider is an extension of a team that’s working towards achieving a common goal.
Considering IT project outsourcing for your company? Get in touch with Arkenea – experts in the field of software development, and we will provide you with an IT outsourcing solution that fits your needs.