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F E A T U R E

Don't Miss the B2C Boat

December 10, 2001
By Lori MacVittie

Before You Outsource, Do the Math


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If you ask any staff developer about the salary of a consultant, he or she will tell you it's "a lot more than I'm making!" That perception, while perhaps once correct, is not entirely accurate today. Consultants, according to leading salary surveys, do still earn more, but in the past year the difference between staff and consultant pay has narrowed considerably. People naturally assume that an outsourced project -- on a simple per-hour basis -- will be more expensive than doing a project in-house. But the comparison is not quite that simple.

The first-year costs of adding a staff developer, including salary, recruiting fees, benefits and overhead, are estimated at $90,000, according to recent salary surveys conducted by us and several online employment sites. Taking into account weekends, holidays, vacation, sick time and training time, there are about 195 real work days. With a 40-hour workweek, this is equivalent to a cost of $58 per hour.

What does it cost per hour to outsource? The typical developer rate is about $72 per hour -- that's down from an average of $90 per hour in 1996. The difference between the internal resource and the outsource resource is $14 per hour the first year.

You must also analyze the relative efficiency of outsourcing versus using internal developers. With an outsource partner, you do not pay for the time required to staff the project. A typical project requiring four programmers plus a project leader might take two to three months to staff and come up to speed on the technologies. A project that might take the internal team 12 months to develop typically takes about 10 months for the outsourced team to develop.

Based on that scenario, a project requiring four programmers and a project leader for 12 months would accrue the costs as shown in "Custom Vs. Outsourced Project," below.

For the custom-development scenario, you must count ramp-up time plus the additional development time, for a development cycle time of 14.5 months. The outsourced solution requires less development time and no ramp-up time, because the developers are already familiar with the technology.

Based on these calculations, the internal development cost will be less than the outsourced approach by $27,200. That's not enough to warrant outsourcing, but what about the difference of 4.5 months? The outsourced approach will get your B2C site up and running 4.5 months sooner than internal development would. What is that worth?

Let's assume that a B2C site, once deployed, will generate $50,000 a month in revenue.

Monthly sales:	$50,000
Less cost of goods at 10%	-$5,000
Less marketing cost at 33%	-$16,500
Net contribution per month	$28,500

If you use an outsourcing partner to bring the site live 4.5 months sooner than a new internal development team would, the impact on the company's bottom line would be:

Additional net revenue contribution (4.5 months)	$128,500
Less additional cost for outsourcing	-$27,500
Net gain	$101,000

You'll need to plug in the numbers for your own project, but clearly for a site that expects a high monthly revenue, the numbers can be very convincing.