A managed services or fixed-fee outsourcing model for application development and maintenance can ultimately yield major savings for IT organizations that embrace it.
A well-planned managed service delivery contract for application maintenance can yield a 25 to 45 percent cost reduction over staff augmentation in the first year alone, according Steven Kirz, managing director with outsourcing consultancy Pace Harmon, with many organizations seeing 50 to 75 percent savings after five years. Likewise, when IT organizations move from a time-and-materials approach to fixed-fee deals for application development, they can cut costs in half, according to Kirz.
Many large companies, however, continue to work with their outsourcing providers in man-hours mode. "The reason most development projects aren't fixed fee is that the client hasn't spent enough time or effort figuring out what they actually want built," says Kirz. In addition, staff augmentation may make more sense for IT shops that are pursuing agile development processes. When it comes to maintaining apps, some companies may simply be used to the status quo or lack the data required for providers to accurately estimate the effort required to maintain their systems. A managed services approach may not be a good fit for unclear or unstable environments, such as when a new application is released into production, Kirz says.
But while a staff augmentation approach comes at a premium, there are opportunities to control the costs of this model for the many IT organizations that still use it. IT leaders can reduce their IT outsourcing rates by proactively managing the four factors that unduly drive up these costs, says Kirz.
When adopting a staff augmentation model, standardizing roles is critical. "We've seen different companies and even different parts of the same IT organizations refer to the same roles with varying nomenclature," Kirz says. "Standardizing roles allows companies to establish a baseline and benchmark these roles, as well as ensure that rates being applied to roles are the same across the board."
In order to establish accurate market rates for these IT services, outsourcing customers first need to insure that the IT organization agrees on not only the nomenclature for application development and maintenance roles (e.g. developer, technical architect), but also their corresponding responsibilities, capabilities, qualifications, and required certifications.
IT professionals with more experience naturally command higher rates. Kirz advises IT outsourcing customers to establish three to four bands of experience levels for all applicable roles in order to avoid overpaying for overqualified resources. "Because roles typically require a separate set of responsibilities, capabilities, and qualifications for each band of experience, organizations can expect approximately 100 different combinations of role descriptions."
3. Technology expertise
Each role has required specific skills, knowledge, and training requirements. When technology expertise is widely available across the market, standard rate levels apply while hard-to-find experts command premium market rates. "To ensure that a company pays the right price for a specific role within a band of experience, it needs to be sure that rates also incorporate the continuum of technology expertise required, [such as] Java, SAP, or mainframe [skills]," Kirz says.
Man-hour rates for IT outsourcing are much like real estate prices. It's all about location. The most dramatic difference in how much you pay for a resource is based on geography, which many companies still define generically as either onshore or offshore. "However, service providers have delivery centers worldwide and resources associated with one account are often dispersed," says Kirz. "As a result, companies should examine rates for all locations delivering services for their project." Consider whether staff are located in India, Argentina, or the Philippines and whether they are tier-one, -two, or three cities. Rates per hour can vary by as much as 15 to 20 percent within a country, says Kirz. "Major service providers are also developing large delivery centers throughout the rural U.S. Like their tier-two counterparts in India, using these U.S. centers can mean paying a premium for those customers using generic onshore/offshore rates."
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