Engagement Cost Components
Project Team Cost
The rate differential for IT services in the US and those of outsourcing to other countries has certainly been the most appealing argument for this outsourcing. Nearshore/Offshore man hour rates can represent only a fraction of the costs at hiring countries, primarily US, UK, Japan and Australia. Project Team Costs which is calculated by multiplying the Man/Hour rate times the project effort, has a very important specific weight in the cost evaluation of a solution, but is by no means the only aspect that should be considered. TCE brings Project Team costs into a context where its relative weight will be determined in conjunction with all the aspects that have an effect on the off- shore engagement overall.
Project Team Costs = (On-Site Man/Hours * On-Site Rate) + (Outsourced Man/Hours * Nearshore/Offshore Rate)
Costs of Vendor’s Attrition
Every time a resource from the vendor resigns and leaves an engagement, there is a burden to the project, caused by loss of productivity and a cost of knowledge transfer to the replacement. This costs need to be considered as part of the TCE. To calculate these costs, two input values are needed; the annual attrition rate in percentage and the average time to have a productive replacement, with these values, the following formula can be used:
Costs of Outsourced Attrition = Attrition Rate (%) * Number of Resources * Time to be productive * Rate
Project Overhead
Outsourced engagements tend to require people that is in charge of supervision and project oversight, minimizing the effects of distance and time zone differences inherent to an outsourced model. It’s a common practice of outsourced vendors to have redundant project management roles, one at the client’s site and the other nearshore/offshore, and in some cases clients have to allocate internal personnel. Thus increasing the cost in order to assure quality, on time delivery and avoid communication flaws. This is considered as a Project Overhead and should be considered within the TCE by using the following formula:
Project Overhead = (On-Site Man/Hours * On-Site Rate)+(Outsourced Man/Hours * Nearshore/Offshore Rate)
Allocation Costs at Client Site
This is the amount charged back from the organization to the project or IT area per person working at the client's site. Generally includes power consumption, office supplies, office space, etc. It is obtained by using the following formula:
Allocation Costs = On-Site Resources* Monthly Facility Use Cost per Resource* Number of Months