We’ve talked a lot about outsourcing on our blog and have shown some of the things to take into consideration as an entrepreneur trying to decide whether or not to outsource.
However, something we talked about in one of our previous posts that I would like to expand on in this article is how to go about being confident in your decision to outsource or augment your technical staff as a founder.
Finance industry folks call what I’m about to show you in this article “cost-benefit analysis”.
What it is, is a framework that allows you as an entrepreneur to evaluate critical information when making huge organizational decisions such as outsourcing.
During cost-benefit analysis, you mainly compare the estimated costs and benefits associated with a potential decision to determine whether it makes sense from a business perspective.
Since there are huge economic benefits to running these kinds of analyses before taking on any organizational risk, this article’s goal is to teach you how to adopt and adapt this process of analyzing cost vs benefit to the software industry as a startup founder starting with outlining expectations.
The preliminary step to analyzing whether a decision is worth taking by comparing and contrasting the cost vs benefit of taking said decision is to first define what your ideal desired outcome should look like.
That is, understand what you need to accomplish to consider the outcome of your outsourcing decision a success.
To properly do a cost-benefit analysis, you must identify the goals and objectives you’re trying to achieve.
This is the crucial pre-step that serves as the framework on which you evaluate the benefits of making the decision.
Identify Potential Costs and Benefits
The next step of your cost-benefit analysis journey is to identify potential costs and benefits.
As a start-up founder, for you to not erroneously believe that outsourcing would impact operations in a way that it couldn’t possibly have, you’ll need to demand an exhaustive list of potential costs and benefits of working with your chosen agency.
Many IT outsourcing companies would typically draw up a list of costs and benefits of their service in a contract that you can then take a sufficient amount of time to decide on when you reach out to them for consultation.
You can make use of the projected cost from this contract as part of something called the direct cost associated with your decision to outsource.
Direct costs include expenses directly related to outsourcing. Agency cost is an example of direct costs.
But there are additional costs you should consider accounting for when doing a cost-benefit analysis that includes indirect costs, intangible costs, and opportunity costs.
Nevertheless, after getting a clear picture of the projected benefits and costs of outsourcing using quotes from outsourcing agencies, you then move to the next step in this process which is to compare the cost to benefit.
Compare Costs Vis-a-vis Potential Benefits
This is the main step of the entire cost-benefit analysis process.
The only way to be sure that your decision to outsource would be worthwhile after you’ve compiled an exhaustive list of benefits and costs is by assigning a dollar value to each benefit and cost in a way that:
- Corresponds to how important it is to you (benefits)
- Corresponds to how ridiculous it sounds to you (costs)
In other words, attach appropriate value to the benefit that’s important to you and do the same for costs that could make outsourcing less worthwhile then compare the sum of both.
This paragraph from a Harvard Business Review article summarized this step better:
Once every cost and benefit has a dollar amount next to it, you can tally up each list and compare the two.
If total benefits outnumber total costs, then there is a business case for you to proceed with the project or decision. If total costs outnumber total benefits, then you may want to reconsider the proposal.
That said, once you’ve been able to determine the viability of your decision to outsource as a founder, you need to take a deeper look at the goal you outlined for your project from step one and ask if the potential benefits of the outsourcing agency guarantee meeting those goals.
In most cases where the benefits of outsourcing outweigh the cost, it will.
However, In cases where it doesn’t, an alternative decision should be considered.
In conclusion, these are the steps involved in the cost-benefit analysis process that can help you become confident in any of your decision-making for your company including outsourcing.
If you find this article helpful, then you’ll like our Founder’s Guide to Software Outsourcing.
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