Changing the Cost Discussion

August 9, 2012

Discussions with client representatives about hourly rates can be frustrating at times. The belief that an hour of any person’s (or supplier’s) time is exactly the same as any other is like comparing software engineering services to purchasing a case of creamed corn. We could be relatively happy if the focus could just be changed to:

Real Hourly Cost  =  Total Work Done/Hours to Do It

This too belies the truth of the matter: it isn’t that easy. Even in cases where the work is closest to a commodity, like simple programming to update text on 1000 screens, there is more to the cost than just the work being done. We have to consider continuous improvement, efficiency, partnership overhead and what I call “Confidence”, an intangible.

Below is a basic Total Value Questionnaire that elevates the cost/value discussion to a higher level:

Continuous Improvement  (1-5, disagree/agree)

Product Innovations: The partner actively looks for ways to improve the product.
Process Improvements: Working with the partner makes your team and organization better

Inefficiency (1-5, high/low)

Defect/rework: Level of defects and resulting rework in delivered products.
Staff turnover: Level of unexpected/unplanned staff turnover.

Overhead Costs (1-5, low/high)

Management overhead: Level of unnecessary management participation for this vendor.
Communications/Translation: Level of extra explanation or translation of directions and scope.
Quality Control: Level of extra check or testing for this vendor.
Project Management: Partner requires project management and direction from us.
Facilities/Equipment: Partner requires facilities and non-project specific equipment.
Training: Level of unexpected training and “handholding.”

Confidence (1-5, worst/best)

Meeting Schedule: Partner can meet schedule.
Meeting Budget: Partner can meet budget.
Reducing Surprises: Partner communicates changes well in advance and there aren’t a lot of surprises.
Non-disruptive: Working with the partner fits well with your company’s culture and operating procedures.

The view this questionnaire represents could be useful for encouraging enlightened discussion about hourly rates. The larger view is that getting the product right, beating a competitor to market or responding quickly to market changes can trump the cost of development. The opportunity should outweigh the cost. If it does not, don’t start the project. Focus more on capturing the opportunity, not just on what it costs to do so.