Calculating the Total Cost of Outsourcing: A Simple Tool

CIO magazine published an interesting chart that META Group helped developed back in 2002 and then showed in a slide during its opening session for the 2004 “Mapping the Future of Outsourcing” conference. “Do the Math” allows you to enter best case and worst case calculations for various management aspects of an offshore outsourcing contract to figure out the total cost of offshoring. In the example given by META, the original contract cost was $16.2 million, which CIO says was the average value of offshore contracts for the 101 companies it surveyed (but which sounds quite high to me). Then, by using set percentages, the worksheet figured out the best case/worst case expenses for vendor selection, transitioning the work, layoffs and retention, lost productivity and cultural issues, improving development processes and managing the contract. The best case added up to $18.7 million and the worst case to $25.4 million.

One problem I have with the functionality in the CIO utility is that it should simply allow the user to enter the total of the original contract and take over the calculations from there — for a general sense of the high and low number. As it is, you're supposed to fill in each number. It simply acts as an adding machine.

Also, although the chart is intended for offshore engagements, I see no reason you couldn't use it for calculating the total cost of domestic projects as well.