The Project Notebook

Outsourcing Sounds Good — But What’s The Cost?

By: Susan Peterson, M.B.A., PMP Copyright 2008, Susan Peterson, All Rights Reserved

Continuing the column series theme of outsourcing, let’s assume that you’ve decided that your project has some definite needs for expertise and/or skills that are not found or that are not readily available inside your organization. As mentioned in last month’s column, the base cost of an activity can be an illusive factor to accurately calculate. There are a number of considerations to assess when determining the “true” cost of performing work. In addition to the base cost, organizations that perform outsourced work will include at a minimum a profit margin and an overhead factor. A project manager who is considering outsourcing needs to be prepared with realistic assessments in advance of contractor negotiations. In this month’s column we cut through some of the “smoke and mirrors” that seem to accompany so many cost estimates and uncover the underlying factors that are major influences of project work costs. Think of the following narrative as a bridge etween accounting textbooks and grim reality.

Do we “have a clue” what it costs us to do this work in house?
Even when using the most sophisticated project accounting systems, it may be difficult to isolate typical costs for specific types of work. A good starting point is to define and document the tasks, the performance measures, and the “allowable” variances. Another critical component of this exercise is to assess areas of risk and to determine which risk areas will be transferred or shared as a part of an outsourcing relationship. Once all of this information has been compiled, an estimate of in-house hours and costs can be determined. Typically, this estimate will be higher than project sponsors want to acknowledge. A project manager needs to hold firm amidst pressure to eliminate tasks in order to “cut costs”. Providing an overly optimistic estimate of work required to an outsourcing organization invariably leads to additional charges and schedule extensions hen the actual hours overrun the false estimate.

What don’t we know?
There are those situations when organizations do not know all of the factors about the work that needs to be performed because the work has never been done in-house. Particularly if the work involves new or unproven technology, custom equipment, or specialized skills, project managers may feel unqualified to estimate the actual level of effort that is involved. In these cases some upfront research is necessary. While a project manager may not uncover all of the aspects related to a particular activity, he/she should obtain enough information to avoid being “blown away” by potential contractors that may inflate the effort, complexity, and investment necessary to perform specific work. It is also necessary that the project manager have a “healthy respect” for the actual challenges that are inherent in unfamiliar work.

Let’s “get real” about our expectations
One of the more prevalent areas of misunderstanding between organizations and contractors concerns expectations. While project managers may believe that specifications and requirements have fully documented every aspect of each activity and deliverable, there are unwritten expectations that are assumed. Often these expectations are based on the work culture of the organization. The bottom line about expectations is “don’t ake anything for granted”. Some areas that the organization needs to consider include the following:

• Project management — What project management practices are used in-house? Is the project manager expected to oversee the contractor’s personnel, to be responsible for quality of outsourced deliverables, etc?
• Service levels — How accessible do contractor management and personnel need to be (especially important in global outsourcing)? What turnaround is expected on interim decisions? Are a number of decisions made “on the fly”?
• Deadlines — What does “completed” really mean for each deliverable?
• Unanticipated problems — What degree of flexibility or agility is considered the “norm” in-house, meaning are problems “worked around”, solved, or ignored?

Readers will note that no traditional accounting principles were detailed in this discussion of project cost considerations. While there are numerous publications that address specific quantitative approaches, it is the realistic definition of work, risk, and expectations that must be determined before any cost numbers can be ffectively applied.

Susan Peterson, M.B.A., PMP, is a consultant who manages diverse programs and projects in both the private and public sectors for individual organizations and consortia. She also conducts enterprise assessments of project portfolio management practices. An overview of her program and project specialties is available at http://www.pmi-sd.org/Consultants. She teaches the Project Management Simulation capstone course in the University of California, San Diego, Project Management certificate program and is a member of the curriculum committee. She can be contacted at susanada@aol.com.

PMP ® Challenge Question – 4/1

On March 15th, the challenge was:

You have finished project management training and desire to earn your PMP® credential. What are some constructive ways you can go about applying your new knowledge and obtaining your first project management assignment at your company?

Certainly one of your first steps might be a discussion with your manager. Let him/her know about your accomplishment and how you might be able to apply your knowledge in a work assignment. Your HR manager is another possible resource. Another constructive tactic might be to have a discussion with existing project managers in the company and ask if you can be considered for a role on a project team. If you have any additional ideas to share, please leave a comment or drop me a line at sdcapmp@aol.com.

Now for the new challenge. Here are some acronyms found in the procurement knowledge area. What does each stand for? Provide a brief sentence or two about what each is.

CR
CPFF
FPFT
CPRC

Good luck with the challenge!

“Yours, Mine, or Ours”: Is Outsourcing the Answer?

By: Susan Peterson, M.B.A., PMP
Copyright 2008, Susan Peterson, All Rights Reserved

Both private and public service sector organizations face an ongoing challenge to determine whether functions should be performed internally or externally. While much is written about how to make this decision from an organizational strategic perspective, there are few guidelines for the project manager to use during the initiation and planning phases. Too often outsourcing decisions are made on the basis of past practices rather than assessing the current project situation. This month’s column is the first in a multi-part series that addresses project-related considerations regarding whether to outsource, insource, or employ a hybrid approach. The first area of focus covers some considerations of the initial decision.

“How could the core competencies have changed?”
It might appear that an organization’s core competencies are “cast in concrete”. However, in this environment of continual mergers/acquisitions, spinoffs, virtual entities, and other structural impacts, project managers often find that the composition of their teams changes frequently. What an organization once considered a strength, such as specialty engineering design or innovative research capabilities, may drop in priority and thus no longer be supported through effective hiring practices or major budget funding. In determining if appropriate in-house personnel will be available, a project manager needs to perform a scan of other current and proposed projects. What activities are being outsourced for other projects? Does the outsourcing appear to be the result of personnel shortages due to short-term allocation issues or to an overall lack of skilled personnel? If the constraints are short-term, then outsourcing may be a viable alternative. However, if the constraints are long-standing, a decision needs to be made by the organization to address long-range outsourcing/insourcing strategies.

“Who can keep a secret?”
Access to proprietary, competitive, and/or classified information may be an essential part of conducting a project’s activities. There are a number of legal agreements that are signed by employees and outsourcer organizations alike that stipulate restrictions on the use of knowledge obtained in the course of performing work. Typically, severe penalties are also documented in these agreements. In reality, violation of confidentiality may be difficult and/or costly to prove. Once proprietary information is “on the streets”, punishing the guilty does not mitigate the damage. Therefore, the primary consideration in assessing the risk of divulging company secrets to an outsourcer organization is to research its actual ethical conduct (not website statements) and its personnel practices.

“All of the problems will vanish.”
In so many cases problems do not disappear just because an outsourcer organization is contracted. The root causes of problems need to be analyzed to determine if the issues are internally based. For example, an organization may be experiencing project management problems due to its lack of understanding of effective project practices. In this type of situation an “outside” project manager may be a strong asset not only in leading a specific project but also in providing a positive example of good project management that the organization can emulate in the future. However, if the project management problems arise from constantly shifting priorities among multiple projects that cascade to under funding and inadequate resource allocation, then an “outsider” will also get pulled into the whirlpool of project dysfunction.

“Ours” blends diverse strengths and needs.
Outsourcing is not necessarily an “either or” decision. In some situations a “hybrid” approach may be effective both in the short term and in the long term. This approach involves outsourcing specific team responsibilities that will not be needed after the project is implemented. Internal employees are then assigned to roles on the team that will either continue after implementation or that will transition to other projects. Additional contract workers may be used to augment certain project tasks that need extra people only for the duration of the project. This approach provides the long-term benefit that knowledge learned during the project remains within the organization while addressing the short-term need for specific expertise and additional labor.

By this point in reading this column, readers may note that nothing has been mentioned about costs. Too often illusions about costs drive the outsourcing decision without regard for project needs. Next month’s column will include cost considerations that should be addressed only after the true project needs have been identified.

Susan Peterson, M.B.A., PMP, is a consultant who manages diverse programs and projects in both the private and public sectors for individual organizations and consortia. She also conducts enterprise assessments of project portfolio management practices. An overview of her program and project specialties is available at http://www.pmi-sd.org/Consultants. She teaches the Project Management Simulation capstone course in the University of California, San Diego, Project Management certificate program and is a member of the curriculum committee. She can be contacted at susanada@aol.com.

PMP® Challenge Question – 8/15

Before we look at a new question, let’s take a look at the answer to the 8/1 challenge. In it, I stated that many PMI components have some controls or policies in place to prevent preferential treatment to active volunteers at the expense of the general membership. For larger components with more procurement needs, the challenges include providing fair treatment for all stakeholders, including minorities, veterans, volunteers, and members. What is one significant way to conduct the procurement to provide an unbiased opportunity for everyone?

There are several variations we can build into a procurement process to make it more fair, as well as ensure we pick the best vendor. First, this includes developing a good set of criteria, possibly weighted, which will be used to evaluate the responses. There still may be bias if the evaluators know who applied, so a blind evaluation might be the next step. This means removing references to the bidder from the materials so a completely unbiased evaluation can be completed.

Now here’s a new question: In an organization, who is responsible for quality?

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© 2010-2012 Ray W. Frohnhoefer, MBA, PMP, CCP