Because of amazing technology, your world has gotten smaller and outsourcing seems to be the norm. As a project manager (PM), when you start to put together your resource and personnel plan, you have the opportunity to run the Make or Buy Analysis. This comparison will help you compare the costs of producing components of your project in house with the talent and infrastructure you have or to outsource those same components. The process can help you determine which option will be most cost effective.
The process hinges on your ability to accurately calculate the estimate of what the cost of producing (let’s go back to econ 101) your widget. Your widget may be a process, a product, code, or any number of things. If you are not an expert at estimating the cost of what would be required, make sure you have someone on your project planning team who is. It is important when making this decision to work with numbers on both sides of the equation that are as accurate as possible. When working with widgets that need updates or maintenance, you must also determine the cost of upkeep. You should also have a ballpark timeline for completion.
You must also get a accurate estimate of what it will cost of outsourcing your widget. There are two ways to get this number. First, you could look back at completed projects that had a similar widget that was outsourced and reference the cost that project incurred. The second way would be to contact a couple of potential vendors, share the requirements for that component with them, and ask them to come up with a rough estimate of what both production and upkeep will cost. Also ask them to provide you with an estimate of how long they will take to complete the package. When I get three estimates, I will use the median as part of my calculations.
To compare costs, you will be finding the break-even point where costs are equal between keeping production in-house and outsourcing. Here is the formula:
Upfront Make Cost + (Maintenance Cost * Time) = Upfront Buy Cost + (Maintenance Cost * Time)
If you know the lifecycle of your product — let’s say it’s two years in this example — then you should be able to easily make your decision based on cost. Let’s say I am an IT Project Manager and the Upfront Make Cost of my new lead generation site will be $150,000.00 and the monthly updates and maintenance will be $10,000.00. The cost to have the site built by a trusted contractor will be $75,000.00 and the monthly updates and maintenance will be $15,000.00. I will use 24 for the time input because my maintenance costs are monthly. The equation will look like this:
150,000 + (10,000 * 24) = 75,000 + (15,000*24)
$390,000 < $435,000
In this case, it would be more cost effective to produce my website in-house than to outsource it to a vendor. What this does not take into account is the timelines that will be required to build my site. My in-house resources may not be available for six more months while if I outsource it, it will be done in six months. At that point you will need to factor in opportunity costs — the amount of revenue you would collect over those six months — to determine which option you should select.
While the decision of how to proceed may not be yours alone, as the PM you need to give your stakeholders the best information possible. A Make or Buy Analysis is not always completely based on purely financial data. Many factors can contribute to your final decision. However you choose to proceed, choose wisely because the success of your project may depend on it.