Last updated on June 16th, 2016 at 12:59 pm
Do software consultants come with value-added services? The dilemma of whether to hire external software consultants, or to make internal hires, is one of the greatest challenges companies experience when it’s time to migrate processes, offer new products or services, or to innovate an entire sector.
If a company is evaluating the use of external consultants, they must consider the relative value-generating capacity of a staff member (a senior developer in Toronto has salary costs of $90K per year plus employment costs) over the more highly-priced consultant. To examine the reasons one might choose this path, we have to examine some of the soft factors. Soft factors don’t appear on the balance sheet because they aren’t traditionally thought of as assets, and are hard to quantify, but ironically they can make more of a difference than the things that are counted. They eventually do affect future revenue streams, but it is difficult to show causation. Let’s make an attempt at describing exactly what the causation might be and what that might be worth in dollars and cents.
A software developer working at an external software consultancy can potentially be more productive than an equivalent developer working in-house for the following reasons:
- Software consulting vendors run multiple projects at once. Even if a team member is assigned to another project within the vendor shop, knowledge of the client’s business remains within the vendor company, and can be accessed for some time to come. This allows institutional business and technology knowledge to be better preserved. Estimated value: 2% or $1.50/hr
- Software consulting managers were often themselves once software developers, and as such are more able to motivate the developers on their payroll, relative to managers at companies in other industries, since they better understand their needs. Higher motivation equates to higher productivity. Estimated value: 5% or $3.75/hr.
- Birds of a feather flock together. Creative, productive people like to have access to other people like them. They ask questions, get perspectives, share their work, and are better informed, appreciated, and understood. It is easier to create a context of shared experience the bigger the set of like-minded people in an organization. The proportion of developers at a consultancy is much higher than that of an internal team in another industry, all other things being equal. Estimated value: 5% or $3.75/hr.
- Software developers at consulting companies can avoid stagnation better than those at companies in other industries, by switching from project to project and having a wide exposure to many different platforms. This lowers the attrition rate by allowing an employee to manage their development within the walls of one company for a longer period of time. It also allows them to grow more in experience more quickly by being exposed to multiple business domains and technology stacks in a shorter period of time. This makes them both more motivated and more productive. Estimated value: 10% or $7.50/hr.
- Software consultancies have a culture of software development, which software developers are attracted to. This lowers the recruitment costs, increases the ability of the company to attract top talent, and tempers the attrition rate relative to developers at a company for which software development is not itself the primary business goal. Estimated value: 10% or $7.50/hr.
- Given the hourly billing model, software consultants must generally account for every hour that they invoice. This usually means that at some level, they are responsible for tracking all of the effort they expend on a weekly basis, and explaining any variances relative to plan. It is well-accepted fact that when these things are measured, people are more likely to be more productive. Most companies do not require internal staffers to track time, in contrast with consulting companies. Estimated value: 10% or $7.50/hr.
- Software consulting vendors are able to make higher quality hires more of the time relative to companies in other industries, due to their primary focus on hiring and talent development. The argument that these developers will be 25% more productive should not be that controversial. Estimated value: 25% or $18.75/hr.
The sum of all of these soft factors gives us an increase in the relative value of the outsourcing by 67%, or $50/hr, bringing the “value” per billable hour to $125/hr. This analysis hasn’t yet considered the cost to the business of managing its own internal software team, which notably includes the stress and time related to managing the team, and the distraction from the company’s main strategic considerations, which could easily account for an additional cost premium of 30- 40%. All of a sudden the value derived per billable hour could jump substantially to $150/hr.
