Small Business Organizations are driven by strong entrepreneurs. The structure of these organizations are very flat and generally they have an the owner who does the sales, client co-ordination and manages a team of 5-7 technical resources mainly developers and designers. The owners are very enterprising people but generally lack management experience. This is specially true for start-up IT services organizations for whom offshoring is of even greater benefit.
The dedicated hiring service that we offer appeals to them as it promises to improve the profits immediately by 30% – 70%. The typical logic works like this :
Annual Cost of In-House Designer: $25, 000 (Average low salary in US as per Salary.com)
Annual Cost of Offshore Designer: $17, 400
Savings: $7, 600 or 30%
Thats alright! But soon they complain that they have to spend too much time in interacting with the offshore team. A typical expectation is that they will send off the project description (Not specification!) and get the expected output. As trivial as this may seem but it a harsh reality that we have live with.
The next stage of this complain is that they begin saying that the project is not profitable enough for them. Although the whole loss of profit is attributed to the offshore team, there is a critical missing point over here:
These organizations don’t have a project manager at their end. Here is what a project manager supposed to do for you:
The project manager is responsible for the coordination and completion of projects. Oversees all aspects of projects. Sets deadlines, assigns responsibilities, and monitors and summarizes progress of project. Prepares reports for upper management regarding status of project. Familiar with a variety of the field’s concepts, practices, and procedures. Relies on limited experience and judgment to plan and accomplish goals. Performs a variety of tasks. Leads and directs the work of others.
Spending too much time with the offshore team
A typical cost of hiring a local project manager in the US is $35, 000 – $100, 000. If you are not employing the services of project manager then this is your opportunity cost i.e. by doing the job of a project manager you are incurring this cost but since you are not paying this out of your pocket, you don’t seem to realize it. If you are spending all your time on project management activities then you are paying yourself money which is equivalent to the salary of a project manager. You realize this money as the sum of profits that you accumulate over the year for all the projects.
Thus, either you have to stop complaining about this or you need to appoint a project manager who will do this for you while you can concentrate on client facing activities and generating sales.
Low Profitability of Projects
In a typical contract, the cost of project management is about 15% – 50% depending on the size and complexity of the job. Thus, you a making a big mistake by not factoring this in while you are quoting your clients. Apart from this there are several hidden costs that lower the profitability rate.
Thus in order to achieve the maximum benefit out of dedicated hiring services, you need to increase your billing rate by atleast 15% or at worse spread the cost of project manager across average number of projects. Thus, if you are planning to accept 50 contracts an year at an average cost of $2000 each, you can hire a project manager at lets say, $36, 000 and then increase the average contract value to $2720.
There are not many companies around that can either explain you this or suggest a way out. I can, because over the years we have accumulated great deal of experience in working with small IT service organizations.