The Old Joel on Software Forum: Part 3 (of 5)

Internal Rates

I think most companies use some internal rate to cost developers. Ours just went from $57/hour to $77/hour. This at the same time they are looking at offshoring our development work.

As we have had several layoffs, a 2 year salary freeze and we now pay for 25% of our insurance, we wanted to know where the increase came from. It seems they now include all the IT managers, the IT VPs, the CIO, CTO and a portion of the CEO in the cost per developer.

We think it just makes the offshore decision easier, but has anyone seen it calculated like this? Maybe even the VPs, but the CIO and CEO? Somehow I don't think they will continue to be included in the offshore cost.

We are now sending out resumes and looking for something before the axe falls.

LancasterCA
Monday, December 29, 2003

That's the thing: they should include much of that in the basis cost of outsourcing.

Sounds like someone in your organizations wants to outsource and is preping for it.

Mark Smith
Monday, December 29, 2003

You're reading it right. Someone is stacking the deck because they decided in advance.

MSHack
Monday, December 29, 2003

The answer is easy, and believe me, I know of what I speak:

The same consultants from a Big Four firm that helped calculate the internal rates are also the ones who will help your top management spearhead the outsourcing initiative, and get paid handsomly to do so.

They may or may not outsource to India or China. In most cases they'll likely outsource to another U.S. firm like IBM Global Services, EDS, CSC, or similar outfit.

And guess who the guys from Big Four consulting firm play golf with? You guessed it, the bosses of your replacement.

Believe me, the kickbacks are likely flowing back and forth right now as we speak. Maybe not on the golf course this time of year, but likely on the ski slopes.

Good luck.

Nick
Monday, December 29, 2003

I know of a consultant who sometimes charged a percentage of what he saved a company when he reviewed and improved their current operations.

e.g.:
1) review current inventory/restocking policies, document baseline costs.
2) perform analysis
3) recommend/implement changes
4) At the end of each of Y years out, get paid %X of what his changes saved vs the baseline costs.

I have absolutely no idea what's going on in your situation, but I agree with other posters that it looks like you folks are being setup for a serious schtupping.

Reading this thread made me think about that one guy getting paid a percentage of what his changes saved the company(though in his case it seemed like the savings were more "real" as they focused on industrial process/algorithmic optimization, plus he got his money only once savings actuall happened).

I wonder if some of the "consultants" working with your company's upper management could be trying to not only tilt the analysis falsely toward outsourcing, but also jack up what they can later claim they "saved" the company. The consultants could be able then to get more money for the percentage they "saved" the company, and the senior management of the company could claim they helped save the company that much more money -- make themselves look better on their respective resumes, to the board of directors, etc., and all of it working to artificially inflate numbers they can all quote on the financial reports. That'll make share prices go up, which of course will most directly benefit the company senior management themselves (all the folks with the preferred stock portfolios and all the meaningful options).

Meanwhile, you all will by then be out on your collective asses. Though they might wait a quarter so whatever severance-related "one time charges" they claim on their financial reports can be pushed off to a different reporting period. It won't matter, the end result will be the same. And none of it will have necessarily added a single bit of tangible value to the company, nor reduced any actual net costs for the company -- it'll all be bullshit made-up accounting/lying.

oh. and I doubt that any one of them knows shit about software development, or if they ever did they sold their souls and have forgotten how it works. None of them are going to have to deal with the downstream damage done by the outsourcing. And hell, even if they did, remember -- **they** all have their golden parachutes; they'll get thousands or millions of dollars no matter what happens.

As a final resort, if everything starts looking like it's going to fall apart and that some of them might be visibly tied to their stupid decisions, they'll just sell the company or merge it with or into some other company. The accounting confusion of a merge is probably a wonderful smokescreen for hiding a multitude of sins by corporate officers.

Just had a funny mental image: if you think of a nuclear reactor control panel that has a big red protected handle for "scramming" the pile in the event of a runaway or meltdown... now think of these senior execs having a similar emergency handle someplace, except it's labeled "Emergency Merger!!" or something similar. They've done their deed, outsourced the entire IT deparment, screwed up operations and the product, raked in their dollars, and the company starts falling to pieces, customers start leaving, blame starts making the rounds, share prices start dropping, the board gets antsy and starts talking about accountability, the analysts starting looking more closely.... Finally one day the alarm goes out among the senior execs -- holy shit! emergency! Merge! Merge! Merge! as an exec's hand slams down on the big red handle.

< grr > makes me angry just to think of it.

ok. ok. put down the keyboard..... calm down..... cleansing breath..... in..... out....

a regular here
Monday, December 29, 2003

When in our company we do consultancy work (mostly research, not software development), the quoted rate includes: researcher salary + overhead (for using administration, offices, power, etc) + profit.

In your case, a portion of all salaries of the managers that are involved in your area are considered as overhead. I guess that if you want to compare with the real cost of outsourcing, you should take into account not only the direct costs charged by the outsourcing company, but also the administrative costs (overhead) of running the outsourced work. This would include the salaries of the people coordinating the job as well as a portion of offices and administration used by the outsourced project.

uncronopio
Monday, December 29, 2003

When you do engineering for another company and you are billing them for the time of your engineers, you include the total cost in fixing your rate. So in this case, the cost of the CEO and VPs and the toilets and the water fountains and everyone is included.

But if you are doing a cost analysis to decide whether to fire all your engineers and outsource their jobs, it does not make sense to include the VPs and water fountains unless you are planning on firing the VPs, the CEO, and all the project managers as well. If you do that, who is deciding what product to make?

There are different ways of calculating cost. You can't pick and choose which ones give you the answer you like - you need to pick and choose based on the reality of the situation.

Analyst
Monday, December 29, 2003

1. Make your internal developers look more expensive than they really are.
2. Make the outsourcing firms look cheaper than they really are.
3. ???
4. Profit!

Caveat: the profit is only in the bonuses received by the decision makers, not profit for the company as a whole.

T. Norman
Monday, December 29, 2003

While there may indeed be some ulterior motive here, doesn't it strike anybody else that $57 an hour seems waaay low to begin with, unless you are talking about a very junior development staff or an out-of-the-way geographical location? Assuming a fairly optimistic 2000 *billable* hours per developer each year, that's a total cost per developer of $104,000 annually. With a $60K salary and payroll costs of an additional $20K (taxes, benefits, etc.), that leaves $24K to cover everything else -- office rent and maintenance, electric and phone, hardware and software, travel and training, plus whatever other overhead gets figured in, plus any profit margin.

John C.
Monday, December 29, 2003

==>While there may indeed be some ulterior motive here, doesn't it strike anybody else that $57 an hour seems waaay low to begin with

Depends. One of my clients is at a similarly "low" number, but they charge it for *everyone* involved in the project. Tech writers, testers, assistants, secretaries, marketing folks, sales folks, admin, management -- anyone, and I mean *anyone* gets that same rate assigned. The co-op or intern that's actually making 10 bucks an hour gets billed internally at the "low" number. It's actually probably about just right if you figure it's an average among all employees that touch the project. We as developers are generally higher paid that a lot of folks. When you pull in their salaries/expenses, it tends to pull the average hourly rate down quite a bit.

Sgt. Sausage
Monday, December 29, 2003

"Plus any profit margin" doesn't have relevance when comparing internal costs vs. external. If you make $10 profit after spending $57 to employ a developer, that developer costs you $57, not $67 (all figures in per hour, of course).

If you're comparing *net* costs, that's only when you start talking about profit margins.

T. Norman
Monday, December 29, 2003

If you don't like the costing, or you don't know the basis on which its been calculated, do an alternative one yourself (or as a group).

Make it clear, make it apparent which are fixed and variable overheads. Do it properly and use surgical precision. Include all of the managerial costs as well.

If you come up with something that tells a radically different story (honestly), allow those you consider good leakable sources to see it, your line manager, other managers that may be customers of yours and so on. If it comes down that yes what you do will be oursourced and you're confident of your figures present them to the board with a covering letter asking them to consider your report as germane to the decision.

If, after doing the exercise you can see yourself that it makes financial sense to outsource (leave aside all the non-financial arguments), then you can calculate, knowing all the other factors of work pending and so on, pretty much how long you've got.

Simon Lucy
Tuesday, December 30, 2003

"The same consultants from a Big Four firm that helped calculate the internal rates are also the ones who will help your top management spearhead the outsourcing initiative, and get paid handsomly to do so."

And then when the outsourcing produces poor-quality work, guess who comes to the rescue!

Joe Grossberg
http://www.joegrossberg.com

Joe Grossberg
Tuesday, December 30, 2003