Resource Mistakes, Part II: Brian, Stewie, and TCO

August 30, 2010

In last week’s post, I wrote about organizations that fail to secure the requisite resources while undertaking major information management (IM) initiatives. In today’s post, I’ll extend the discussion to another source of resource-based problems on these projects: money.

Penny-Wise, Pound Foolish

When it comes finding the right resource for an IM initiative, many organizations are cautious with small amounts of money but careless with larger amounts. While attempting to procure independent contractors or full-time consultants/vendors, many focus exclusively on hourly rates. (This is particularly true if third parties such as recruiters or consulting firms are involved. These companies often attempt to pressure the consultant or subcontractor into taking the lowest possible rates.)

Focusing on hourly rates alone is one of the cardinal sins made by organizations during IM and IT initiatives. Such myopia misses the big picture and ignores the very important concept of Total Cost of Ownership (TCO).

Now, this is hardly rocket science. A consultant or subcontractor with superior skills might–and probably does–charge a premium rate. However, highly skilled individuals can often accomplish their work in far fewer hours than their lesser-skilled counterparts.

An Example

Consider the following fictitious example. Griffin, Inc. is a major manufacturer of toys. Over the years, the company’s data and systems have become increasingly segregated. Orders are often incorrect, delayed, or shipped to the wrong location due to inaccurate customer information in its cauldron of systems. Management is starting to realize that this problem isn’t going away; it’s getting worse.

Griffin has decided that enough is enough. It will begin a major IM project with the ultimate intent of consolidating and purifying its data. For this, it needs help. The hiring manager, Peter, has the resumes of two candidates:

  • Brian charges $125/hour for his services. He has extensive programming, data analysis, and general business experience. He can interpret requirements that are anything but iron-clad.
  • Stewie charges $90/hr his services. While no newbie, he just doesn’t bring the same skills to the table as Brian.

Pressed for money, Peter tries to get Brian to come down to Stewie’s rate. Brian has some flexibility but ultimately won’t come close to $90/hr. Peter goes with Stewie, thinking that he’s ultimately saving money.

But is he?

Stewie is no fool, but he’s simply not in Brian’s class. He struggles trying to make logical inferences. He doesn’t have the same tools in his bag as Brian. Stewie is unaware of existing frameworks that mitigate project risk and allow for smoother transitions, such as MIKE20.

Against this backdrop, it ultimately takes Stewie about six months to complete the project. He bills Griffin for 1,000 hours of his time. Brian could have performed the work in half that time. Consider the following TCOs of each:

  • Brian’s TCO is $62,500 (500 hours * $125/hr)
  • Stewie’s TCO is $90,000 (1,00 hours * $90/hr)

Also consider potential travel expenses and the fact that Stewie needed to engage Griffin employees for three extra months, taking them away from their day jobs. Also, what about the issues that Brian would have found?

Look, money matters in any economy, much less this one. There’s always a temptation for organizations to make do with “adequate” resources. Sometimes paying more on an hourly basis results in a lower TCO; highly-skilled resources often more than justify their  premiums. Don’t dismiss resources simply because they initially appear to be too expensive in the near-term. Ask yourself if actually they’re cheaper in the long-term.

Read more at MIKE2.0: The Open Source Standard for Information Management