Cost-benefit analysis is one such concept that should be considered a critical component of the software development process. With an average failure rate of 20%, software projects are at a high risk for costing more money than they generate. Performing a thorough analysis of a project’s costs and expected benefits or outcomes is the only way to identify whether or not a given project will be profitable—and therefore viable—for your company.

Business benefits of cost-benefit analysís

A focus on quality products is a great asset to any business. However, without the ability to generate profits, the quality of your product offering has little value. If you cannot afford to stay in business because your development time and costs outweigh the amount of revenue earned from sales, your attention to detail and strong commitment to user needs will be lost. There are three primary benefits that smart businesses can enjoy from a cost-benefit analysis:

• Loss prevention 
  When you can clearly see the costs that go into your software program and balance those with the sales profits, you will be able to prevent pouring more money into a product than you get out of it.
• Increased profits 
  Preventing a loss is important but it is in the generation of profits that your business can really succeed. A cost-benefit analysis can help to illustrate ways that your company can increase software sales, revenue and ultimately profits.
• Improved decision making
  Every part of the software development process offers opportunities to streamline operations, reduce costs, or improve performance if the right information is made available. Having data readily accessible can help management and development teams make the right decisions at the right times.

Costs in the cost-benefit analysis

In order to ensure that your cost-benefit analysis is truly useful for your company, you must make certain that it incorporates all necessary aspects of the project. At a minimum, a cost-benefit analysis should factor in the following components:

• Development costs
  This includes the time required of the development team, management and administrative staff. Remember, too, that time spent on one project is time spent away from other, potentially more profitable projects. Any costs associated with tools, technology or other non-human resources should also be factored in.
• Projected sales
  The identification of target sales goals should include expected sales and revenue volume at different price points to best identify the ultimate product price.
• Sales costs
  When estimating sales revenue, any cost of selling your product should be included. This may include advertising, sales team commissions or salaries and more.
• Maintenance costs 
  The world of software creation is never a one-time thing. Practically every software product that is developed will have ongoing corrective, adaptive or perfective maintenance tasks and associated costs. There are also planned updates or enhancements to the program that must be considered. Each of these costs should be factored into the original project from the outset.

Steps For Cost Benefit Analysis of IT Project Outsourcing

2. Calculate In-House Costs

The next step if to start looking at the numbers. Determine all in-house costs that can be averted by IT project outsourcing. These include:

a. Hidden Expenses: These include crisis (Covid-19 pandemic), organizational changes, legal formalities, third-party risks, employee disengagement, etc.

b. Direct Costs: These consists of subscription fees on search platforms, training, payrolls, etc.

c. Indirect Costs: Team expansion, project delays, resources needed, etc.

Decision-making based on a cost benefit analysis should be focused on avoidable future costs, which for this step are expenses that can be eliminated by outsourcing a project. Prepare a list of all the in-house costs that can be averted if an IT project is outsourced.

3. Determine Total Cost of Outsourcing

With all in-house costs calculated, its time to determine outsourcing expenses. Start with the biding price of outsourced vendor. Company may include expenses for administering outsourcing engagement, such as evaluating and monitoring providers’ performance. A project manager or an analyst must consider all outsourcing costs, without underestimating or overestimating benefits.

Revenue opportunities can be calculated in outsourcing costs, which consists of –

a. Intangible benefits such as high customer satisfaction due to faster delivery or enhanced product features.

b. High sales and revenue from new IT product or increased production rate.

c. Competitive edge and market share gain.

4. Perform Analysis to Determine the Savings

With all the above data, its time to perform analysis. According to the timeframe of an IT project, this process is as simple as subtracting one from another.

Calculate total costs and benefits, and then compare both values. If benefits are higher than costs, then a project offers net benefit to a business. At this stage, consider payback time, how long will it take to reach the break even point (point in time where benefits have repaid costs).

Limitations of Cost Benefit Analysis

Cost benefit analysis of IT project outsourcing is best suited for smaller to mid-sized projects that don’t take too long to finish. For these projects, an analysis helps businesses to optimize cost benefit ratio for projects.

Large projects which take time can be problematic for CBA. Outside aspects such as interest rates, inflation, natural calamity, or crisis impact the accuracy of cost benefit ratio. In this case, calculating the net present value, discount rates, time value of money, and other metrics create complications for projects.

Other methods that complement cost benefit analysis for larger projects are NPV (Net Present Value) and IRR (Internal Rate of Return) , however cost benefit analysis helps to determine whether to pursue IT project outsourcing or not (or any other project).

Wrapping Up

Choosing an outsource service provider is a long-term commitment for every business, which brings with it numerous benefits in return; starting with minimal expenses on project development, strong knowledge base, and expert team members. An outsource service provider is an extension of a team that’s working towards achieving a common goal.