Cost Control—Calculating a Return on Investment

Home/Publications/CIDM eNews/Information Management News 10.05/Cost Control—Calculating a Return on Investment

JoAnn Hackos, PhD
CIDM Director

Note: This is the seventh article in an eight-part series on the key characteristics that we measure in the information process maturity model (IPMM). Here’s the sequence of articles to date:

I should no longer be surprised by hearing information development managers tell me that they don’t know how much their information products cost to develop. Too often, managers do not track the time it takes the staff to complete projects. They have nothing on which to base estimates of cost.

Equally problematic is the absence of budget lines for information development organizations. Managers are assigned a headcount, which may include both direct and contract staff but not a departmental budget. In addition to personnel costs, a budget might include funding for equipment, infrastructure (office space, furniture, telephone, and basic supplies), travel, training, staff development, and other resources. In too many instances, the information development manager must gain approval for every expenditure beyond the basic infrastructure. At the very least, expenditures below a threshold should be allowed without layers of approval.

In this article, however, I want to emphasize the issue of costs associated with our projects. It is around projects that we should be controlling costs and not around the small expenditures that allow us to develop our staff. The projects are where the substantive costs can best be tracked and managed. Without knowing what projects cost, we are more likely to become victims of second-guessing in which someone decides that our projects can be done less expensively in a country where personnel costs are lower.

Most information-development project costs are attributable to people time. Except for translation, print production, and sometimes distribution, the principal costs associated with our projects come from the work of our team members. We can use the fully burdened costs of our team members to calculate the project development costs—as long as we know which projects people are working on and how much of their time is devoted to each project.

If team members are tracking their time by project, we can use fully burdened costs to calculate project costs. However, if our projects include multiple deliverables, we may not know the cost of individual deliverables unless they are assigned to different individuals. To calculate the cost of each deliverable, we need to know how much time was devoted to each one. Consequently, we must ask team members to account for their project hours worked by deliverable.

Once we know the amount of time people have spent on each project and deliverable, it is quite simple to calculate the people costs.

For example, you can use a typical fully burdened cost for direct employees of $66 per hour, based on an average salary of $62,500 to which you have added all the overhead of taxes, benefits, office space, and so on. An hourly cost of $66 includes overhead equal to salary, or 100 percent overhead, typical of all but the most capital intensive hardware development companies.

If you have spent 100 hours on a project, the total person cost of that project would be $6600. If a staff member works for a year on a project, at an estimated 35 hours per week for 48 weeks (allowing for vacation, holidays, and personal leave), than the project costs 35 x 48 x 66 or $110,880. What that total implies is that each person in your organization costs a little over $110,000 for project work.

If you have contract staff, you can multiply by their hourly rate plus some percentage of overhead. Consult with your finance director to know what that percentage should be. If the contractor uses your facilities and equipment, you have a higher burdened cost than if the individual works at home or at an outside facility.

As you can see, estimating project or deliverable costs is not difficult. Doing so provides you with important information you can use to decrease costs and evaluate the feasibility of contracting or outsourcing.

With cost information in hand, you can implement processes to reduce costs, including minimalism, topic-based authoring, and topic reuse. Any topic that an information developer does not have to write reduces your development costs. You can also effectively evaluate the real savings from outsourcing or moving tasks to low-cost personnel. If you must continue to devote resources to manage or assure the quality of outsourced or offshore projects, you must include those costs in your total project costs. Without cost information, you have little evidence with which to argue that you are not experiencing the promised savings.

Not only do you benefit from understanding and controlling costs, but you can use cost information to communicate with your management. Senior managers often have no notion of the real costs of information development or the effects on costs of poorly managed, out-of-control product development projects. By maintaining data on each project and the deliverables, you can produce analyses that show which project cost the most and why.

Cost control is a powerful management tool, but many managers have little data to work with. Only when you understand and control costs can you achieve a high level in process maturity.

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