The concept of the blended rate when it comes to out-sourcing I.T. development is a sorely misunderstood subject. Business leaders need to go in new directions in order to remain relevant in their industry; However, there is a good deal of question surrounding the blended rate and many still have not decided if it is a good thing or a bad thing for their business style, here’s my take…
First, what is a blended rate? It is was it sounds like it is, rates in a blender – a blended rate is derived by averaging higher cost HR with lower cost. How is this a good thing? The idea is, you will get better rates for Senior “Subject Matter Experts” (SME’s that charge back between $150 – $350 per hour) when you average that high rate against the cost of an entry level admin or against lower cost resources such as Quality Assurance testers (which could mean anyone, like my Mom is my best QA resource I have got!), one can get a better rate on average. 
When I estimate a project, based on previous experience and special knowledge of time outlay and task resourcing, I can safely guesstimate how long a project will take using my CoS vs. Level of Effort scale mentioned in a previous post.
Sure, blended rates are a good thing – but what ultimately happens is, I.T. companies under-bid and drive prices down across the industry – this creates an unnatural rift in what resources actually cost versus what is being charged and then, these companies have to cut back or go out of business – especially if they can not sustain momentum with a continuous stream of overlapping projects. Perhaps many businesses currently in financial ruin are in that state from this cut-throat under bidding and there for are not able to charge-back to clients what they need to to cover costs.
There are numerous advantages to fixed price development projects. The obvious advantage is that the business owner understands the cost before the project is approved. To provide an accurate fixed price, the business owner and development partner must have a complete understanding of the project including specifications, testing requirements, delivery dates, etc…
The fear on the part of the potential client is that as the project rolls out that lower cost resources will be utilized for high level tasks that would in turn wind up costing the I.T. source less and turn a profit ; This does happen, however when YOU the client engage with a professional entity, such as what my company offers, you wind up getting more time of the high end resources because we are very dedicated to seeing clients achieve success AND find it is often easier to look into issues concerns of our clients directly without bogging down progress with a lot of over zealous processes.
Key Concept: Hand Off Rates
The primary advantage is, if you go with a company that offers a blended rate that also employs the resources full time, in-house or virtually =, you will have 100% availability of all resources within the company and benefit from what I call hand off rates – meaning, if you call in a bug or change request, you wouldn’t be charged for every resource to work at the same time on one task – first the Project Manager would log the change request (which could take 10 minutes) and then the request is handed off to say, a Solution Architect who spends 20 minutes analyzing the request. Solution Architect hands off a development task to a developer and then the developer executes the task. All in all, perhaps 5 hours of actual human resource time, but you will not be paying for 3 people for 15 hours – you would pay a “blended rate” of “5 hours” total time.
Fixed price development forces an amount of clarity prior to the start of the project that often isn’t achieved until a testing phase. Features and options can be priced separately allowing the business owner the opportunity to adjust requirements (based on costs and/or time frames) prior to the start of the project. A three phased approach is best for delivering fixed price development projects. The business owner knows the cost prior to the start of each phase.
- The First Phase – Discovery
- The Second Phase – The Creation of a Detailed Project Plan
- The Third Phase – The Execution of the Detailed Project Plan
We will get into the depth and breath of this three phase approach in the next post!
What do you think? Comment now!
In any project, HR cost of an expert and that of a working hand do not differ widely because the expert looks after so many such projects and his cost is distributed over all the projects under him, while a working hand remains fully engaged in a single project. So with proper utilization of manpower by the organization, concept of blended rate will not be of much significance.