It’s a Tuesday morning, and a customer shows up at a car dealership. He is tired from being up all night in the hospital with this wife, celebrating the birth of their first child. He explains to the salesperson that they need a newer vehicle now that they have a child. After a quick walk around the lot, the customer points to a small blue car and askes, “How much will it cost to drive it off the lot?” The Salesperson says, “$1,500 plus monthly payments.” “SOLD!!” blurts out the new father. Quickly the papers were signed and off the lot he drove.

To anyone that has bought a car, this seems like a crazy example. No questions about how big the payments are or for how long? No test drive to see if validate it will solve the needs of the new family? Although this is a made-up example, organizations make these types of decisions regularly.

Let’s look at an example. I once coached a program that used two different overseas outsourcing companies, one for development and one for testing. Although I never got a complete answer to why two different companies, the reason floating around the organization was to minimize the hourly bill rate. The assumed reason was to reduce cost.

On the surface, it might look like the question “What does it cost?” was asked, but so many other “costs” were completely forgotten or ignored.

For instance, if an overseas tester found an issue in the middle of the night, they stopped testing, created a ticket, and emailed the onsite test lead. The onsite testing lead would then look at the tickets in the morning and discuss them with the onsite dev lead. Then dev lead would then send the ticket to an overseas developer that would hopefully look at it overnight. IF the developer didn’t have a question, the issue might be fixed the next morning and then passed back to testing. If problems arose, the whole process needed to be reversed. At times, it would take a week or two to fix issues using this process.

The leaders that decided to sign the contracts were not dumb people. They looked at multiple proposals and chose what they thought would be the lowest cost. They might have asked how much it cost but did not take a system view to determine what the TOTAL cost would be.

Total cost is not just the financials. The behavior of the system needs to be also questioned. In the example above, the cost per hour worked was lower due to overseas labor, but the total hours required to complete a story or feature were considerably higher. Also, the lead time was substantially longer. These factors, and others, cut into the bill rate savings. Instead of comparing bill rates, they should have looked at a system metric of flow like cost per feature.

To truly understand the total cost, a systemic view of the REAL process is needed. The process is not what senior leadership hopes or says it is; it is what is happening where the work is being done. The people that know the process best are the ones on the front line.

In this example, several of the front line people saw the problem early in the program. They raised the issue in the hope of improving the system, but instead, the issue got addressed through performance standards. Instead of fixing the system, management tried to fix the people.

If you don’t take a serious look at the system and interactions within the system, cost analysis will become more of a guessing game full of assumptions and biases. You might be able to create some great charts and spreadsheets to show your premises, but it will still be a guess.

The reduction of cost in one area can have a considerable effect on other areas. Due to the increased hours required for a feature in the example, it is likely the total cost for two different off-source teams to develop and test was the same as having people on site. Possible more!! By looking at the system as a whole, they most likely would have gotten faster performance for the same cost.

By understanding the system and the interdependence within the system, you can start to get a better view of the true cost. It does no good to reduce costs in one area by 15% to find out it double the cost over the whole system. Make sure you look end to end when you ask, “What does it cost?”

Photo by Alexander Mils on Unsplash