Total Cost of Ownership - Part II
As I was collecting my thoughts for this week’s post, I realized that it might be helpful to back up a little bit. I had planned to explore some of the dynamic costs associated with creating a website, and how to exercise some control over those when bidding web projects. But the more I thought about it, the more I realized that before we get to that, we really should figure out what an hour of our time is worth.
Having a clear understanding of what an hour of your time is worth can greatly influence your ability to make informed decisions that lead to good project bids. It might also have a profound impact on other decisions in life. Before we can really evaluate our dynamic costs, we need to know what the cost of our own time is worth.
Total Cost of Ownership (TCO) starts with each individual. Sure there’s a TCO for the person or company that will own the finished website, but there’s also a TCO for the people creating the site, and that starts with the value we place on an hour of our own time.
Six years ago, I was underemployed for several months. This experience gave me time to slow down and reflect on my career choices, my work experience and what I would like to see in my future. I had a lot of things to consider.
One day, I thought about how much money it would actually take to support the lifestyle I was interested in achieving and sustaining. After a few days of playing with my calculator and filling up pages of a notebook with odd calculations, I came up with a number. This number represented what one hour of my time was worth to me; not what I thought someone might pay me for an hour’s work, or what people in my career field typically earn, or what the other web firms in town were charging, but what each hour of my time was worth, to me.
Armed with my number, I can make better decisions about how I invest my time.
Here’s how I got to my number. This is a guide, not a prescription. It’s one person’s way of doing this. Your way will be better. Also these numbers are for demonstration purposes, these are not my actual numbers, they are hypothetical, and each of us needs to use his/her own numbers in something like this.
“Big rocks in first,” creating time for the things I value most: how many hours do I want to work each year?
• 21 days vacation the first year (one month’s worth);
• 12 holidays (any 12 that are important to me), and;
• 12 personal health days (focus on preventive care and continuing health education)
Those 45 days, when taken during the typical five-day workweek, add up to about nine weeks off a year, leaving 43 weeks a year to work, which is about 215 days to create annual earnings.
The other goal I have, although I’m still not even half way there, is a 30-hour work-week with semi-flexible hours.
So 30 hours a week multiplied by 43 weeks gives me 1,290 hours a year to get my work done.
Once I knew how many hours I would have to work, the next part of the puzzle was to figure out how much money per hour it would take to reach my financial goal.
• I figured I would spend about six hours a week in activities that were not directly billable to clients, so this left me about 24 billable hours each week.
• I wanted to gross $100,000 plus 25% in work-related benefits annually, so I needed to create $125,000 in gross earnings: $100,000 x 1.25 = $125,000.
• If I choose to work 43 weeks a year while averaging 24 billable hours a week, then I need to provide a service valued for at least $96.90 per hour.
• I know that 43 weeks x 24 hours = 1032 hours, so when I divide $100,000 by 1032 hours, I have my hourly goal of $96.90 per hour defined for me. Round that up and an hour of my time is worth about $100 to me.
If you work for an employer, then the days you have off, the number of billable hours you’re shooting for and the number of hours you’re expected to work will likely be different than in the example here. How you come up with your number will likely be quite different than the way I did it.
What can you do with this number once you have it? For some, it might have us wondering if we’re in the right job, but that’s not my intent here. I would like to show you how to use this number when making informed decisions, because making informed decisions is the key to controlling dynamic costs.
Let’s consider the design cost for a project. Design is typically a dynamic cost in a web project, and is one over which we have some control. Many of us use that control when negotiating with our client over the price they will pay, but I would like you to consider another possibility.
In my case, design is something I’m painfully slow at. If I’m going to create a professional looking design for a website from scratch, it will take me at least 40 hours. Design is not my strength: it’s not as much fun as other parts of the creative process for me, and the end results never quite achieve the look I hope for. While I can “do” design, I don’t “live” design and I probably shouldn’t be doing it except for my own entertainment.
There are people that “live” design and these designers can create a beautiful set of web templates in less than half the time it takes me, the finished product will be at least twice as cool as anything I dream up and the client will be happier in the end.
See where I’m headed here? If it takes me at least 40 hours to come up with a “functional” set of web templates, and an hour of my time is worth $100, then my cost to create a set of web templates is about $4,000. Assuming that a good designer will create something that’s twice as cool as what I would come up with, then a good set of web templates is worth even more to me.
It would be to my advantage to find a designer who can create some custom web templates for me for $4,000 or less. I could hire them to do the design and I would use my time to work on what I’m really good at. Plus, the design will not only cost me less than if I did the work myself, but the end product will likely be superior.
It would also be to my advantage if I could work out an arrangement with a designer where she would charge me by the project, rather than by the hour. If I develop an ongoing relationship with her, and can send her enough work, and maintain good boundaries around the scope of the designs, and she learns to trust that I would not mess up her design when building out the website, she might consider a package deal for me; a fixed price for web template design.
In real life, that’s what we did at my firm. We worked out a package price for design services with a talented, experienced designer. This didn’t happen overnight and it took some work on our part to find the right person and to arrive at a package price for her services, but the benefits outweighed the investment of energy.
We both kept a close eye on how the first half dozen projects went and ended up adjusting the price, but the designer continues to work with us for a package price and this really helps us control that portion of our dynamic costs.
I’m not advocating that you should try to lock down every dynamic cost into a fixed package price; the real world is not so simple. Just know that it is sometimes possible, and with that knowledge, take a second look at your vendor relationships. It could be the only reason that you’ve not locked down some of your dynamic costs is simply because you haven’t asked someone nicely to do it for you.
Second, and perhaps this should be done first, make sure to figure out whether you should be the one doing the work. Just because you “can” do something, doesn’t mean it is in your best economic interests to do it. You might be fully capable of creating a design, coding an extension or plug-in or importing a member database into a new EE site, but is that the best use of your time?
When you’re working outside of your areas of strength, its going to be more difficult for you to narrow down how long something will take you and that’s going to make it near impossible to get control of your costs.
Hiring a pro to do the things I’m not so good at gave me time to focus on what I am good at, helped me control some of my dynamic project costs and that helped grow my business. I also enjoy working on websites more now, knowing that I don’t have to create the designs.
There are two concepts to take away from this post. One is that if you know what your financial goal is, and you can figure out what an hour of your time is worth to you, then you can use that amount to evaluate when it makes sense for you to be doing parts of a project, and when it makes more sense to bring someone else in. The second concept is to challenge conventional thinking when it comes to dynamic costs and see if there’s an opportunity to get a package price on some of them.
I’ll continue to revisit this Total Cost of Ownership theme in the future. I’ve done quite a bit of thinking on this subject and it make take a few more posts for me to get it all written up. Stay tuned for more on this subject.
