Back in April, I discussed the issue of companies understanding their own costs in order to make good decisions about outsourcing. One reader recently suggested that I turn the tables and discuss the same issue from the outsourcer's viewpoint.

Unlike their clients for whom IT is a supporting cost, outsourcers are very good at understanding the actual costs of delivery as this is the core function of their business. The real question is not "do they know their costs?", but how good are they at predicting the costs of a deal during the proposal phase? This is where their margins and deal success are ultimately determined.

When an outsourcer is trying to win your business, they are often playing a very interesting game. They must clearly understand all of the requirements; what it will take in terms of human resources, hardware, software, etc., to deliver on those requirements, allow for surprises and contingencies, and yet make a profit. At the same time, they cannot lazily throw out a big number to be sure they can cover the costs as they have competitor bids to contend with. So they have to very carefully account for everything and put forth a competitive bid.

It can be very hard to know all of the costs at this stage. Outsourcers have experience on their side, working from the knowledge of costs from all of their past deals. This knowledge base is a key advantage and the large outsourcers are very good at leveraging their experience. However, every client situation is different. The art of making these deals is applying the knowledge of actual costs in past deals to the client situation of the current deal. This is where the lack of knowledge of true costs by the client can ripple into the outsourcer's cost estimates. Outsourcers must consider the following in estimating costs:

* Accurately estimate the costs.

It is key that the client has provided enough detail to make a good estimate. It is rare that an outsourcer will know everything they want to know, so it is a matter of knowing enough to make a good cost forecast. Related to this is having enough time during the sales cycle to work through all questions and ensure enough detail has been provided. There is a reliance on the client both knowing the current costs and being upfront and honest about them. The outsourcer can certainly point out where costs are too low, but some clients will reject that information and look for another vendor.