Productivity Arbitrage and AJAX

Last February when Jesse James Garrett first wrote about the new term he had coined, AJAX, I was one of the first people to run up and down the hallways shouting, “Yes! Yes!” because I immediately recognized the value of attaching this new moniker to some previously obscure (but increasingly important) techniques.

I don’t know if Productivity Arbitrage has that same resonant ring to it that AJAX had, but I think Obie Fernandez has certainly crystalized the concept very well. If you want to know why you should start using Ruby Rails now (especially if you are a consultant), then this is a must-read.

Want a realistic example of what I’m describing? Two well-respected consultancies find themselves competing head-to-head for a project: a fairly typical internal web application, of the type that large corporate clients often request. Both consultancies follow Agile practices. Timely delivery for this project is critical (as usual), but delivering on-time is particularly important in this case. The client will get hit with severe regulatory penalties if the new system is not implemented within a year’s time.

The decision makers at Consultancy A propose a Java-based solution at a price of a million dollars, and they estimate final delivery within 10 months. Their bid is competitively-priced and they feel confident about it. They plan to allocate an experienced team using a mature platform (Java). They calculate, using rough figures, that 6 resources x $97 blended hourly rate x 10 months equals about $1MM, a gross margin of about 25%. A higher margin would be better, but all-in-all this deal is not too shabby.

The folks at Consultancy B also have extensive experience building the kind of webapp needed and they see a potential productivity arbitrage play. Instead of Java, they differentiate themselves by pitching a Ruby on Rails solution. Quite innocently, they undercut their competition by pricing their bid at $800K and promising delivery within 6 months. According to their calculations, (and once again, these are rough figures), 4 resources x $192 rate x 8 months equals about $800k. That rate ($192) represents a much higher gross margin, even taking into account that Consultancy B pays its consultants higher salaries.

Can you guess who won? Consultancy B won! At the contract signing, the client CIO says that it was a “no brainer” and lists the following reasons in order of increasing importance…

Please go read Productivity Arbitrage now, and be sure to include reading the other posts to which he links. This is about real-world consultancies staking their business on the productivity advantages of Ruby on Rails!

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