Why outsource | Outsourcing Return On Investment

why outsourcing | return on investment

Why outsource?

 

why outsource

Many companies outsource In order to stay competitive in today’s global marketplace as a way to cut costs and improve efficiency. While there are some risks associated with outsourcing, the potential savings can be tremendous.

In this article, we will explore the reasons why companies outsource and how to calculate the return on investment for your own outsourcing projects. We also provide a free outsourcing calculator that you can use to model your own scenarios.

Primary Drivers

 

primary drivers of outsourcing

When it comes to making decisions about where to allocate company resources, the question of whether or not to outsource is always a key consideration. Outsourcing can provide many benefits for businesses, including cost savings, increased efficiency, and freed-up time and resources that can be devoted to other areas of the business.

Business processes that lend themselves to outsourcing are typically time-consuming repetitive tasks that strain the in-house team. Business functions where outsourced tasks can easily be defined and easily separated from the core functions performed by in-house employees.

Grow Quicker

When businesses grow, they frequently discover that they require more personnel on hand but can’t afford the costs involved in hiring and maintaining full-time employees. This restricts your company’s growth potential and slows any momentum it has developed. Some businesses may gamble by bringing on new workers only to discover that the risk does not always pay off. Instead of expanding slowly and carefully, they often find themselves in a position where they have to lay off staff, which can damage morale and make it difficult to attract new talent.

Outsourcing provides businesses with a way to grow quickly without incurring the same risks. By outsourcing key functions such as customer service or accounting, businesses can expand their operations without having to worry

Gain access to deeper talent pools

The most well-known businesses in the world may provide pay and benefits that you probably can’t match, so the best talent goes to the biggest firms. This might stifle your company’s potential for success. It could even put you at risk of losing your top employees to larger organizations that offer greater incentives. Outsourcing agencies are able to attract top talent because they work with numerous businesses in a variety of industries. Many offshore outsourcing companies set up operations in university towns that provide deeper talent pools. This gives them a larger pool of workers to choose from and the ability to place employees in positions that are the best match for their skills.

By outsourcing, your business can tap into these deeper talent pools and find the best employees for the job without having to worry about competing with larger businesses.

Focus on value to customers

Another advantage of outsourcing is the opportunity to focus on critical internal operations of your business.

By outsourcing back office and support activities small and mid-size companies can leverage their talent to work on core business processes while operating at the performance level of much larger enterprises.

When these decisions are made strategically, these support functions can deliver better quality and dependability than if firms spread their management resources to support areas.

Outsourcing firms have improved in terms of quality and dependability. The days of unreliable and lack of quality control are long gone. You may expect modern outsourcing businesses to uphold the highest standards possible when it comes to representing your business.

Compliance and standards

Even large enterprises may be affected by new laws. Many sectors have stringent privacy and security standards that can drive up labor costs.

They also have severe consequences. Having an under-equipped staff that doesn’t follow the rules might result in significant financial losses for your organization. It’s difficult to assemble a team with the experience of a major corporation if you don’t have access to similar resources.

Look for an outsourcing firm that is ISO, SOC2, or HIPAA compliant as needed to ensure your team and company are protected against the threat of potential litigation and other difficulties. Integrate compliance of these remote teams into your own home country in-house teams to extend the governance umbrella to all your remote teams.

Time zone advantages

When turnaround time is critical, outsourcing work allows people to perform the work round the clock. At Telegenisys we use this time to organize, quality control schedule work, or manage supply chains while our clients in the US are asleep.

Many companies choose outsourced resources in other countries to take advantage of time difference. Offshore outsourcing to India can provide significant advantages to US companies. Time zones offer advantages to businesses of all sizes, micro business enterprises can offer 24/7 support, introduce performance metrics and create performance governance similar to large businesses without adding expensive infrastructure or learning the technology used to deliver value to customers.

Business Process management expertise

Outsourcing companies have business process outsourcing engineers who document workflows, training guides, performance metrics and implement performance measurement tools. They have evolved human resource policies that improve employee tenure giving them more time to apply the skills they learn for the benefit of the company. Often process engineering can improve the quality of customer outcomes in customer support, streamline supply chains and deliver much quicker and more professionally than the client company could do by itself.

Business process engineers do not start with a bias or domain information so they typically end up documenting the knowledge base better without assumptions.

Save money on labor and reduce costs of operation

Perhaps the pivotal reason businesses outsource is to save costs. Outsourcing can be a strategic means of reducing costs, and as businesses grow, their needs for cost-effective services continue to increase.

Many businesses are unable to visualize the costs which outsourcing adds. Often they use the outsourcing vendors’ charges to compare with their raw labor cost to generate a savings estimate. This leads to poor estimates of cost which depletes savings making outsourcing less attractive than originally planned. There are many hidden costs to outsourcing, for a primer please read the associated articles in this series for feasibility and readiness. We will pick up from where those discussions left off.

Savings beyond raw payroll

 

savings beyond raw payroll

Documented governance and operating procedures

Companies outsource jobs for potential savings. However, these jobs interrelate when business processes are outsourced. Business process outsourcing companies develop a service delivery workflow supported by qualitative measurements to ensure performance. This is often helpful to the company outsourcing. Such process documentation is expensive to develop and often included as part of the contract with an outsourcing company.

Payroll overhead

Vacation management, personal time off, human resources support, accounting, federal and local taxes, employee benefits packages are managed by the outsourcing company providing a turnkey cost to companies.

It is important for companies to know how these are handled both contractually and to the outsourced employees for transparency. As an example, US companies are required by their workman’s compensation insurance policies to provide workplace insurance so that the US insurer is not exposed.

Infrastructure

Outsourcing remote teams means saving on office space and equipment. The outsourcing company provides the space, equipment, and connectivity required to complete work on behalf of the client.

This is a significant saving because these resources require on-going maintenance which can be expensive in First World countries.

In developing countries, this infrastructure is often less expensive to develop and maintain resulting in cost savings for companies that outsource to these locations.

Some management overhead

When a company outsources, it is important to realize that the work will not self-manage. The contract must stipulate adequate resources to manage the outsourcing agreement. These costs include human resource management, operational training, compliance, security, and digital assets.

This includes defining scope, quality expectations, and maintaining performance oversight. Savings in these areas are significant but must be explicitly planned in contracts to minimize expensive order changes.

Reporting and quality control

Outsourcing vendors can often improve reporting and quality control of a business process. This improved quality can result in cost savings for the company.

Hidden costs of outsourcing

 

hidden costs of outsourcing

Unanticipated disruption due to inadequate transition planning

Unanticipated disruption due to inadequate transition planning can be a significant hidden cost of outsourcing. This is especially true if you outsource critical functions such as customer support or your IT help desk.

Inadequate transition planning can lead to:

  • Unanticipated downtime
  • Poor performance
  • Missed deadlines
  • Loss of customers

To avoid these potential problems, it’s important to have a well-thought-out transition plan that includes:

  • A detailed understanding of the current state of the process or function being outsourced
  • A clear understanding of the desired future state
  • A clear understanding of what needs to be done to get from the current state to the desired future state
  • A detailed plan for how the transition will be executed
  • A clear understanding of who is responsible for each task in the transition plan
  • A clear understanding of the risks and potential problems that could occur during the transition
  • A plan for how to deal with those risks and problems if they do occur

Some transition risks:

  • Lack of knowledge transfer
  • Unclear objectives and goals
  • Inadequate communication
  • Poorly defined scope of work
  • Cultural differences
  • Changes in technology or business processes
  • Outsourcing firms going out of business or being acquired

These are a few examples of why estimated savings from outsourcing might not materialize as expected.

Insufficient governance planning

Integrating your in-house team with remote offshore teams requires extending your governance umbrella through creative methods. Vendor management is often missing in small businesses so economic issues need to be balanced with increased investment in extending governance to outsourced teams.

Requirements creep and process change orders

Easy to add functions can drive costs up. Decisions that would weigh costs before implementation can be added rapidly with outsourcing partners so such changes can drive up costs far beyond original contracts.

Consulting Creep

The ability to tap consulting talent in the outsourcing company is easier causing ad-hoc requests which are charged on a time and cost basis.

Some other hidden costs:

  • Third-party risks
  • Process adaptation (process change management)
  • Ramp up and ramp down costs
  • Collaboration challenges
  • Knowledge loss
  • Duplication of work
  • Employee disconnect
  • Integration requirements
  • Regulatory costs
  • Innovation

Evaluation of savings

Evaluation of savings

Outsourcing can have a high return on investment, but only if it is well planned and managed. Make sure you understand the potential risks and hidden costs before you outsource any critical business functions.

The decision to outsource is not an easy one, but we hope that this series of articles provides some insights into the process. Please contact us by filling up form below if you have questions or would like assistance with your outsourcing project.


Mark Merani has been involved in deploying remote teams for business process outsourcing projects since 1999 at Telegenisys. He has been involved in all steps of the process from due diligence, RFP to set up remote teams that perform with durable excellence. He can be contacted here

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