Watch for 'Gotchas' When Making Cost Case for Offshoring

Ann All

A pretty frequent topic in this blog is the need to balance cost savings with other business benefits in outsourcing initiatives. As I've written before, companies chasing short-term cost savings may find that long-term process improvement suffers.


Not only that, but many companies fail to take into account or underestimate management and other costs involved in outsourcing. In fact, one of the most interesting takeaways from a recent EquaTerra report is a move toward supplier rationalization, with a growing number of companies looking to shrink the number of suppliers in order to cut their due diligence, supplier selection and management costs.


According to a recent NetworkWorld story, many companies make incorrect comparisons between on-shore and offshore work when building their business case for outsourcing. Often, for instance, companies figure the same number of employees will be required for a project, when tasks done onshore typically require fewer workers. Also, although onshore projects may involve contractors as well as full-time employees, companies often neglect to include the appropriate loading factor. (You obviously won't pay into pension funds for contractors, for example.)


Among other costs that may not be adequately taken into account are travel and onshore employees who may be retained to assist with transition efforts. The article cites a few real-world examples to illustrate how much these items can increase the overall cost of an outsourcing initiative.


The article's final point: It can be pretty difficult to illustrate some of the longer-term financial benefits of outsourcing, such as increased efficiency and revenue improvements, with concrete examples.

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Nov 17, 2008 1:53 AM vishi vishi  says:
I have shown many a times before that even with the costs (travel, overlap of onsite resource) the offshoring certainly will bring in savings, process efficiency. I am not sure how the report was prepared. Yes, it is not a slam dunk exercise - you have to know your do's and don'ts - however, as we call this, the business optimization model will certainly bring benefits in the long term.ThanksVishi Reply
Nov 18, 2008 6:29 AM Ashish Ashish  says:
I think it's a bit premature to assume companies that consider offshoring do not work their way through all applicable cost components of current "as is " state and then define what they expect from offshoring. Especially with the wealth of information and ready made cost calulator models on offer.I have run an extremely successful Offshoring Program at one of UK's largest and best known Healthcare Insurance services organization- and having tracked costs from As Is current state onwards, we have shown and have had our Accounts accept that the program has turned in savings in excess of �4 million ( US$ 7million) over the last 1 year. This was after taking into account travel, overseas calls, time of onsite employees -spent on calls and managing offshore /vendor staff, possible reduction in productivity, transition costs. Reply

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