In the world of IT outsourcing, costs are not just related to the price charged for the services rendered. What are often more important, and often overlooked, are the costs clients will bear associated with managing relationships with IT services providers. Location, geopolitical conditions, employee qualifications, employee turnover rate, and culture are all important variables companies need consider before choosing an outsourcing vendor. This is where the risks lie and the risks represent the TCO – the total cost of outsourcing.

Risks Affecting TCO – Total Cost of Outsourcing

Managing risk in any outsourcing relationship is a critical consideration. Understanding what the risks are is important to evaluating what the TCO is on an outsourcing project. Risks, generally speaking, fall into two categories: geopolitical risks and risks associated with a possible partner company.

Risks associated with location are important to consider when evaluating potential partners. Some risks include location, stability of the country’s government, the supporting infrastructure, local weather, time zones, language, travel time for on-site visits and cultural background. All of these can play a role in the true cost of an outsourcing project as they can influence how long a project takes to complete, as well as other costs that get added to the project, like airfare, lost time for holidays, etc.

When evaluating the risks of a specific partner, considerations include ready access to the right mix of talented people, location, corporate governance and the company’s internal auditing procedures. Recent situations have highlighted the need to ensure that an outsourcing partner has the mechanisms in place to faithfully monitor their internal activities to protect your investment.

What to Consider When Choosing an Outsourcing Partner

To minimize the TCO of any outsourcing relationship, there are a few things that need to be factored in when selecting a partner.

The primary consideration needs to be why outsourcing is being considered. Most companies outsource to improve their performance, save money, meet market demands and, generally, be more competitive. But to minimize TCO, it’s important to consider the type of project that is being outsourced. A project that has, among other things, clear requirements, low complexity and requires a limited amount of knowledge transfer is best to minimize TCO.

Another consideration is the type of partnership and support the project requires. Is it a stand-alone one-time project? Do you want a company to augment your staff? Or are you looking to have an entire function taken over? Knowing this upfront allows companies to select the right partner and the right relationship to minimize TCO. One key element to remember here is to select the right “fit.” Companies looking for an outsourcing relationship should consider outsourcing firms beyond the normal “big players” in the market, as oftentimes, this is where the most value is found, as well as the degree of service that is required.

Lastly, and maybe most importantly, when selecting an outsourcing partner, companies need to ensure that the company – and the country they are in – have stringent controls over intellectual property, and the means to legally pursue any violations. The ability to prevent loss of information is vital to keeping the total cost of outsourcing down.

Evaluating the Benefits of Nearshore, Offshore and Rural Outsourcing

There are many things to consider when selecting the type and location where the work is going to be outsourced. With the continued growth of South America, Eastern Europe, Russia and the Far East – along with traditional outsourcing locations like India – companies have many options and locations. Determining what’s right for the company based on the type of work that is going to be outsourced is a key to keeping TCO down.

Outsourcing types are generally distinguished by distance, with offshore being furthest away, nearshore being relatively close, and rural outsourcing – or rural sourcing – being in the same country.

Each has benefits and drawbacks. Offshore offers the benefit of well-established infrastructure, stable governments and a good talent pool, as well as a long history in outsourcing to fall back on in terms of established protocol. Drawbacks, however, include large time zone differences, language barriers, long travel times and the resultant costs associated with that. Offshore, and to a lesser extent nearshore outsourcing, also suffers from a negative opinion among the citizens in North America, particularly the U.S.

Nearshore offers many of the same benefits of offshore. Most nearshore locations have solid governments, solid infrastructure and an increasing talent pool to draw from. Other advantages include better time zone challenges, fewer language challenges and shorter travel time requirements.

Rural sourcing has most of the benefits of offshore and nearshore, and almost none of the drawbacks. The biggest concerns with rural sourcing are the availability of talent in some areas to complete the project and the cost of these resources, typically higher than at nearshore and offshore locations.

Outsourcing is a viable business tool for companies to remain competitive and improve efficiencies. Understanding the factors that affect the total cost of outsourcing – beyond the clearly defined costs in the contract – are key to maximizing this tool.