Watch for 'Gotchas' When Making Cost Case for Offshoring


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.