Clearly, one of the most typical benefits of outsourcing comes from cost reductions. This can include lower labor rates, lower management support costs, reduced capital outlays and other reductions in support costs. Despite these significant savings, I urge managers who are considering new outsourcing projects to do a careful assessment of costs and savings.
Direct costs such as wages are relatively easy to identify. Indirect costs, including things like staff planning, process documentation, legal costs (contract review) are more difficult to estimate but must be considered.
It is convenient to break down costs into two categories. First, there are non-recurring “transaction” costs that include:
- Research and business planning
- Contract costs (legal)
Then we have the ongoing/recurring operations costs. Key costs to consider include (apply on a case-by-case basis):
- Changes to productivity
- Communication costs
- IT and software costs
- Physical infrastructure and support
- Resource redeployment
- HR change management
- Training and productivity
- Disaster recovery and business continuity investments
- Offshore knowledge development
- Supplier management/governance
Understanding these costs is essential for budgeting and cost control. They also form the foundation of your ROI analysis, which I will touch on in a subsequent blog.
I hope this outline of costs is helpful. Please let me know what I have missed.