Four Common (But Often Overlooked) Outsourcing Costs
As the labor market continues to tighten, employers are challenged with finding resources for special projects and ongoing operations. As a result, many organizations turn to outsourcing to augment their staff, engage specialists or to completely offload non-core capabilities. While there is tremendous benefit to strategic outsourcing, organizations should be aware that there are often overlooked – or soft – costs behind those benefits. In the majority of cases, the benefits will outweigh the costs, but it’s always a good idea to be fully informed before making the leap into retaining an outsourcing partner. Here are four costs that you might not have considered in your outsourcing equations.
1 – The Hidden Cost of Transition
Just like hiring a new employee, it takes time, energy and focus to bring an outsourcing partner up to speed on the work they are expected to perform. While you would expect not to have to train contractors on the key skills involved, they still need a baseline understanding of the company and its processes. This orientation could take weeks to months, depending on the complexity of the project, and during this period, you’re paying for less-than-full efficiency.
Where it can get tricky is when you are switching from one outsourced vendor to another. In these cases, the incumbent vendor may be expected to oversee the transition to the incoming vendor. This can cause a “bubble cost,” in which you’re paying the incumbent vendor to disengage and provide knowledge transfer, while also paying the new vendor to come up to speed before they even start the actual service. These costs are hard to avoid, but you may be able to manage some of them contractually with both vendors.
2 – The Not-So-Hidden Cost of Attrition
Given that outsourcing arrangements can be seen as staff-cutting measures, it’s not uncommon for employees to leave the organization – either voluntarily or involuntarily. While many strategic outsourcing initiatives are actually meant to augment existing staff, some people in-house may feel threatened and seek other opportunities.
If the organization backfills vacated roles, there will be costs associated with attracting, interviewing and onboarding new employees. There’s also a corresponding loss in institutional knowledge and disruption to ongoing projects. While an outsourcing firm might eventually help fill some of the gaps, the particular role might not be within the scope of work.
3 – Infrastructure and Process Costs Critical to Outcomes
Many organizations still support aging hardware and software at premium rates, operate legacy systems at higher integration costs, and support a fragmented environment with potential security risks. A new outsourcing project will likely introduce changes in infrastructure and business processes that require an upfront investment in new equipment.
The changes may include new productivity or project management tools, security and authentication protocols and data integrations. Many organizations fail to realize that the introduction of vendor tools will likely require their own users to undergo training to learn how to use them effectively.
Further, in a highly customized IT environment, there could be significant costs associated with interfacing systems between the organization and its outsourcing vendor. Custom integrations may need to be developed and data structures and values may need to be rationalized between the two systems.
4 – Governance Costs Impact Outsourcing Success
The full value and benefits of outsourcing can only be realized if the organization addresses its approach to managing its relationship with the vendor. In some cases, this approach may not exist, so the organization should formulate how it will interact with and evaluate the vendor. This should go beyond any benchmarking clauses in the contract and encompass how the organization will actively enable the provider to deliver service excellence while providing guidance and oversight throughout the project.
Internally, there may not be an appreciation for the different roles involved in the service relationship, beyond obvious ones such as contract manager. In-house staff may be asked to take on roles such as “process owner,” in which they are expected to ensure that particular processes and protocols are followed in the course of delivering the work. These staff may have difficulty transitioning from a hands-on role to one where they are managing the work of others and might require training and support.
It’s also important for the organization to set expectations around innovation and how it will be introduced and measured. Losing out on innovation is a direct outcome of poor governance. Management processes that unite the business and technical management processes of both parties can enable better responses to business opportunities or threats.
In the final analysis, outsourcing is a business decision that involves a careful examination of costs and benefits. Just be sure you understand and plan for the soft costs that could come along with what’s enumerated in the contract.