Many studies have highlighted that cost savings is one of the main drivers for companies to consider outsourcing. But many other studies have reported that one of the biggest areas of frustration for companies is their inability to achieve the expected cost savings.
According to Deloitte’s annual “Global Outsourcing and Insourcing Survey,” 62% of the companies surveyed have been able to achieve modest cost reductions in the 10-25% range, lower than their expected savings. Only 23% of have been able to achieve savings in the 21-40% range, and only 9% have achieved savings greater than 40%. Are these numbers representative of failure of the initiative, or of the analysis that preceded it?
Too often, the “real” business case is not fully understood when the analysis is done.There are many factors that go into the true operating cost, and without understanding these factors, the analysis can be flawed.
And it can work both ways. Sometimes critical cost factors are not considered upfront and the resulting ROI is lower than expected when the Accountants show up to calculate the real value. But in other cases, the business case may be understated, not including some key factors that affect the “bottom line.” Sometimes, these factors may also be missed when the final accounting is done.
- Identify and include all costs. Consider your labor cost, and all of the other factors that should be considered. The obvious ones, such as compensation, benefits and taxes, are relatively easy to calculate. But I have seen many cases where companies do not consider the many other, less-obvious, costs that are often in place.
Overtime, for instance, may be a factor in some businesses, as well as the use of temporary or seasonal staff. These potential expenses should be analyzed and included in the cost savings. Another important factor is the presence of some fixed and variable costs, such as training, recruiting, infrastructure and even facilities costs that may be recaptured. Capturing all of the other, non-direct labor-related cost factors is another important element in the business case.
- Identify transition costs. Make sure to identify all of the transition costs. This includes some that are labor-related such as severance and “stay on bonuses,” as well as other factors more closely related to the migration, such as the fees for the implementation. The overlap of new and old staff during transition is often overlooked, as well. If this is an internal, shared services initiative, you will likely pay a consulting firm to help you with the design, documentation and implementation. If it’s outsourcing, the supplier typically charges a set-up fee that includes these activities.
- Other costs. Other costs may include facilities improvements, hardware and software costs, T&E and, in some cases, taxes, if you are moving roles from other offshore locations. Certain countries charge VAT and other taxes for moving roles, and the tax implications can be complex and hard to ascertain. It’s generally a good thing to bring in expert guidance on these kinds of matters.
When doing the analysis, the outsourcing savings opportunities will often “speak for themselves.” By that I mean that if you do a good job of analyzing the potential areas of scope, you will easily see which functions are the best candidates for migrating to an outsourcing model. Once you see the outsourcing savings cost savings opportunities, make sure that you also factor in the complexity, core and strategic nature of the functions, as well as the risks inherent in moving them.
Also, it may make sense to move certain roles within a function, rather than the entire function itself. It’s often preferable to retain certain levels of subject matter expertise and/or management in-house in order to handle more complex issues and establish a structure to manage the external party, whether it remains part of your organization or moves to a third party.
- Have an initial vision. Before jumping into an outsourcing solution, you should have a clear picture of what the model will look like when it is implemented. There should be an initial vision established upfront that has executive and organizational alignment. The end result should look similar to what was originally envisioned, and if there are changes to that original vision, they should be clearly articulated, understood and agreed upon by all key stakeholders.
Ultimately, the operating model may be a three-way hybrid solution with certain functions retained because of the their complexity or core nature, others fully migrated because they fit the profile of highly transactional, non-core functions and still others potentially shared responsibilities, as certain elements of the functions may require retained resources to execute them or to have more oversight on them.
Finally, if you do a good job in the planning, analysis and design, you should be able to identify and quantify operating efficiencies that can drive further cost savings. Some will be in the “Quick Win” category and can be realized quickly, with minimal upfront investment. Others may take more time and require some levels of investment. Make sure that you are realistic about both the nature of the opportunity and what it will take to implement, when doing your business case. If done right, the total cost of outsourcing should be a significant win. A good business case captures all of these elements and presents them in a practical, realistic way.