Knowing the Critical Costs of Outsourcing Processes

As business process outsourcing grows, the ability to properly understand the cost of the outsourcing process become ever more critical.

With the growth of outsourcing, the need to better understand it and know the cost of outsourcing processes becomes more apparent. Outsourcing is far from a magical cure all to lower costs and needs to be approached with caution.

What is business process outsourcing?
Business process outsourcing, BPO, is when a company outsources an entire business process, such as accounting or payroll, to a third party. BPO can be categorized into what is called back office outsourcing, internal business functions to include accounts receivable, payroll and human resources. On the other hand, front office outsourcing covers services directly related to customers to include call centers, debt collection and help desks.

While outsourcing is often assumed to take place overseas, the third party provider could be anywhere from next door or on the other side of the planet.

Other business outsourcing processes
With technological improvements and the growth of outsourcing, the types of processes that can be outsourced have greatly expanded from the days when they were concentrated in manufacturing.

Knowledge process outsourcing (KPO): This involves the outsourcing of more skilled work to include that which is more knowledge and information related. Some of the processes involved are data analytics, market research and investment research to name a few. Considered a higher level of BPO, it is best utilized by those more experienced in outsourcing.

Recruitment process outsourcing (RPO): Is another outsourcing process that is commonly targeted for outsourcing in which firms transfer their recruitment to outside providers.

Firms that are outsourcing will often become too fixated on labor rates and neglect to look at the whole picture. To get the real cost of outsourcing processes, it is necessary to carefully consider all the likely drawbacks as well as benefits.

The upside of outsourcing
Outsourcing is popular for a reason and does offer many benefits. These include:

  • More nimble and flexible firms: By outsourcing, firms are freer to experiment and reinvent themselves more easily. The pace of business can also be speeded up.
  • Focus on core businesses: While processes that have been outsourced still need to be monitored, when done in the right way, outsourced processes take up a lot less time when they are done outside vs. when they are done in house.
  • Less need to invest: When certain processes are outsourced, companies no longer have to purchase equipment for those jobs. This eliminates the need to invest in equipment and personal that might not be fully utilized.
  • Lower taxes: Companies can sometimes reap tax advantages when they outsource to areas with more favorable tax climates.
  • Reduced costs: Although many companies become too fixated on labor costs, they, along with other costs, can certainly be lowered through outsourcing with the right approach.

The cost of outsourcing processes
There are costs to outsourcing that can sometimes outweigh its benefits. Both sides need to be considered.

  • Competition for good labor: Since outsourced processes cannot be monitored as easily as those done in house, it is paramount that outsourced work be performed by workers with the right skills. The growth of outsourcing has increased the competition for these workers in some fields, particularly in some places overseas where different education levels sometimes put the needed skills in short supply.
  • Management overhead: Those outsourcing processes need to develop monitoring processes that include incentives, disincentives and quality control that can potentially require more time than keeping the process in house.
  • Employee morale and work environment: Outsourcing can hurt employee morale and cause firms to lose good employees. In addition, workplaces can lose the cooperative feelings that come with people working together.
  • Communication and time zone problems: If the outsourcing takes place overseas, the service provider may be operating in a totally different time zone. In addition, the number of skilled English speakers may be limited leading to various communication problems.
  • Quality control: Not only is it harder to monitor quality when work is performed in another location, but cultural and other differences may lead to the provider misunderstanding or not doing what is needed.
  • Missed deadlines: The potential for missed deadlines is almost always greater when the work is not performed in house.
  • Protecting intellectual property: Outsourcing necessitates the sharing of information. The potential of that info reaching the wrong hands always exists.
  • Legal problems: Legal issues are certainly no fun and are even worse if the other party is in another jurisdiction with different laws and customs.

The fact that outsourcing keeps growing in spite of these and other potential costs is a testimony to its real benefits. To increase the chances of success, have a plan that incorporates the following points before getting started on the outsourcing path:

  • Continuously look for process improvements that may eliminate the need for outsourcing or change the direction it will take.
  • Be sure to have a lot of proposals before deciding on any offer.
  • Have a flexible migration plan in place whenever outsourcing any process.
  • Always look at the whole picture and do not become too fixated on labor costs.
  • Never forget that even outsourced processes will require some monitoring and management.
  • Be very specific with any contract but flexible as required.
  • Have strong incentives and disincentives.
  • Be sure of the reputation and financial stability of the vendor.
  • Do periodic cost evaluations.
  • Be sure of the vendor’s commitment to quality.
  • The vendor should be offering something the company outsourcing does not already have.
  • Make sure the vendor has procedures to protect any trade secrets that might need to be shared.

Nobody can ever be exactly sure what the cost of outsourcing processes will be so approach any outsourcing in a measured and methodical way, especially when first starting out.