The Additional Costs of Outsourcing

Offshore outsourcing has been known to significantly reduce or provide predictable costs. However, the total cost of outsourcing is not entirely reflected in the contract. Many businesses dive into outsourcing expecting to save money immediately, but there are still a lot of things to be done before and after the contract is signed.

What are the additional costs of outsourcing?

The total costs depend on what is being outsourced and to whom. Here are the most important additional costs in an outsourcing engagement:

Procurement

SMEs need time and money to send out requests for proposals, evaluate responses, and negotiate the contract. There are alternative ways to search for a service provider, but they still have to follow up. In offshore outsourcing, travel expense is another cost.

In IT outsourcing, benchmarking is part of this process, especially for expensive long-term deals. This enables businesses to assess the competitiveness of their service provider's price. This can be expensive and time-consuming, but beneficial in the long run.

Transition

Similarly, SMEs need to allocate resources for transferring work to the service provider, especially skills training. First-time outsourcers either send trainers to the service provider's facilities, or hire offshore employees on a temporary basis.

In IT outsourcing, it's the service provider's responsibility to put the right infrastructure in place. However, the outsourcing client still needs to bring in offshore employees to ensure that it's functional and delivers the required performance level. Service providers may also need to send offshore employees to the outsourcing client. They are hired on a temporary basis to lay the groundwork for the initial stages of the outsourcing deal.

Australia's 457 visa legislation, which requires labour market testing before hiring temporary overseas workers, can make this onerous for outsourcing clients.

Lay-offs

SMEs that move jobs overseas may need to lay-off staff because of redundancy. They have to pay severance and retention bonuses. While the latter is optional, they may need to keep employees long enough to share their knowledge with offshore employees.

Job cuts can bring down morale among remaining in-house staff. This can lead to job dissatisfaction and work slowdown. SMEs need to explain the outsourcing move, or else in-house employees will make up their own stories. In-house staff needs to embrace change for business to fully transition to outsourcing.

Governance

SMEs need to manage, maintain, and monitor an outsourcing deal to ensure that service requirements are met. A significant amount of work is needed for invoicing and auditing, especially for multiple projects or a sizeable offshore staff.