Outsourcing Risk Management: Hidden costs of outsourcing
December 4, 2013, by
One of the biggest outsourcing risks is the possibility of incurring hidden costs. Offshore outsourcing is fabled to save up to 80%, but the savings are rarely that high. Keeping in mind the six common hidden costs of outsourcing will help your organization manage potential risks that arise from under budgeting. Knowing the risks upfront and planning for them will help you achieve cost efficiency as you move through your outsourcing venture. Luckily, most of the costs can be managed by addressing three key factors: choosing the right vendor, choosing the right outsourcing model, and building solid internal processes.
1. Costs of choosing a vendor
The costs of choosing a vendor can be substantial, and should not be under-budgeted. You will need to dedicate time and personnel to the bid, RFP and evaluation process, as well as to the actual contract writing. You also need to invest in examining the various outsourcing models vendors offer and choose the one that best matches the needs of your to-be-outsourced project. Make sure you closely evaluate the vendor’s proposition and their capacity to build a quick infrastructure. Pick an experienced vendor who knows how to write reliable contracts and wants to form a successful partnership. Research shows that companies may incur an additional 1 to 10% cost of their whole outsourcing venture on initial vendor selection. Keep in mind that this is a necessary up-front investment that will save you money and headaches down the line.
2. Cost of transition & relationship building
Another necessary cost that should not be underestimated is the cost of transition. At the start of an outsourcing relationship you will typically spend some time training and explaining your business processes to your new remote employees. While it is estimated that companies spend an additional 2-3% on transition costs, you can avoid this cost by selecting a vendor with a responsive outsourcing model and experienced staff that needs little software development training and can begin work immediately. Also make sure to give the partnership time to grow and develop. Intetics currently averages about three months to build a responsive, working team of experienced developers (download an article about how they build agile teams here. The time of transition may vary vendor to vendor, but you should account for the time (and cost) of the adjustment period.
3. Cultural difference costs
This is another cost that you can minimize by carefully selecting your outsourcing partner. No matter where you outsource (be it in Eastern Europe, India or the guy next door) you will go through a period of solving cultural and organizational differences. On average it is said that this can add between 3 to 27% extra to your outsourcing costs. Take the time to understand your vendor’s culture, and carefully explain yours. Select an outsourcing location based on their cultural proximity to minimize potential for miscommunication. More cultural proximity will generally make it easier to align your vision with theirs. Travel onsite as much as you can, but to minimize costs also take advantage of the newest videoconferencing technologies.
4. Productivity lags
About 20% of organizations that went offshore also experience a lag in productivity. This extra cost can be avoided by having the ability to select your own remote staff with the right qualifications for your project. By selecting your own people you can make sure that the technical side doesn’t suffer as you align your remote team’s goals with your vision. Turnover can also cost you an additional 1 to 2%, so it is crucial to choose a vendor that guarantees that your remote employees remain on your project. Choosing the right outsourcing model, such as Remote In-sourcing will take care of turnover issues.
5. Costs of improving internal processes
Outsourcing is a two-way street. Sometimes your own internal team needs additional training, which may mean anywhere from 1 to 10% of additional cost. The vendor may suggest adding more specialists to your team to complete your project – but this may not be the most cost effective choice for your company in the long-term. Make sure that your team knows what outsourcing entails and build internal acceptance of outsourcing. Talk to your employees about outsourcing before and during the venture, and explain how they should cooperate with the new team, as well as what they can learn from the process. Ask your vendor if they offer knowledge transfer to make sure that your internal staff can manage your IT processes when your outsourcing venture is completed.
6. Costs of managing the outsourcing relationship
Invoices, contracts and time sheets all have to be managed correctly during an outsourcing venture. You also have to make sure that there is a project manager who can manage the whole outsourcing process and make sure projects are moving forward. If you’re going to make outsourcing work, the cost of management is a critical cost that you should include in your calculations and can add anywhere from 6 to 10% to your outsourcing costs.
Some of the costs above would be incurred by your company with or without outsourcing, but it’s important to keep these costs in mind as you proceed with your outsourcing contract. Most importantly, make sure to choose the right vendor for your project, set clear objectives, consider your risks and manage them effectively. For more tips on outsourcing risk management check out how to manage Loss of Visibility and Control.
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