Can You Really Save Money By Outsourcing? Offshore Outsourcing Costs Can Significantly Reduce Any Savings

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Promised huge cost reductions by outsourcing your information technology staff to a foreign land? Many outsourcing service providers promote the labor rate difference as a Â?no-brainerÂ? decision for outsourcing. Not so fast. A careful analysis of all the costs involved with an outsourcing initiative may cause you to rethink the whole idea.

Promised huge cost reductions by outsourcing your information technology staff to a foreign land? Many outsourcing service providers promote the labor rate difference as a “no-brainer” decision for outsourcing. Not so fast. A careful analysis of all the costs involved with an outsourcing initiative may cause you to rethink the whole idea. “In fact, for many successful outsourcing programs, cost reduction is not a significant driver to the overall objective”, states Ron Kreutzer, co-founder and director of Global Sourcing Insights LLC (GSI), a company that provides outsourcing advice to companies. “Technical skill sets, quality processes, and reduced time-to-market are several factors that could outweigh cost as outsourcing objectives.”

Regardless of the company’s reasons for considering outsourcing, you should identify the hard dollar costs attributable to outsourcing as part of the decision-making process. These costs can include vendor selection, infrastructure, and transition. Because often the outsourcing vendor’s sales pitch may not match their execution process, it is critical that the vendor selection process be rigorous, which translates into additional costs. Infrastructure items comprise the most obvious costs related to an outsourcing initiative. But while these costs are generally the most readily identifiable and quantifiable, managing these costs is still a significant challenge and there are a few potential cost elements, such as investments in process rigor, that are often neglected. Once you have established the appropriate infrastructure: creating the necessary network and telecommunications; enhancing your internal process capabilities; enabling your environment with the appropriate tools; and addressing the legal and regulatory issues, you are ready to start the process of moving work offshore - the “transition” phase of the offshore outsourcing process. During this phase there is an overlap of existing employees and vendor staff. Besides the obvious costs of having two people doing the work of one, additional costs during transition can include: travel and temporary living, retention incentives, retraining of staff, severance, and onsite differentials.

“Our latest white paper details the components of these costs, and can be used as a guide in a cost analysis process” comments Scott Noble, GSI’s other co-founder and director. “This white paper is part two of the ‘Real Costs of Outsourcing’ series we are publishing,” continues Noble. Other papers address the need to assess and quantify an IT application portfolio as part of outsourcing planning.

These white papers and additional information are available on the Global Sourcing Insights Web site (http://www.gsinsights.com).

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