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How Do You Calculate Outsourcing Costs?

May 13, 2022

When companies want to cut costs, they usually consider outsourcing. This can apply to several types of industries, and positions vary from technical support to accounting and data entry.

The growing pains of outsourcing

It is very common for many companies experiencing growing pains to consider outsourcing functions like HR or IT, along with outsourcing specific job roles to individuals with skill sets that match the role. Depending on your business needs, it might be a good idea for your business. Technology makes it really easy to connect people and teams digitally from all across the globe and this can make outsourcing services, and individual job roles, very attractive. Outsourcing IT services to third parties may look like a solution to the problems many businesses are facing. Ideally, this reduces labor costs and gives access to a wider pool of talent which improves productivity. But in reality, things don't always go along that smoothly. Outsourcing also involves certain risks and costs that you must consider.

Why outsourcing is still worth it 

Whether you have a tight budget, whether you need a skill that is missing internally, or whether you and your teams are already overloaded, outsourcing is the most concrete and easy solution to put in place. Outsourcing can become a strategic advantage, a way to increase the profits and revenues of the company, provided you prepare it well. Two things to remember first:

1. Don't outsource a task because you don't want to do it.

2.  While some tasks may seem tedious, underweight their importance in your core business.

Of course, keep in mind that outsourcing is not about delegating tasks in the hope that it will naturally increase your productivity or that you will increase your profitability overnight. Achieving these results takes some work on your end. But it definitely could be worth it.

Step 1- Define the Business function you want to outsource

First of all, before anything else, it’s important that you determine the specific business functions that you are considering to outsource. While doing this, you need to keep in mind the exact quality and quantity of the tasks you plan to outsource too. This will help you achieve a fair comparison between what you can do in-house and what can be outsourced. If a business function is wrongly defined, the in-house costs may be lower than the outsourcing costs because you may be doing less internally.

Step 2- Calculate your in-house costs that could be avoided by outsourcing

After clearly defining the business function that you would like to outsource, the next thing for you to do would be to identify and calculate the costs your organization would avoid from outsourcing. You can do this by listing down direct costs (supplies, salaries, equipment, etc.) and indirect costs (administration and internal services), you can remove variables you don't need to pay for. It is important that your in-house costs for the specified tasks are lower than the actual outsourcing costs.

Step 3- Calculate your total costs of outsourcing

The third thing to do is to calculate the total costs of outsourcing the specific business function already outlined. The costs of outsourcing usually include the bid price, contract administration costs, and transition costs, less any net revenue generated from sales of unneeded supplies and equipment. Your contract administration costs should include all the costs associated with the activities necessary to select and manage an outsourcing partner over the life span of the contract. 

Step 4- Deduct your costs of outsourcing from your in-house costs to get your savings 

For the final step, you should calculate the difference between the amount and costs you've saved from outsourcing and the costs incurred from outsourcing. If your results show that outsourcing significantly reduces your cost, then you can reasonably give reasons for proceeding toward outsourcing. So basically,  you should subtract the total costs of outsourcing from the in-house costs that could be avoided and if the result is favorable, you can justify your decision to outsource to a third party.

Conclusion 

The competition is fierce for all the players working in their markets. To cope, there is no miracle solution except to be more efficient, and to provide better solutions than the others. One of the keys to achieving this goal is to focus on your strengths to sharpen them, develop them and thus become even better. This posture involves making choices, and it is often more interesting to leave the management of some of its activities to companies that have perfectly mastered the associated know-how. Outsourcing is definitely not the cheapest option, but when you do it right and with the right service provider, you can actually save money (and in some case, generate a social impact)! You can collect quotes from different service providers, compare them by the skills and expertise they provide, you can make your choice based on these.

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