The Hidden Cost of Outsourcing 

With the growing landscape of customer channels to support, and ever decreasing budgets – operational leaders are faced with the increasing pressure to do more with less resources (or at the very least, the same). 

This fact drives many businesses to explore the option of outsourcing or offshoring some or all of their customer transactional processes. This usually represents an immediate decrease in operational costs due to the low costs of resourcing and a reduction in business overheads. 

Outsourcing key components of a business function is something we often recommend to clients, and when it is done well it can drive improvements in both financial and customer outcomes, while also driving increased staff engagement for your remaining in-house team. 

However, there are a few hidden costs and key success factors that you should be aware of when considering this approach for your business.  

 

Cost # 1 – The Cost of Repeat Transactions 

We live by the mantra: never outsource a broken process. 

If a process that your business does today is not optimised, clearly documented and failure-proof – outsourcing it WILL highlight the cracks.  Those workarounds and steps that your team ‘just know’ to do will not be ‘just known’ by your outsourced team. 

It was Albert Einstein who said “If you can’t explain it simply, you don’t understand it well enough”. Before outsourcing any process you should know it so well you could talk through every step in detail while blindfolded and hanging upside down!  It should be optimised within an inch of its life, so there is no unnecessary step and every possible scenario has been accounted for. 

Clarity on ‘who does what’ is absolutely critical – what are the handover points where the in-house team becomes involved in the process, and what authorities and delegations do your outsource team have to enable issue resolution and decision making? 

Lesson: Lack of clarity or inefficiencies in processes will lead to repeat work, which will lead to increased costs. 

 

Cost #2 – The Cost of Moving House

Moving business functions to an outsource supplier will always incur a period of increased expenditure – we call this the cost of moving house.  This refers to the transition period where you may need your current team and systems operating in tandem with the outsourced team and systems. 

Invariably, the duration or significance of this transition period is underestimated, and key project or support functions need to be cut to make room in the project budget for the mission critical requirements. 

There will always be impacts that were not foreseen or planned for. 

There will always be delays or challenges in technology integrations and accessibility. 

Lesson: Always over-estimate the expected resourcing and transition period by at least a third – better to be pleasantly surprised than to cut corners due to under-funding and end up with a lower quality result. 

 

Cost #3 – Supplier Management 

When embarking on outsourcing for the first time, it is not uncommon for businesses to overlook the number and type of resources required in-house to support the supplier relationship with your outsource provider.  

You will require operational escalation and support points to enable complex or unforeseen issues to be escalated, ongoing feedback to be handled, and customer issues managed. 

You will need contract management and finance resources to ensure the supplier is meeting their performance KPIs and other contract terms, manage supplier payments and conduct periodic contract reviews with the supplier. 

You will need an account management resource to act as the interface between the outsourced operation and the rest of the in-house business – communicating changes, coordinating flow on impacts and managing operational performance. 

You may need additional IT resources to support the technical integrations between your environment and your supplier’s environment and ensure that system access continues uninterrupted. 

You may need quality resources who spot-check the suppliers work outcomes and ensure they remain aligned with the expected quality standards, and conduct calibrations with the supplier’s quality team. 

You may need additional training resources to develop variations to training content rolled out internally to ensure relevance to the supplier’s environment. 

Depending on the size and scale of your business, some of these functions may not be required or may be bundled into one person’s role.    

Lesson: Always thoroughly scope the support required in-house to support the outsourcing arrangement, and consider the impact to every support function and internal team within your business to fully understand your in-house costs. 

 

Cost #4 – Poor Outsourcing Strategy 

How have you determined what tasks & functions you will outsource?   

Have you involved your key stakeholders (both internal and customers) in designing the future-state?   

Have you considered the strategic value to the business in losing that connection point with your customers?  Will the short term cost saving result in bigger and more costly challenges longer term? 

Outsourcing the wrong functions, or not engaging key stakeholders early enough in the process to hear and manage their concerns can result in customer backlash.  And people are clever – they will find the loopholes to get in contact with in-house resources or find other solutions if they are not happy with the service they are getting from the outsourced team. 

Or worse – they will leave you and go elsewhere, become disengaged, become detractors, and generally cause damage to your brand.  You only need to look at the number of big brands bringing their customer facing functions back in-house to see the impact of poor strategy. 

 

Lesson: As with any change, do an impact assessment as part of your decision to outsource and always overcommunicate to those stakeholders affected by the changes. 

 

Bonus Lesson: Automation vs Outsourcing

We recently developed a white paper which discusses in’s and out’s of Robotic Process Automation, and our research found that automating a routine, high volume task can cost 50% less than a worker in the Philippines, 34% less than a worker in India, and 90% less than a worker in Australia. 

When considering your approaches to reducing cost, it’s worth considering if some of your business processes are suitable for automation before deciding on outsourcing as your primary cost reduction strategy. 

 

 

About the Author 

Frances Quinn is the Founder and CEO of Athena – a consulting firm specialising in driving operational excellence and customer experience through on-point strategy and masterful execution.