The Real Cost of Outsourcing

The Real Cost of Outsourcing

TABLE OF CONTENTS
? Introduction
? Cost of Selecting the Vendor
? Cost of Transition
? Cost of Managing an Offshore Contract
? Conclusion

Introduction
In this white paper, we will explore the total cost of outsourcing by uncovering the hidden figures that boost up your bill. There are areas where you will have to invest more than you thought in the beginning, issues where things like poor processes and productivity can eat away potential savings and places where you can end up spending just as much as you would do it without outsourcing.

The Cost of Selecting a Vendor (1-10%)
With any outsourced service, the expense of selecting a service provider can vary from 0.2 % to 2 % in addition to the annual cost of the deal. These selection costs include documenting requirements, sending out RFPs and evaluating the responses, and negotiating a contract. A project leader may be working full time on this, with others chipping in, and all of this represents an opportunity cost. There are also the legal fees. Some companies hire an outsourcing adviser for about the same cost as doing it themselves. To top it off, the entire process can take from six months to a year, depending on the nature of the relationship.
Even when there is an existing tie between the customer and offshore vendors, the expensive and lengthy step of vendor selection is a must-do for successful outsourcing.
At this stage, travel expenses enter the picture as well. A trip overseas helps CIOs get comfortable with their choice.
%Estimation: Expect to spend an additional 1 to 10 % on vendor selection and initial travel
costs.
Choose the best sourcing model
According to a study released by Gartner, many CIOs are still focused on short-term savings rather than longterm business success when establishing outsourcing relationships – and that it’s costing them in the long run.

Cost of Selecting the Vendor
? Putting together the RFQ/RFP
? Distributing the RFQ/RFP and
collecting the feedback
? Analyzing and short listing
? Due Diligence
? Management Sponsorship
? Decision to Outsource
In order to address these issues, the organization must know that they can choose from among eight basic sourcing models to best exploit established or future capacity, whether the organization gets its services from internal staff, external staff or through a partnership. You must take each of the following models into account before rushing to choose one vendor or another, or even before taking the decision to outsource.

8 SOURCING MODELS
• Internal delivery: The current status of most organizations’ IT or process operations
• Shared service or captive center: A centralized — onshore or offshore — service organization delivering IT services or business processes for an organization, also known as an “insourcing” organization
• Full outsourcing: A single contract with one provider for the full scope of services
• Joint venture: A separate service company built and co-owned with an external service provider (or other client organizations in case of consortium), which is expected to provide management and expertise
• Best-of-breed consortium: A group of external service providers, with a lead provider established for a large contract
• Brand service company: A way to share IT services (and often non-IT services and processes) to leverage the market, selectively outsource parts of the services and, in some cases, provide services to the market
• Selective outsourcing: Separate outsourcing contracts for selected IT functions or business processes, using a best-of-breed tactical approach and competitive deals
• Prime contractor: Provides management and integration of multiple service providers to derive a single or global solution or service In some sourcing arrangements — including multisourcing, transformational relationships and project work — an organization may want to consider additional options to get the services it needs. Specialists suggest several sourcing options sit below the sourcing models.
? The sourcing of technical or business skills
? The sourcing of a project or a part of it
According to a survey of 945 IT professionals, more than 50% of the respondents said they expected to see significant cost savings by outsourcing. Fewer organizations said their objective in outsourcing was to make companies more competitive in the market.(Gartner 2006)
? The sourcing of management
? The sourcing of an IT service
? The sourcing of a business process
? The sourcing of a business solution etc.
Organizations can choose from these sourcing options based on their tolerance for risk and their willingness to accept or transfer management responsibility for the delivery of services.
Selecting an External Service Provider requires personnel resources and access to data, key processes and procedures, generally for a short period of time. These resources are crucial to maintaining the schedule and meeting objectives. Develop and follow a formal, specific timeline for each step in the process. This timeline provides rigor, reduces costs, helps maintain enthusiasm, and provides for an overall coordination of the organizational and External Service Provider personnel who manage the process.
Too many organizations, however, focus only on selecting the lowest-cost source. Organizations must institutionalize an effective and efficient process that enables the source selection team to make the best value selection (which is often not the lowest cost selection).
Cost benchmarking to the current market?
If the price (regarding the in-scope, requested services) is not appealing enough for the client, a typical vendor reaction is to offer fewer services, reducing the scope. The offer will include only those services for which the vendor can provide the best results, and it will simply leave the rest — by default — under the client’s responsibility.
This causes two major problems for the client:
• The responsibility issue: The client must manage the overall service, being responsible by default for everything that will not be done by the vendor (i.e., not clearly agreed in the contract).
• The cost issue: The client will incur all costs associated in both doing everything that will not be delivered by the vendor (i.e., not clearly agreed in the contract) and managing on top of that the services delivered, the contract and the vendor relationship.
- Supplier delivery commitments
- Is cost/quality appropriate for services delivered, or distorted by supplier issues?
- Does outsourcing compare favorably against in-house service delivery?
- Are internal contract management costs and time appropriate?

The Cost of Transition (2-3%)
The transition period is perhaps the most expensive stage of an offshore endeavor. It takes from three months to a full year to completely hand the work over to an offshore partner. If company executives aren’t aware that there will be no savings—but rather significant expenses—during this period, they are in for a nasty surprise.
Costs of transition are typically bundled into the cost of the overall outsourcing deal. However, in the case of complex BPO involvig migration to new IT platforms and systems, which is more than labor arbitrage, Gartner sees separate contracts drawn up to cover these costs. Best practice is for a single comprehensive plan of activities to be created and used as the master plan for the entire transition. The greater the complexity, the higher the transition cost. Costs retained by the client must also be factored into the business case when contemplating an outsourcing deal.
CIOs must bring a certain number of offshore developers to their headquarters to analyze the technology and architecture before those developers can head back to their home country to begin the actual work.

Cost of Transition
? Transition project management
? Third-party consultant oversight (if outside verification and validation is needed)
? Communications (resources to write, manage and facilitate, as well as the potential use of public relations firms to communicate outsourcing deal/transition messages to the public)
? Human capital management (can include severance, outplacement, retention bonuses, “re-skilling” and hiring costs)
? Legal fees (interpretation of the contract, third-party contracts, established vendor contracts if an interface is needed with the new provider)
? Technical costs (development/integration costs to new interfaces, porting of code to new platforms)
And CIOs must pay the prevailing home country hourly rate to offshore employees on temporary visas, so obviously there’s no savings during that period of time, which can take months. And the offshore employees have to work in parallel with similarly costly in-house employees for much of this time. Basically, it’s costing the company double the price for each employee assigned to the outsourcing arrangement (the offshore worker and the in-house trainer). In addition, neither the offshore nor in-house employee is producing anything during this training period.
During the transition, the offshore partner must put infrastructure in place. While the offshore partner incurs that expense, the customer should monitor the process carefully. Often it can take longer than expected.
%Estimation: Expect to spend an

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