The Real Cost of Outsourcing
additional 2 % to 3 % on transition costs.
Hidden Costs of Transition:
The Cost of Layoffs – Laying off employees as a result of your offshore contract poses other sometimes unanticipated costs. To begin with, you have to pay many of those workers severance and retention bonuses.
Layoffs can also cause major morale problems among in-house “survivors,” in some cases leading to disaffection and work slowdowns. Companies with experience in offshoring factor productivity dips and potential legal action from laid-off employees into the cost-benefit analysis.
%Estimation: Expect to pay an extra 3 % to 5 % on layoffs and related costs.
The Cultural Cost – One of the biggest impediments to offshore savings is productivity. You simply cannot take a person in your home country and easily replace him/her with one offshore worker. One reason for that is the home country workersâ comfort level with speaking up and offering suggestions. Another productivity killer is high turnover at offshore vendors. Attrition rates climb as high as 35 % in India, according to the National Association of Software and Service Companies. Turnover can cost an additional 1 % to 2 %. Finally, communication issues can slow things to a halt. Language and other cultural differences can cost an extra 2 % to 5%
%Estimation: Expect to spend an extra 3 % to 27 % on productivity lags.
The Cost of Ramp-up (ensuring Quality, processes and procedures)
Well-defined and accepted internal software development and maintenance processes are also key to making an offshore situation work. If a company doesnât create solid in-house processes, the vendor will have to put more people onsite to compensate for your inadequacies, and theyâll spend all of your savings.
The ability to write clear specifications is also critical to achieving offshore savings. Creating a great spec package is costly and time-consuming. On a 1,000 man-hour project for example, the staff will spend 100 hours to create a spec package.
At the other end of the process is quality assurance (QA) testing, an area which must become more robust in an offshore arrangement.
%Estimation: Expect to spend an extra 1 % to 10 % on improving software development processes.
The Cost of Managing an Offshore Contract (6-10%)
Managing the actual offshore relationship is also a major additional cost. There’s a significant amount of work in invoicing, in auditing, in ensuring cost centers are charged correctly, in making sure time is properly recorded Each project manager oversees the effort. He audits the time sheets from the vendor and rolls the figure into an invoice, which then has to be audited against the overall project, which is then funneled to finance for payment.
Sometimes, managing the offshore vendor is such a big task that you have to assign someone to handle it on a half-time basis. The individual must make sure projects move forward, and develop and analyze vendor proposals against the RFPs when it comes time to bid out new work.
% Estimation: Expect to pay an additional 6 % to 10 % on managing your offshore contract.
Now letâs sum it up What we skipped in mentioning so far, are the well-known standard costs of outsourcing that every company will provide you. That is because we wanted to emphasize exactly on the âtrickyâ hidden costs that will give you a more realistic view on how much will outsourcing bite from you budget.
The IT research company, Gartner, provides us with the following standard figures in %age of what you must specify in the contract about payment.
Furthermore we add another table with what we have outlined on the previous pages. Therefore you can see that the real costs you pay for outsourcing is somewhere between 13-65% higher than you think in the beginning.
Conclusion
The estimation of costs itâs a crucial stage in deciding whether, how and what to outsource. You must take into consideration every single aspect that might boost your bill.
And whatâs more important, instead of focusing on low cost when choosing an outsourcing partner, you will gain more by looking at the bigger picture, and scrutinizing if the firm has the necessary resources and the ability to deliver. The firm should be a part of the strategic decisions taken by the parent company and commitments should based on long-term returns that benefit the business as a whole rather than just saving on short-term costs.
Pages: 1 2