How to ensure accurate ROI on outsourcing

March 7, 2012: The statistics prepared by most of the companies on the savings as a result of outsourcing is exaggerated. They claim that the company has achieved 40 per cent cost reduction, 20 per cent less defects, 35 per cent reduction in time taken to launch a product or service and so on. Some of the companies go to extend of considering such savings as business value.

For instance, a firm might consider that a reduction of launch time by 8 weeks will mean 8 weeks of extra revenue or reduction in cost. So 8 divided by 52, then multiplied by the annual revenue will equal to the value generated from reduced launch time. But this is not true.

There are many customers who are not sure whether outsourcing has provided them with value. Various surveys show that between 17 to 53 per cent of the customers have not realized return on investment from outsourcing to offshore locations. There are various factors that need to be considered while calculating the Return on Investment (ROI). Most of the outsourcing customers are not aware of these.

The following steps will help outsourcing customers in arriving at the accurate Return on Investment.

1)      Consider investment and operating cost separately. Most of the customers do not have a clear idea about the difference between investment and operating cost. Investment is something that will generate a return, which will be in the form of spending on a profit making operation. Whereas operating cost refers to the cost incurred in carrying out the operations or activities in a firm.

2)      Be clear on the objective. The organization should be clear on the objectives behind outsourcing of a particular task. For instance, if cost reduction is the objective, then the firm should compare the costs associated with both the native country and the offshore location.

3)      Compare the domestic capabilities with that of the offshore location. The customer before outsourcing should determine whether the processes that are compared are optimized. Cost comparison can be made if no changes are introduced by the service providers in the functions that are outsourced. But if changes are introduced, the customer should take that into account. Look for process improvement from the service provider and measure the results.

4)      Consider all the costs. The firm that outsource a particular business function should not make a comparison just based on the in-house cost or outsourced cost. It should consider all the costs that are involved in outsourcing the function to the service provider.

5)      Track the operating cost.  The firm must keep a track of the operating cost and compare it with the estimated that were used in the decision making process. It will be a learning experience that will help in the improving the estimation next time.

6)      Compare what the service provider delivers with that of in-house capability. The firm should determine whether they are receiving services from the service provider that they were receiving from the in-house capabilities.

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