Optimize Outsourcing: Analyze Cost and Benefits

April 23, 2019

Cost and benefit calculations are key components in understanding the advantages of outsourcing, and whether this strategy is a prudent decision for a particular business. Countless businesses of all sizes outsource as many functions as possible. Other businesses never use or consider outsourcing as an alternative means to accomplish certain internal functions.

Operational cost savings and optimizing efficiency are two key considerations to consider when deciding whether or not to outsource various business functions. In a competitive marketplace (which is almost all marketplaces), businesses must concentrate on both of these aspects to maximize profits. It is important, however, for a business to understand both costs and benefits before deciding on this approach. By leveraging the benefits with costs, businesses can use outsourcing as a major contributor in achieving goals both in terms of profit and market competitiveness. 

Outsourcing cost and benefit analysis must take into consideration financial and non-financial factors: 

Cost Savings - In economic terms, outsourcing must add to the bottom line by reducing operational expenditures. This analysis can be quite simple in determining any cost reduction. Does outsourcing eliminate or reduce operational expenses, employee costs, or a significant capital investment for equipment? Along with cost reductions for outsourcing, consideration must be given to the quality of services received. Significantly lowering costs but accompanied by a reduction of quality should be carefully considered before making the decision to go forward. 

Technology and Human Resources of Vendor – The decision to outsource must include an analysis of the vendor’s technology and human resources. Is the vendor capable of handling all outsourced needs in a particular area? Are equipment and software needed to process the outsourced functions up-to-date? Are employees well trained and able to execute the outsourced tasks successfully? If technology and resources of an outsourcing vendor negatively affect quality, the purpose of outsourcing can easily be defeated making any economic savings less than beneficial to a business.

Quality and Timeliness - Quality and timeliness are as important as cost savings. If an outsourcing partner fails to deliver on time and without high standards of quality, any cost reduction will be offset. Inquiries should be made regarding an outsourcing vendor’s disaster recovery plan. What will be the effect on the business be if the outsourcing vendor has a disaster? A business cannot afford to have its operations interrupted due to vendor problems.

The Competitive Advantage Factor – Can the outsourced vendor be a “business partner?” Will the vendor be reliable? Will the vendor communicate with the business and treat it as a priority client? Will the vendor share the business’ philosophy in helping to gain a competitive advantage in the marketplace? Is the vendor ready and capable of “going the extra mile” if and when necessary? Although any outsourcing vendor needs to be monitored, will regular progress reports be furnished at designated times? And, in the case of increased business or an emergency, will the outsourcing vendor have the capabilities – technical and non-technical – to handle out of the ordinary needs? An outsourcing vendor must be capable of maximizing their resources with unfailing support for a business.

Time to Focus on Core Business – One major advantage of outsourcing is to allow owners and managers to focus on the core aspects of their respective businesses. Outsourcing decreases the time spent on non-core areas giving owners and managers more time to devote to core functions. If an excess amount of time has to be spent monitoring an outsourcing vendor, then it can defeat a non-economical objective of outsourcing. Outsourcing must allow additional time for owners, managers, and employees to focus on core business objectives. 

Reduced Liability – Many functional areas in a business carry with it a certain amount of liability such as the proper processing of payroll, deductions, and filing of various governmental tax returns and reports. Other functional areas depending on the business might have liability exposure depending on the risk of the activity. Outsourcing these functions can reduce both liability exposure and possible insurance costs. Liability details need to be considered and discussed with the vendor in advance of any agreement.

A real advantage of outsourcing is a combination of economic benefits and business empowerment such as increased knowledge, technical superiority, quality compliance, timeliness, market advantage, and limitations of liability. Outsourcing should be a definite consideration for small businesses and SMEs depending on the type of business and functions currently performed internally.