The Real Cost of Outsourcing: The Good and Bad of Outsourcing IT

Global Sourcing Insights: Know what you're getting into before you start offshore outsourcing

Global Sourcing Insights: Know what you're getting into before you start offshore outsourcing

Santa Fe, NM — April 29, 2004 — What is the real cost of outsourcing? Conflicting reports from respected sources can heighten any company's anxiety over the decision to embark on an outsourcing initiative, particularly if it involves offshore outsourcing.

On the one hand, there is tremendous pressure to use offshore outsourcing as a means to reduce costs and increase the firm's ability to compete globally. On the other hand there is pressure both socially and politically to keep jobs in your home country.

"While there are very real benefits to be gained from [offshore] outsourcing, there are many hidden costs that can easily reduce or even negate many of these expected benefits," says Scott Noble, co-founder and director of Global Sourcing Insights LLC (GSI). "To be effective, offshore outsourcing should be very selectively focused on the specific activities and types of work that can be done more efficiently offshore; otherwise you're just playing a game of labor rate arbitrage and our experience indicates that, in the long run, this can backfire on you."

Chasing cheap labor around the globe can result in many hidden costs that, all too often, are not adequately identified or measured and, subsequently, are not accurately reflected in the firm's return on investment (ROI) analysis of outsourcing but will surely be reflected in its long-term profitability.

Scott added that some of the hidden costs for companies with poorly executed outsourcing initiatives include:

* Selecting an offshore service provider — there are now literally dozens of providers all claiming substantial savings and delivery capabilities, according to Scott. Separating the fact from the fiction can be a long, tedious, and frustrating process. Selecting the wrong vendor can be disastrous.

* Transitioning work from onsite to offshore — there are very real costs to be considered, and not just the obvious costs like telecommunications and network infrastructure. Scott said there are also the costs of training, redundant personnel during the transition phase and travel, not to mention significant cultural, social and organizational hurdles.

* Resource "shifting"— Scott explained that this is the most insidious of the hidden costs caused by changing resource requirements from one department to another, resulting in the appearance of cost reductions while, at the organizational level, the net effect on cost savings is less than what is being measured.

Hidden costs are one of the issues addressed in a recently published white paper "The Real Cost of Outsourcing" by Global Sourcing Insights. The company said this is the first in a series of papers that will deal with the cost issues affecting offshore outsourcing.