Top 10 Hidden Costs of Outsourcing - Retained Organization, Lack of Governance, Internal Transition
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Hidden Cost No. 3: Retained organization
Problem: You transferred 50 percent of some employees’ jobs to the service provider, but you’re still paying them for the full function. This eats into your savings. One retailer, for example, had the work of 1,100 employees in scope, but the company held onto 50 percent of the work for 200 of those employees. As a result, the company overstated its business case by $24 million.
Solution: After the transition, redesign the organization, redefine job functions, and redeploy or sever. Indeed, if the same retailer had realigned its retained organization, it could have regained $12 million of its lost savings.
Hidden Cost No. 4: Lack of governance
Problem: Companies typically underestimate the people, process and technology required to manage the outputs of an outsourcing contract. In fact, provider invoice errors alone can erode your monthly savings by two to 10 percent. For example, when one global consumer goods company assessed the performance of its governance organization, it discovered overcharges on 5 percent of the provider’s invoices, to the tune of $40,000 month.
Solution: Remember, just because you’ve outsourced a process doesn’t mean you’ve outsourced the need to manage the contract. Invest in governance teams and tools to mitigate risk and achieve the deal’s intended value.
Hidden Cost No. 5: Internal transition
Problem: Companies typically overlook the effort required to do things in a new way. In one outsourcing deal for finance and accounting, which included a new e-system for accounts payable, the buyer failed to budget for the interface development required on the client side—an oversight that cost $2.5 million in the original business case.
Solution: Anticipate these costs—including time, external resources, and applications for interfacing with the service provider—and include them in your estimates.
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