Top 10 Hidden Costs of Outsourcing - Shadow Organizations, Staff Augmentation

Hidden Cost No. 9: Shadow organizations
Problem: Shadow organizations—those employees in the retained organization who continue doing things the old way—almost always exist in an outsourcing relationship. For example, even though a global retailer’s service provider was doing operations testing and reporting, a shadow organization continued doing it as well—which eroded savings by $3 million in the first two years of the relationship. Left unchecked, redundancies created by shadow organizations can reduce outsourcing value by 10 to 15 percent.

Solution: As part of change management, educate the organization on why it’s important to use the new services. If some departments or executives don’t trust the service provider, then the governance team should find out why—and fix it.

Hidden Cost No. 10: Staff augmentation
Problem: If your transition is six- to 12-months long, but employees leave before the transition is complete, then you have to backfill those positions, which adds unanticipated hiring and training costs. One transportation company, for example, failed to keep about 20 employees long enough to do the testing and process-mapping required for the transition. So it paid its service provider an extra $500,000 to do the work. That’s a premium of about 20 percent over the salary of each lost employee.

Solution: Most employees are more willing to stay if there’s a monetary payout at the end of the road. Hold on to employees by tying their severance to the end date, or give them a retention bonus.

David Brown, a client executive with EquaTerra, leads the firm’s financial architecture competency.

See also: Pros and Cons of Offshore Locales

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