Top 10 Hidden Costs of Outsourcing

By David Brown  |  Posted 09-09-2008 Print Email

Businesses often make avoidable mistakes in crafting and executing their outsourcing plans. Here’s a list of typical pitfalls—and how your company can avoid them.

When it comes to outsourcing, there's more to your business case than the service provider's price. Some outsourcing costs are less visible--or downright hidden. EquaTerra, an outsourcing consultancy, reviews the top 10 hidden costs and how to avoid them.

Hidden Cost No. 1: Currency
Problem: Because of currency fluctuations, last year's invoice of $1 million a month could be $1.4 million today.

Solution: Hedge the currency risk by including caps and collars in the contract. For example, you and your service provider might agree to share responsibility for currency adjustments up to a certain dollar amount, beyond which you'll go back to the table and renegotiate. By hedging the risk in this way, many domestic companies protected themselves against the devaluation of the U.S. dollar.

Hidden Cost No. 2: Hardware/software refresh
Problem: Your contract may include a two-year refresh of hardware like desktops/laptops and software like Microsoft Office. But if your outsourcing deal is five to seven years, you're going to need another refresh--and it's usually not in the contract. Fail to account for it, and the cost can be $500 to $2,000 per employee. One pharmaceutical company, for example, mistakenly assumed its service provider would pay for an unscheduled refresh, and the company had to come up with $20 million.

Solution: Anticipate updates beyond the typical one-year refresh, and put them in the contract. That means carefully evaluating the outsourcing solution, asking service providers the important questions about hardware, and developing contract terms that are clear and precise. To ensure the price includes refreshes throughout the equipment lifecycle, ask your service provider to include a refresh schedule for every piece of hardware.



 

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