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Retirement Costs, Planned Headcount Reduction, Poor Change Communications

By David Brown  |  Posted 09-09-2008 Print

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.

Hidden Cost No. 6: Retirement costs
Problem: Many companies continue to pay into retirement plans and pensions even after employees have been terminated--and they never realize the error. This overpayment can cost hundreds of thousands of dollars a year in foregone savings. One company, for example, eventually discovered that it was paying thousands annually into a pension fund for each of about 1,000 displaced employees.

Solution: After the outsourcing transaction, review the list of employees that will be displaced, and work with the HR department to update the database. May seem pretty simple, but this is a common oversight that can add big cost. 

Hidden Cost No. 7: Planned headcount reduction
Problem: Most companies plan to reduce headcount through outsourcing, but they usually end up keeping some employees to help in the transition - and that's a cost they didn't account for. To minimize its risk, for example, one pharmaceutical company kept about 20 percent of its staff for six months after the go-live date, which added $1.5 million in cost. Overambitious headcount estimates can cut projected savings by 10 to 20 percent.

Solution: Don't overstate the savings. Many companies, for example, will anticipate a "ramping down" of employees after the provider takes over the services. This helps ensure a smoother transition and a more realistic business case.

Hidden Cost No. 8: Poor change communications
Problem: Change communication in outsourcing is extremely complex and burdensome. If you do it poorly, some employees may leave before the transition. Or, if you fail to give enough notice, some employees or union workers may stay too long. In this case, you won't be able to reduce your headcount in time, which means you'll end up paying your employees and your service provider for the same work.

Solution: Develop a thorough communication strategy--with external counsel if necessary--and start communicating well in advance of the transition. One company, for example, was outsourcing development and maintenance for a very strategic application, but it wanted to retain about 45 critical staff for their knowledge. Thanks to a "high-touch" communication plan--including frequent communications, an engaging mix of tactics, and strategic messaging--the company kept all of them, including at least 10 at-risk resources. Loss of those resources would have cost the company about $1 million for backfill and knowledge transfer.


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