Understanding the ROI of Outsourcing

By: TAPFIN February 16, 2022

If you are an HR professional, you may wonder, "Would it be less costly to outsource a job instead of hiring someone in-house?" 

With modern IT solutions and a smaller, tech-savvy world, companies can remain competitive and enjoy the benefits of outsourcing. 

Today, 85% of global manufacturers consider outsourcing an excellent way to streamline operations and keep operational costs down. Almost every organization outsources services like accounting, legal assistance, IT services, and web development services, to name a few.

The big question for you is whether outsourcing as an investment is profitable or not.  

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The Hidden Costs of Outsourcing 

To determine whether or not outsourcing is a good investment for your company requires discovering how much it will cost to implement. Though outsourcing can save your organization a considerable amount of money, failing to consider the hidden costs that are likely to accrue can subtract from the gains.  

TAPFIN's outsourcing solutions take the hidden costs into account so that you never have to worry that unexpected costs will take away from your profits 

Cost of Outdated Strategy 

Organizations need to constantly assess their outsourcing portfolio in terms of revenue typology versus the outsourcing decisions that may lead to higher costs. Markets change over time, prompting complicated logistics, transportation, in-transit handling damages, and other covert management costs. 

A constant review of outsourcing strategy would help take advantage of market changes and reduce costs. For example, if all the manufacturing work is done in China, it would be expensive to serve emerging markets in South America in terms of transport and logistics. In this case, an organization may consider relocating some of the manufacturing functions to Brazil upon a strategy review. 

Cost of Management and Coordination of Contractors 

The annual cost of management and coordination of suppliers may add up to millions of dollars if unchecked. These costs include the expenses incurred when you visit suppliers and other unseen costs like warranty and returns, loss of customer confidence, and lost sales. 

To control the losses, organizations need to collect and analyze relevant data. Ask why something happened, and then interrogate each answer until you get to the core of the problem. Then make the necessary adjustments to rectify the identified problems. Some of the causes of the losses may be poor leadership or a bad selection of suppliers. 

Cost of Aspirational Services 

When you draft a contract engagement, you set the price depending on what you believe you will need over the agreement period. However, the leadership may change, or changes in your business may happen. The changes may mean that your organization no longer needs what sounded so good when signing the contract.  

To make sure you do not continue paying for unnecessary services, you must eliminate those that the organization no longer needs. You should only pay for the essential services and drop those that are not necessary. 

Organizations can prevent losses due to aspirational services by identifying the contract's most basic or costly deliverables and obligations. Then track their delivery within the contract period and do away with the unimportant ones. 

Duplication of Work 

When problems arise, the first thing an outsourcing client does is attempt to fix the problem. But they should not. They should call the supplier of the services for the job. Trying to fix problems requires the outsourcing company to retain more staff, which works against the goal of hiring an external services provider. 

To avoid unnecessary costs, ensure the roles of the remaining staff are clearly defined to avoid duplicating the supplier role. However, some business units must not wholly opt out of the outsourced services to prevent value loss. 

Employee Disengagement 

While outsourcing, businesses must take care of transition impacts and risks. Employees of the outsourcing organization must seamlessly transition from doing the work to supervising it. Ensure the workers do not feel left out or out of touch with the organization. 

If workers feel left out, they may opt to leave the organization, leading to high attrition and loss of talent. 

Most organizations reap big when they decide to hire third parties to carry out some functions. The move can lead to significant profits or fast growth and development. However, it is advisable to uncover the unseen costs because the outsourcing process is complex, often involving an intricate network of transactional procedures. These procedures often obscure the hidden costs. 

The ROI of Outsourcing: Four Case Studies Examined 

Various businesses have reaped huge benefits from outsourcing. They have had time to focus on other core business growth and development aspects.  

1. Slack  

The case of Slack represents an example of successful outsourcing by an early-stage startup. Slack is a real-time office collaboration tool that features chat rooms channels by topic, direct messaging, and private groups. Today, Slack has become a favorite business communication tool with more than 12 million daily users. Statista projects that the number of users will hit a staggering 79 million by 2025. 

Besides being one of the fastest-growing companies, Slack is an excellent example of a successful outsourcing case. For instance, in an attempt to cut down on costs and save on its startup capital, Slack outsourced app development services from the start. 

Moreover, the company managed to get 15,000 users in its first two weeks in business, thanks to outsourced services. As a result, Slack became a startup unicorn in 2014. It is an excellent example of how a startup can use outsourced services to win investments and clients. 

2. WhatsApp 

This app does not need an introduction. WhatsApp has metamorphosed into one of the most famous messaging apps globally, with over 2 billion users. Back in 2009, WhatsApp was little known to the world. The app faced many problems soon after its launch. It crashed twice and kept experiencing bugs, not to mention stiff competition from similar services like Facebook. 

But why then did WhatsApp become so popular beginning in 2012? The answer lies in outsourcing. Acton and Koum, the founders, decided to turn to Eastern Europe for much-needed programming services. Consequently, WhatsApp transformed from a small organization with just 30 employees into a significant player in the tech industry. 

Outsourcing helped the company cut operational costs and allowed the founders more time to concentrate on other crucial business aspects like marketing. By the time the duo sold the app to Facebook in 2014, it was worth $19.6 billion, up from an initial capital investment of $250,000. Is this not a wonder of outsourcing? 

3. Citigroup 

Citigroup is a US-based multinational investment and financial services provider. The company began outsourcing talent from India, the Philippines, and Poland in 1992, making it one of the earliest companies to outsource crucial business services. Consequently, the company reduced its HQ staff by 11,000 employees. The workers were redistributed to the company's overseas offices, enabling Citi to save an astonishing $1.1bn a year. 

Today, Citigroup is one of the most prominent financial services providers. The company runs 74 million customer accounts for leading brands like Shell, Mobil, Exxon, Best Buy, Macy's, and Sears. Additionally, Citi serves more than 10,000 ultra-high net worth clients hailing from 100 countries. 

Outsourcing has made Citigroup rank among the world's largest multinational financial companies. Other financial services providers that have achieved great growth and development due to the practice include the Bank of America, Goldman Sachs, Absa, and J.P Morgan. 

4. Google 

Google is a global tech giant. However, even with its staggering more than 89,000 in-house employees, the company cannot handle its massive workload. So the firm has turned to outsourcing global talents and partnering with contractors to get enough manpower for the AdWords project. The project is Google's income earner. In 2021 only, the company raised $209.49 in advertising revenue through its ads platform, an example of an incredible ROI of outsourcing. 

Google has had a chance to increase its revenue, access valuable global talent, reduce operation costs, and get global expertise lacking within its walls. By 2018, the company's external workforce was larger than its direct employees

Taking Google as an example, companies can learn that outsourcing is essential if you don't have the needed talent in your workforce. It takes less effort and time to get the talent you require. 

Maximize Your Outsourcing ROI 

Outsourcing involves unpredictability, professional input, hard data, and an array of informal activities underlying a formal procedure. So, if you want to maximize the return on investment from HR outsourcing, you should pick an outsourcing partner that provides your organization with a full set of services.  

A full-service outsourcing partner will lower your expenses for recruiting, benefits, and workers' compensation insurance. It will also confer protection from certain liabilities since a full-service outsourcing agency also handles administrative tasks like unemployment insurance and legal compliance. 

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