How can you calculate cost savings when outsourcing a business process?

In simple words the amount of money being spent in running the show inhouse vs outsourced. The only thing to bear in mind is the cost of service depends on which tier partner you choose, so the cost savings may or may not been seen if you only look for just employee cost + infra, there are a bunch of other costs which are hidden and are never attributed or looked at, for example; the additional cost of managing that employee at inhouse (not just his/her immediate management cost) which includes, payroll, grievance management, regulatory requirements (PF, ESI), admin costs, cost of perishable items...all of these see a reduction but never get attributed.

Difference of total cost of operations between inhouse and outsourced model is the cost savings. But outsourcing a business process does not necessarily lead to cost savings if the objective of outsourcing is to get the non core business activities managed effectively through industry expertise creating long term value and enhance the customer's experience which will help organisations to focus on their core. There are certain hidden costs which are not apparent while calculating fees paid to an outsourcing service provider. It is business imperative that the service provide relentlessly work towards consistency, excellence and innovation to improve the outcome and reduce the cost to help achieve both the organisations strategic vision.

The cost savings formula is simple to apply once all the “costs” are accounted for. Keep in mind that outsourcing will lead to additional costs such as vendor management, travel to partner sites, site level certifications if applicable etc., that should be accounted for. I also highly recommend keeping a contingency budget cost savings are computed and presented/committed.

Identify and Measure Current Costs: Labor Costs: Calculate the current expenses related to salaries, benefits, and other employee-related costs for in-house operations. Infrastructure Costs: Consider the costs associated with office space, utilities, equipment, and technology needed to support the process internally. Training and Development: Include costs related to training and ongoing development of in-house staff.

The cost of running the show in-house vs. outsourcing. The only thing to remember is that the cost of service depends on which tier partner you choose, so the cost savings may or may not be seen if you only look at employee cost + infra. There are a lot of hidden costs that are never attributed or looked at, such as the additional cost of managing that employee inhouse, which includes payroll, grievance management, regulatory needs, and more.

Consider a scenario where an organization spends $500,000 annually on in-house customer support operations. Upon outsourcing the same function for $300,000, the calculated cost savings would be $200,000. This example exemplifies the tangible financial benefits that can be realized through judicious outsourcing decisions.

Understanding needs is a crucial factor in cost saving through outsourcing. 1. Conduct a thorough process analysis. 2. Identify key performance indicators (KPIs). 3. Define your outsourcing objectives. Vendor Selection a. Create a comprehensive vendor evaluation framework. b. Assess cultural compatibility. c. Scrutinize past performance & client testimonials. Cost Analysis & Savings Calculation i) Break down costs into direct and indirect categories. ii) Account for potential hidden costs. iii) Implement a dynamic cost-saving model. Implementing this steps will ease your outsourcing decisions. Our clients have been witnessing a 35-40% reduction in operational costs, increased efficiency by 30% & a surge in overall productivity.

Another aspect which makes a dent in cost savings during the entire course of outsourcing term is automation, RPA and rate of process digitization at the BPO provider's end. Often slow decision making, lack of technology ability and failure to automate manual tasks does not realize the desired cost savings.

This cost savings formula offers a helpful framework, but it's crucial to acknowledge its limitations. Quality and performance of the provider play a pivotal role, impacting customer satisfaction, retention, and ultimately, revenue. Undoubtedly, failure to meet expectations can be costly, leading to dissatisfaction and tarnishing reputation. Moreover, hidden costs like communication, coordination, and legal aspects are often overlooked. While outsourcing can optimise focus on core strengths, it's vital to balance this with potential loss of control and adaptability. Navigating these factors ensures a holistic view, enabling informed decisions that align with both short-term gains and long-term strategic objectives

Several factors orbit the cost savings equation, influencing its outcome. These include the nature of the outsourced task, geographic location, labor costs, and technological requirements. Each variable introduces a unique dimension, requiring a meticulous understanding to ensure accurate calculations and strategic decision-making

Identify Costs: Break down the expenses. Look at direct costs like labor, equipment, and overhead. For labor, compare outsourcing costs to in-house salaries, benefits, and taxes. Don't forget to factor in equipment, technology, and other overhead costs.

Optimizing cost savings demands a nuanced approach. Organizations must conduct a thorough analysis of potential outsourcing partners, evaluating their expertise, reputation, and cost structures. Implementing efficient communication channels and performance metrics further optimizes the outsourcing process, enhancing operational efficiency and overall savings.

Beyond the immediate financial gains, the benefits of cost savings calculation extend to strategic planning and resource allocation. It provides organizations with a roadmap for informed decision-making, aiding in the identification of areas ripe for outsourcing. Additionally, it fosters transparency, enabling stakeholders to gauge the return on investment and assess the viability of outsourcing partnerships.

the formula for calculating cost savings when outsourcing a business process can be summarized as follows: Cost Savings = (In-house Costs) - (Outsourcing Costs) +/- (Efficiency Gains or Quality Improvements) - (Risks and Hidden Costs) By conducting a thorough analysis and utilizing this formula, businesses can make informed decisions regarding the cost-effectiveness of outsourcing a particular business process.

I always like to consider how much I am paying and how much the actual associates are being compensated. Try to get the organization that you are working with to give you a salary range for the position(s) you are outsourcing. What I have learned is that the actual associates do not get paid well and the outsourcing company pockets a lot of the money and makes huge profits. Always try to make sure your team is taken care of financially. Consider building your own offshore team and outsource to your own company. You can save a lot more money that way!! All it takes is hiring an expert to make it happen and you can ensure that your associates are taken care of and you still save a huge amount of money.

You BPO partner should be able to add new capabilities to your business that you did not possess before. If not, you are doing it wrong. After you finish your cost savings exercise, answer the following question: "How much would it cost to develop these capabilities internally"? In some cases, this added value provided by the BPO partner is superior to any cost saving you can achieve.