Outsourcing is a business strategy that involves hiring external parties to perform certain tasks or functions that are not part of your core competencies. Outsourcing can help you save time, money, and resources, as well as access specialized skills, expertise, and technology that you may not have in-house.
However, outsourcing is not a one-size-fits-all solution. It requires careful planning, execution, and evaluation to ensure that it delivers the desired results and benefits for your business. One of the most important aspects of outsourcing is measuring its return on investment (ROI), which is the ratio of the net profit to the total cost of the outsourcing project.
In this article, we will explain how to measure the ROI of outsourcing, what factors to consider, and what best practices to follow.
To measure the ROI of outsourcing, you need to follow these steps:
- Define your goals and objectives: Before you start outsourcing, you need to have a clear vision of what you want to achieve and why. You need to set specific, measurable, achievable, relevant, and time-bound (SMART) goals and objectives for your outsourcing project, such as increasing sales, reducing costs, improving quality, or enhancing customer satisfaction.
- Identify your metrics and indicators: After you define your goals and objectives, you need to determine how you will measure and track your progress and performance. You need to identify the key metrics and indicators relevant to your goals, such as revenue, profit, cost, quality, productivity, efficiency, or customer satisfaction.
- Collect and analyze data: Once you have your metrics and indicators, you need to collect and analyze data from various sources, such as reports, surveys, feedback, or testimonials. You need to compare the data before and after outsourcing, with your benchmarks and targets, to evaluate the impact and outcome of your outsourcing project.
- Calculate the ROI: After you collect and analyze data, you need to calculate the ROI of your outsourcing project. You can use the following formula to calculate the ROI: ROI = (Net Profit / Total Cost) x 100%. The net profit is the difference between the revenue and the cost of the outsourcing project. The total cost is the sum of all the expenses related to the outsourcing project, such as fees, salaries, training, equipment, or overhead.
- Report and communicate the results: After you calculate the ROI, you need to report and communicate the results to your stakeholders, such as your management. You need to present the results in a clear and concise manner, using charts, graphs, or tables, and highlight the key findings, insights, and recommendations.
When measuring the ROI of outsourcing, you need to consider the following factors:
- Time horizon: The time horizon is the period over which you measure the ROI of your outsourcing project. Depending on your goals and objectives, the time horizon can vary from short-term to long-term. For example, if your goal is to reduce costs, you may see the ROI in a few months. However, if your goal is to increase sales, you may need to wait for a year or more.
- Qualitative and quantitative benefits: The benefits of outsourcing can be both qualitative and quantitative. Qualitative benefits are the intangible and subjective benefits that are difficult to measure, such as customer satisfaction, brand reputation, or employee morale. Quantitative benefits are the tangible and objective benefits easy to measure, such as revenue, profit, or cost. You need to consider both types of benefits when measuring the ROI of outsourcing and assign a monetary value to the qualitative benefits if possible.
- Direct and indirect costs: The costs of outsourcing can be both direct and indirect. Direct costs are the explicit and visible costs related to the outsourcing project, such as fees, salaries, or equipment. Indirect costs are the implicit and hidden costs indirectly related to the outsourcing project, such as overhead, training, or quality control. You need to consider both types of costs when measuring the ROI of outsourcing and include all the relevant and significant costs in your calculation.
To ensure the accuracy and reliability of your ROI measurement, you should follow these best practices:
- Define your baseline and benchmarks: Before you start outsourcing, you need to establish your baseline and benchmarks, which are the starting point and the standard of comparison for your ROI measurement. You need to measure your current performance and results, as well as your industry average and best practices, to compare them with your outsourcing performance and results.
- Use multiple metrics and indicators: To get a comprehensive and holistic view of your outsourcing project, you need to use multiple metrics and indicators that cover various aspects and dimensions of your goals and objectives. You need to balance the financial and non-financial, the short-term and long-term, and the internal and external metrics and indicators.
- Adjust for external factors: To isolate the effect and contribution of your outsourcing project, you need to adjust for external factors that may influence your ROI measurement. You need to account for the changes and fluctuations in the market conditions, customer behavior, competitor actions, or regulatory environment that may affect your performance and results.
Outsourcing can be a powerful and profitable strategy for your business if you measure and manage it properly. By following the steps, factors, and best practices that we discussed in this article, you can calculate and communicate the ROI of your outsourcing project and demonstrate its value and impact to your stakeholders.
