Hidden Costs of Outsourcing

The benefits of outsourcing are crystal clear: cost-efficiency, improved performance, quick scaling, introduction to the latest technology, and global tech talent. Among these, cost reduction is the major driver of outsourcing. The Covid-19 pandemic turned tables around, where cost efficiency remains the top priority.

Offshore outsourcing tells a bigger story of cost-cutting techniques and strategies. It took the place of traditional methods, tools, and processes of speed to market and scaling. 

Outsourcing is a dynamic process that changes over time, and such changes can come with increased costs, for example, increased volume data processing during the scaling process of a company.  

 A few costs are incurred while finalizing outsourcing partners or during the changing work environment, generally termed as hidden costs. It may puzzle you whether these so-called hidden costs can drain all the cost benefits from the outsourcing engagement. The straightforward answer is no. Instead, such costs serve you as a long-term investment. The increased costs of outsourcing may be hidden in fulfilling the bigger objective of business process optimization. Let us discuss hidden costs in the purview of costs of outsourcing.

Following propositions can increase the cost involved in outsourcing and lead to hidden costs: 

1. Benchmarking and Analysis costs 

Ramping up the outsourcing process involves analysis and benchmarking. Cost analysis and benchmarking are the methods organizations use to compare their outsourcing cost competitiveness in the industry. A typical benchmarking exercise considers the talent pyramid, scope of work, and non-compensation cost – the factors driving outsourcing operating costs. These factors are specific to a company, and several other market-driven forces need to be considered as they impact operations costs in a company. These include erosion, inflation, and, an obvious one, the exchange rate across nations. It also involves the cost of managing offshore contracts.  

2. Costs of Investigating and selecting a vendor 

Costs are wrapped in vendor investigation and selection. The expenditure on selecting a service provider may involve the following outsourcing costs:  

•  Request for Proposal (RFP)
• Documentation 
• Negotiation 
• Opportunity costs  
• Legal charges (as required)  
• Cost of time  
• Travel expenses

3. Cost of Transitioning

Transitioning is one of the highest outsourcing costs. It comes with the need for transitioning work and knowledge when there is less or no appreciation. Transitioning may involve the following:  

• Cost of knowledge and work transfer
• Ironing out cultural differences  
• Plugging money-saving Logistics  
• Reorientation of process

4. Layoffs and HR-related costs

A wide transition can result in unanticipated layoffs and HR-related costs. It may move to the extent of laying off. It may also necessitate severe bonuses for retention. There may be a cost of replacements involved. The high HR-related cost could be a morale problem resulting in slowdowns. 

5. Costs of Staffing and Management of Outsourcing Relationship 

Staffing and Management outsourcing costs include cultural costs, especially in an offshore outsourcing scenario. Bridging the talent gap via onshore staffing may also be a huge cost.

The business environment is highly volatile, uncertain, complex, and ambiguous (VUCA). Companies need to manage potential exposures and risks in the business environment. What is prevalent today, may lose ground tomorrow. Slow move with the business environmental drifts can impact the company’s core competency. Some outsourcing costs may increase as the markets grow, while some may decline. 

The real ambush of outsourcing costs is the modifications in the vendor contract. Such changes may impact the overall outsourcing costs. It can be due to advanced technologies that are improving at a fast pace or additional legal formalities. Even a fundamental transformation attracts huge additional work. Additional tasks add costs despite the agreement on a fixed fee. Thus, outsourcing costs differ with context and situation that may be rewarding or risky.  

Therefore, while cost-benefit analysis is performed, all such metrics and factors that lead to hidden costs should be considered.

Outsourcing partners are a part of the ecosystem and close to the company staff and vendors. It is inevitable to consider a highly-efficient outsourcing partner like ARDEM. 

ARDEM Incorporated provides Business Process Outsourcing for established companies that reduce not only the operational costs but also compliance costs of oversight that increases productivity.  

Outsourcing solutions with ARDEM combine cloud platforms, automation, and training services.  

With decades of expertise, ARDEM is an outsourcing partner of leading companies serving across industries, including:  

• Manufacturing  
• Legal outsourcing 
• Insurance outsourcing 
• Finance and Accountancy  
• Healthcare and Life Sciences 
• Non-profit organizations  
• Logistics  
• Retail  

 ARDEM solutions encompass a wide range of services. A few outsourcing examples are: 

• Business Process Outsourcing (BPO)
• Covid testing 
• Accounting outsourcing 
• Travel and Entertainment services 
• Accounts payable  
• Account receivable  
• Government solutions  
• Data outsourcing 
• Back office services  

Thus, it is always crucial to map the initial to the final stage while outsourcing. As your outsourcing partner, ARDEM’s primary focus is to provide the best outsourcing solutions, keeping in mind the factor of cost-efficiency.  

ARDEM provides Business Process Outsourcing and Business Process Automation Services to established companies to help them improve operational efficiency and reduce costs. For more information, please reach out to us at pricing@ardem.com or call us at 908-359-2600.