The full picture – Weighing up the true value of an outsourcing agreement

Posted: 23rd October 2018

We have previously discussed the fact that one of the most common myths about outsourcing is that “cost is the only driver” – instead, we think anyone looking to outsource operations should be focussing on how such an agreement can improve customer outcomes, add value to a business and address problems with a tailored approach.

However, it is undeniable that cost is a significant factor in any business venture. Teaming up with a delivery partner not only frees up members of internal teams, speaking from a purely financial perspective, it can also improve the bottom line through reducing operational costs.

When weighing up the financial benefits of an outsourcing agreement, there are many obvious, and not so obvious, costs to consider.

The foundation of any good agreement is understanding the full picture, or the ‘true cost’, of your business venture, not simply the day-to-day operational investments. Only when we’ve accounted for everything from the cost of water coolers to salaries can we really understand why outsourcing can be so valuable.

The foundations of your future operation

Many businesses operate at, or near, capacity in terms of floor space, so a sudden increase in work volumes can quickly become expensive. The cost of a premises alone can often explode and grow out of proportion to the operation itself, so having a partner on hand to take in any ‘overflow’ can certainly be an advantage.

The biggest cost involved in this is obviously that of renting out new office space, which sometimes requires signing a lease for a longer period than required for a specific piece of work. Additional expenses can include parking spaces, maintenance of facilities and various utilities costs.

Firms must take into account the ‘little things’ as well. Desks, chairs, furniture for meeting rooms and breakout areas, general décor, facilities such as vending machines, water coolers and other office amenities should not be forgotten. These can certainly be a hit to the pocket – especially if you need to quickly upscale operations.

There are also other infrastructure costs, including IT systems (network cabling and communications equipment) and workstations made up of telephones, laptops and monitors. Access control systems, such as fob keys and their associated locks, passes, and even CCTV will also be needed to ensure security and the safety of your staff.  

If you are required to upskill staff on, and give them access to specialised software, this could also end up being a significant figure for your bottom line. Your firm must consider the cost of software licenses, set up and server fees, as well as any essential training or development.

Setting people up for success is an investment

Once you have determined the potential cost of upsizing or outsourcing operations in terms of physical space and associated infrastructure, the next stage in planning will be considering recruitment costs.

Getting the right people into the right jobs is never a simple task, neither is the question of whether to recruit permanently or utilise contractors and temporary staff.

Many businesses, particularly small to medium sized ones, do not have internal recruitment or resourcing functions in-house, so must rely on agencies as a way of recruiting new staff. Often, this can be time consuming to manage (it takes a while to screen candidates, review CVs, interview them and then onboard successful applicants) as well as costly (paying agency fees).

Salary costs for staff are an obvious but crucial factor to account for. In order to attract and keep the right talent, your firm will have to consider bonuses and staff benefits, as well as legally required contributions, such as National Insurance costs, sick pay, contributions to pensions, holiday pay, and so on.

Training staff, and employing the HR professionals that will help manage your new inductees, can also be a significant cost to a firm going it alone. Staff will often need to be trained to carry out their work, taking up other valuable resources or requiring the investment in an external training provider. Businesses that take on outsourcing requests often already have specialist teams imbedded, trained and ready to deploy, so this could be an area in which savings could be made should an agreement be written up.

Supporting the operation

Finally, we must consider ongoing support costs, including, but not limited to:

• Project management
• Resource / capacity planning
• Risk and compliance monitoring
• Quality assurance
• Management information and reporting
• Governance frameworks

These costs will likely exist in any outsourcing agreement, though they are particularly important factors for regulated business to factor in, as ultimate regulatory responsibility will always rest with the ‘parent’ firm. This firm will need to have oversight over outsourced operations – they can’t simply hand them to a provider and hope they undertake the project compliantly.

Time is arguably the largest cost of all. Finding ways to maximise meeting deadlines and minimise the impact to working hours (such as seeking out partners that are already trained and specialised in specific software) should help businesses manage their time much better – leaving more space and resource to innovate.

So, is outsourcing right for you?

It is very likely that at least some aspect of your firm’s operations could be outsourced. The key is finding where the most value to your firm and your staff exists if you were to do so.

Consider the cost factors outlined above, and try to plan out where the pain points would be if you were to experience sudden spikes in demand.

The greatest benefit to outsourcing is the flexibility it provides. Most agreements can be upscaled or downscaled according to need. It means you probably won’t need to invest in hundreds of chairs, vending machines and software licenses that might only be used for a few months at a time.

Furthermore, outsourcing agreements can also include all the support expertise required, including quality assurance, project delivery, management and, in cases of regulatory expertise, compliance functions. Though, as already noted, ultimate regulatory responsibility will remain with the ‘parent’ firm, meaning some oversight and expense in this regard will be required.

Experienced and expert outsourcing specialists will be able to rapidly deploy resources to meet any demand – these are the firms you need to consider partnering with. When researching a potential partner, be sure to look for experience, and those who will come prepared to cover the various costs associated with sharing operations. These kinds of providers will be able to deploy skilled professionals who are ready to take on roles in a short amount of time.

Outsourcing shouldn’t all be about the bottom line, but finding a partner that will help you deliver excellent customer outcomes and save time and resources at the same time is certainly an opportunity to forge ahead of the competition.