FAQ: What are the expected saving from outsourcing?

FAQ: What are the expected saving from outsourcing?

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Most companies that have gone about outsourcing the right way have saved about 30%-40% to their bottom-line costs. This surprises many people. As they believe that the savings should be more like 50% of operating costs as the human labor cost in Low Cost Countries (LCC) is about 1/5 the cost of labor cost in the US.

Let us break down this contradiction: You have five real costs of running an outsourced operation

  •  Management cost on your side to manage LCC operations
  • Your infrastructure: Infrastructure cost and process changes and overheads added on because of outsourced operations. This might be better telephone charges, more bandwidth if you have machines in LCC, VPN access from LCC
  • Labor costs in LCC: This is where we get most of the cost benefits in outsourcing. The LCC countries have a quality labor pool available at low cost.
  • Infrastructure costs in LCC: Much to the surprise of many readers most of the infrastructure that is used in LCC to run and support the outsourced operations is imported from the United States. This actually costs more in LCC than it does here.
  •  Management costs in LCC: Management cost and support costs on your supplier side are pretty high. This eats up into your margins. But a rock solid reliable management is a prerequisite to ensure your project success. You cannot cut corners here.
  • Shipping costs from LCC (Manufacturing only): This is very common understanding that whenever there are physical equipment being shipped there is a shipping, packaging, tariffs, etc., that have to be considered. In case of data processing this cost is not much the internet infrastructure costs have to be looked carefully.
  • Other than the labor cost everything else adds on to the 50% or 60% labor rate difference and brings the returns down to about 30-40%

Harsha

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