Understanding Outsourcing: The True Cost of Offshoring

How the cost savings from offshore labor comes with unrealized hidden costs.


There are many factors behind decisions to move to an outsourced business model. The biggest reason, cost savings, is in my opinion, one of the most misleading. Outsourcing purely for cost savings may initially save money, but the long term impact on the business evens out and may eventually lead to unconsidered losses.

Offshoring is by far the cheapest outsource model one can implement for their business. Its very attractive for a business to create the kind of savings that comes from using offshore labor. Where it becomes misleading is the level of interaction necessary to manage the offshore labor and, subsequently, manage corrections, training and coordination of effort.

Offshore models have notoriously high turnover. With so much competition and such high volumes of staff required, offshore companies struggle to keep qualified headcount attached to their engagements. Resources jump from outsourcer to outsourcer to make a few dollars more per year, leaving gaps that are often filled with less qualified candidates. Now the business is impacted by ramp up time to get new resources up to speed and at maximum output. Service levels fall until eventually stabilized, but not without impact.

Frequently clients are called on to train or mentor new hires, diverting internal resources to manage the outsource. Worse still, internal resources pick up the slack, taking time away from their own duties. This creates two issues. First, if their not performing their own duties, the business is suffering a loss of having key performers maintaining their action items. Second, if service levels are dropping, there is a direct impact on, in the case of receivables, the customer.

Staying with receivables as an example, as customer service levels fall, potential sales drop and payments could be delayed. These are costs that are a direct result of poor outsource performance and often aren't considered a part of any ROI models when deciding to offshore. In working with a client recently, we identified that 1-2 resources per month were necessary to make corrections stemming from offshore transactional work. These aren't dedicated resources, but work spread throughout the internal teams and now, not focused on their own duties.

Considering a cheaper model, doesn't always mean a cost savings. In the end, the impact on the business can be felt throughout the entire customer lifecycle and eventually leads to a break even or worse a loss. A good partner brings savings through understanding, performance and quality.

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