The True Value of Business Process Outsourcing

How to properly calculate savings from Business Process Outsourcing

In recent example, a client had received a proposal for outsourcing and called to say they were not overly impressed, claiming that the total cost savings would be only 17%.

After further investigation, we found a common mistake in their calculation process. In order to determine their cost savings, this company took their best employee and had them perform the function to be outsourced for approximately 30 minutes. They took the result, multiplied it by 16 to get a daily production, then by 7 to get a weekly production, then 52 to get a yearly production. They then divided that total by the salary of the average employee to determine a per unit or per action cost, compared that to the proposed outsourced cost and found only a 17% savings.

The actions taken by the company discussed above seem to make sense, however if you dig deeper, you can see that areas of significant cost savings were not calculated into their total savings. The areas that should always be considered when exploring savings from outsourcing should always include:

Actual Productivity

It is one thing to have someone perform a task for 30 minutes. It’s another to have them do it all the time. On a typical day they will not be as focused as they are in a 30 minute test, which will significantly reduce actual productivity in the real world.

Vacation/Holidays/Sick Days

Instead of taking projected productivity and dividing it out by 52 weeks or work, it should actually be divided out by 52 weeks minus your employees vacation, sick, and holidays, resulting in a higher per unit or action cost.

Benefits/Taxes/Unemployment

Although it is easiest to explore costs by simply looking at an employee’s wage, we know that is not the true cost of that employee. We must also factor in the cost of that employee’s benefits, company paid taxes and unemployment insurance, as well as any other cost incurred by the company as a result of that employee.

Training/Recruiting/Hiring Costs

It is becoming more and more expensive to attract and retain quality employees. Those costs should be included when exploring total cost savings from business process outsourcing.

Hardware/Software

If processes are outsourced to SALIX, we incur all the necessary software and hardware costs, including licenses, computers, and any other specialized equipment, potentially saving you significant amounts.

Office Space

Office space and utilities aren’t cheap. If you have someone working for you, you must provide them a space to work as well as any utilities associated with that space, adding costs.

Opportunity Costs

If this person wasn’t working on these particular processes, is there something else they could be doing that would bring a greater direct financial benefit to your company?

The True Savings…

In the example we started above, the potential client initially estimated their total cost savings at 17%. After going back and considering the areas discussed above, that same company found their true savings to be over 50%.

More than three times what they had initially estimated.