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: