Why Cost Should Not Be The Sole Factor When Deciding How And With Whom To Outsource
The cost of partnering with an outsourcing vendor is often the predominant factor in how and with whom a client ultimately decides to outsource. This is a fatal error, for basing cost effectiveness and total cost saving solely on the actual cost of outsourcing is an incorrect and inaccurate calculation. This is because the cost of outsourcing is not directly proportional to the cost saving a client ultimately makes; the cost of outsourcing does not equate to cost saving. Furthermore, by focusing purely on cost, clients leave themselves susceptible to outsourcing with an incompetent firm whose strategy is to purely entice and win clients with unrealistically low costs.
Cost of outsourcing is not equal to Cost saving made by client
High levels of productivity when outsourcing are important because when outsourcing work halfway around the world, even small levels of inefficiency quickly lead to high levels of inefficiency. Such incompetence transpires to create a loss of time and thus money. Hence, if cost saving is an objective to be achieved via outsourcing, an inefficient outsourcing process defies the objective of outsourcing in the first place. The manner in which a company outsources is thus important for if the process is not efficient it will not be cost effective; this is irrespective of how low the cost of outsourcing is or even how qualified the vendor’s staff are.
Furthermore, cost saving can only be qualified and calculated once and if the client attains a result they are satisfied with. If the client does not attain at least a satisfactory result then there has been no cost saving irrespective of how low the cost of outsourcing was. This is because the client is no closer to attaining their desired end result and so will have to re-invest to achieve it. Hence the quality of the end result achieved also has an impact on the cost saving a client attains (explained in more depth below).
There fore, the cost saving a client ultimately makes by outsourcing is deduced by calculating
- the cost of outsourcing;
- efficiency levels that characterize the outsourcing process;
- efficiency with respect to the correct implementation of the outsourcing model by the vendor; and, iv) the quality of the final result. Clients who want to maximize cost saving should, therefore, not take merely the cost of outsourcing into consideration. Rather, clients should also consider how they outsource, the vendor they outsource with and the quality of the final result a vendor is able to produce.
Efficiency - How a client outsources
How a client outsources should be compatible with and productive for the client’s business
There are many different methods by which a client can outsource. “What is the most productive manner to outsource for my business?” “Which model will work best for my company?” These questions are important for if the method of outsourcing is completely incompatible with and does not compliment the client’s company, then the cost and quality of the outsourcing service is simply beside the point. Even if the client ultimately attains the result they desire if it was achieved in a manner that did not compliment their business, the cost saving will be significantly, if not completely, eradicated.
To decide the most productive manner in which to outsource, clients should take into consideration several factors. For instance, do they want to retain project management control of their work or not? Does the client require long term outsourcing services or if the work is a short term one off project? Does the client want to work closely with their offshore team or not? What is the nature of the work being outsourced - is the work a core competency of the company or back office work? And lastly, does the client’s business have the capacity and flexibility to work and outsource in the proposed manner?
A model or method of outsourcing that works more efficiently with the client’s company may lead to higher cost savings and better quality results than a lower outsourcing cost option that is incompatible with the client’s way of working. A good hypothetical scenario to illustrate this point is to compare hiring a dedicated offshore resource, like a Virtual Employee with an offshore freelancer. Take for example a client who, hypothetically, i) wants to work closely and collaboratively with their offshore resource, and, ii) wants to project manage and work directly with their offshore resource. This client would attain higher levels of compatibility and efficiency by hiring a Virtual Employee over a freelancer. This is because a VE is a dedicated offshore resource, working only for the client, working the same office hours as the client and operating from a supervised office that is set up for remote collaboration with clients. An offshore freelancer, by contrast, works with multiple clients simultaneously, from home with limited resources and during their own office hours. Theoretically, a client may be able to hire either a Virtual Employee or an offshore freelancer and attain a similar end result from either. However, in the case of hiring the offshore freelancer, the level of collaboration and project management control the client would have would be a lot less when compared to hiring a Virtual Employee. In turn, the client would find working with the freelancer a lot more inefficient and this could easily result in long delays and a lot of frustration and stress for the client. It would, therefore, take longer for the freelancer to produce the same result as the VE. Hence, in this scenario the cost of hiring a VE may be more than hiring a freelancer but a client may nevertheless still enjoy more cost savings with a VE because this model is a
By asking, “which method of outsourcing is most compatible for me and my business?" clients may discover that a more costly outsourcing model works better and more efficiently for them than a lower costing outsourcing service model. In summary, a client might actually save more money by outsourcing with a more costly service provider if that service provider’s method of outsourcing is more suited and complimentary to the client’s needs and the way the client’s business operates and functions. Outsourcing with this mindset is the key to success.
Efficiency – correct implementation of the outsourcing model by the vendor
A business model or method of outsourcing may be compatible with a client’s requirements and company. The cost of outsourcing may be low and the outsourcing vendor/ staff may be highly talented and experienced. However, if the vendor incorrectly or ineffectively implements the business model then the outsourcing process will be less, if at all, cost effective.
Offshore freelancing once more is a good example of the point herein, (where the freelancer is substituted to constitute a vendor). Offshore freelancers work from home unsupervised, often with several clients simultaneously and during a different time zone from their clients. The freelancers, thus, have a lot of discretion and flexibility as to how they work with their client. And because there is little accountability for the freelancer’s conduct, some freelancers are guilty of conducting themselves and their work unprofessionally. On the one hand, a client who hires a low costing but qualified freelancer who works professionally may attain excellent and cost effective results. On the other hand, a client who hires a low cost and qualified freelancer who works unprofessionally may experience long delays and find the process highly irritating. In the latter hypothetical scenario, the client may not witness any cost saving due to the high levels of inefficiency. This is despite the freelancer having the technical ability to work for the client and the cost of hiring the freelancer being low. Hiring a freelancer may be the best way of outsourcing for a client, the cost may be low, the freelancer may have a lot of technical ability and the flexibility and choice clients get from freelancing may be just what the client requires. However, despite freelancing being the ideal solution for the client, if the freelancer ineffectively implements working remotely or does not uphold their duty to work professionally, the freelancing process can still become inefficient and cost ineffective.
In reality, this is actually the case with the offshore freelancing industry. Freelancing in theory is a highly efficient way of outsourcing. But because many freelancers do not effectively implement their duties and work in an unprofessional manner, freelancing is often highly ineffective. This is not necessary because the process of freelancing is inefficient but because the freelancer incorrectly implement the process. And this is the main reason why freelancing has gained a notorious reputation for unprofessionalism and cost ineffectiveness. If freelancers worked professionally, freelancing would have a much higher success rate because the business model would be correctly implemented. And so it is crucial that even if a client selects the right mode of outsourcing that the vendor implements the model in an effective way.
The same is true for outsourcing companies. Two outsourcing vendors may have the same business model and staff with a similar level of skills and experience. If one of the vendors neglects their responsibility or does not have the resource or capacity to correctly implement the business model and the other vendor does, the latter will achieve better results and levels of cost effectiveness.
These points may seem obvious, nonetheless it is a consideration clients usually do not give due attention to. Clients are too often guilty of taking and accepting outsourcing vendors at face value. For example, many clients deduce that two outsourcing vendors with the same business model will also attain similar results and efficiency levels purely because their business models are identical. Hence, the better vendor to outsource with is simply the cheaper one. Clients make such deductions without adequate prior investigation as to which vendor can better implement the business model. This thought process and such actions are, however, illogical. Even if two vendors have the same business model one can achieve better and more productive results if their implementation of that business model is more effective.
Often clients even fail to appreciate the impact incorrect implementation can have on efficiency and cost effectiveness. Clients should enquire and investigate thoroughly into the setup and management of any outsourcing firm to ensure that they not only work in a method the client requires but that they can and will correctly implement their services. If the vendor does not, undoubtedly it will reduce the cost effectiveness of outsourcing, if not rob it of the advantages altogether.
Why the quality of the end result is a factor in total cost savings made
The importance of the quality of the end result when calculating cost savings can be illustrated with the following hypothetical scenario. Client A outsources with vendor A and client B outsources with vendor B. Client A and client B both outsource the same project and the cost of outsourcing with both vendor A and B is the same. If both vendor A and B attain a result that satisfies their respective clients, but vendor B attains a marginally higher quality end result then client B has made a bigger cost saving than client A, despite the cost of outsourcing being the same for both the clients. This is because client B is getting more for his money than client A. Client B has, therefore, achieved more in terms of result despite spending the same as client A. If client A wanted to achieve the same result as client B, the former would have to reinvest more money to do so.
The following hypothetical scenario also exemplifies the link between quality of result attained and cost saving. Client A outsources with vendor A for a cost of $1250. Client B outsources the same project with vendor B for a cost of $1500. The result vendor A achieves is deemed satisfactory/mediocre. For the same project the result vendor B achieves is assessed as excellent. Which client has made the greater cost saving? There may actually be no right or wrong answer for this hypothetical scenario and question. The answer would depend perhaps on several other circumstances and an individual’s own perspectives and bias. Some may vote for client A while others may back client B; a lot would depend on the subsequent impact an excellent result or a satisfactory result would have on the client’s business. Nevertheless, the point is that this hypothetical scenario demonstrates how the quality of the result is linked to the final cost saving a client eventually makes.
From this we can conclude that the better the result the greater the cost saving the client achieves. And so the quality of result achieved should be a factor taken into consideration when deciding the most cost effective way to outsource. Clients should, therefore, focus on the results an outsourcing vendor can achieve as opposed to simply the cost of outsourcing with any particular vendor.
Why quality results should be a factor irrespective of any bearing on total cost savings
Irrespective of whether quality results do or do not increase overall cost savings, for obvious reasons clients should base their decision-making process on the results an outsourcing vendor can achieve. It is imperative that clients do not have “blind faith” and do not make presumptions that a vendor will be able to deliver the result a client desires. If a client does this, they leave themselves vulnerable to being enticed by low cost outsourcing service providers that are significantly limited in their capabilities, which is why their costs are so low. More often than not, in the end the client is left in a position much worse than they could have anticipated. Clients are often left with an end result of little or no value, let alone of mediocre or barely satisfactory quality. Whatever little amount the client did spend on outsourcing is then a complete loss. These cases then become infamous outsourcing disaster examples and the assertion is made that, “outsourcing does not work”. In truth, however, the outsourcing process failed because the client was gambling with the probability of success by over focusing on costs and partnering with incapable vendor.
It is crucial that clients test and asses the capabilities of an outsourcing service provider to ensure the vendor has the capabilities to produce the results the client desires. Provided clients do this there is no reason why outsourcing will not be a success. Focus only on costs and forget about capability, efficiency levels and quality results and the client is undoubtedly taking a risk.
To outsource successfully clients must think beyond simply the cost of outsourcing. Outsourcing often fails because this is the sole, if not predominant, factor when deciding how to outsource. The result is clients outsource in a manner that does not compliment their company or how they want to work, i.e. trying to force a square peg into a circle, (freelancing instead of hiring a virtual employee etc…). Or, the client ends up partnering with an unsuitable vendor. Outsourcing requires research and a thorough assessment of a vendor’s capabilities. Clients be warned - presume all outsourcing vendors that share a similar business model will provide the same service at your peril.
This paper establishes a link between levels of efficiency and quality of the end result with the actual final cost saving a client makes. If a client wants to maximise their cost saving, they must appreciate that efficiency and quality have a significant impact on how much they ultimate save.
Partnering with a more costly outsourcing vendor over a lower costing outsourcing vendor can actually result in a higher level of cost saving for the client. In conclusion, the cost of outsourcing does not equate to cost saving, to presume so is not only extremely naive but likely to result in outsourcing failure. Efficiency and result capability of a vendor must be noteworthy factors when seeking to maximise cost saving and deciding how to outsource.