If your spending a huge chunk of your working hours doing menial and repetitive tasks, instead of working on your core business processes, then you should consider outsourcing.
While outsourcing offers a wide array of benefits for your business, you also need to know the costs involved when outsourcing your processes and tasks.
Depending on your needs and goals for outsourcing, there are several ways to compute the cost of outsourcing.
To make the outsourcing cost calculation simple, you can do a Differential Cost Analysis to see the total cost difference between two alternative courses of action.
Here are the steps to do it.
Step 1. Define the tasks and processes you want to outsource.
Defining the specific business processes and tasks you want to outsource, their quality, and quantity are crucial to doing a Differential Cost Analysis.
These factors can help you make an objective comparison between what a third-party service can provide, and what you can do internally.
When you clearly define your business functions and workflow steps for outsourcing, you’ll have a better understanding of all your workflow steps, and get a more accurate cost analysis.
This also helps you ensure that the services in your outsourcing provider’s proposal match your expectations for your business.
Step 2. Identify the in-house costs you can avoid by outsourcing.
First, you need to list down the costs related to your processes to be outsourced.
This includes your direct costs (equipment, supplies, salaries, and more) and indirect costs (internal services and administration).
Also, ensure that you don’t include Sunk Cost or already incurred costs that can’t be recovered.
Next, enumerate all the in-house costs that can be avoided if the business function is outsourced.
These can mostly differ from your total costs – such as the costs you would incur if your company maintains a level of management of the business function.
Step 3. Calculate the total outsourcing cost.
Once you’re done calculating the in-house costs that can be avoided by outsourcing, it’s time to compute the total cost of outsourcing your specific business process.
You can work the computations with your outsourcing provider as they have the complete details of their bid price, including the amount for managing and building your team.
The total outsourcing cost will also include transition and administration costs, equipment, processing change orders, and more.
Step 4. Deduct your total outsourcing costs from your in-house costs.
The final step in your cost analysis is to compute the difference between the saved cost and the incurred costs from outsourcing.
To do this, you can deduct the total cost of outsourcing from your in-house costs.
If the figures show favorable results and significantly reduce the cost of your business process, then you can justify your need for outsourcing.
Understanding your outsourcing costs helps you make better business decisions in terms of working with third-party service providers.
It’s also a good basis for determining the cost-effectiveness of outsourcing your business processes and functions.
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