How to Calculate the Real ROI of Business Outsourcing
Outsourcing is frequently seen as a convenient option for decreasing costs in a business. The firm just subtracts the cost of employing someone internally from the fee charged by the outsourcing firm, thinking that the difference is what they save. Yet the formula is a bit more complicated.
ROI of outsourcing takes into account the entire effect of transferring a business function out of the firm’s sphere. Such aspects as recruitment, training, technology, time spent managing and others might be taken into account when calculating the ROI of outsourcing.
For firms who want to outsource their processes, knowledge of this will allow them to make an informed choice.
What Does ROI Mean in Outsourcing?
ROI is a calculation of how much a company gets for what it has spent. In the context of outsourcing, it enables one to find out whether the external service is generating enough value to cover its price.
This value may take many forms, starting from direct savings and ending up with increased efficiency. Thus, outsourcing of administrative tasks will lower operational costs and let internal employees focus on sales, building customer relations, etc.
The key thing is not whether the service is cheaper, but whether it brings more value than it costs.
Calculate Your True In-House Cost
In order to compute the ROI for outsourcing, one needs to first know the total cost associated with performing that function internally.
The salary is just a component of the cost. Other areas where companies might incur costs could be recruitment, induction, training, software, hardware, office and managerial costs.
Other cost components can include:
- Salaries and benefits of the employees
- Recruitment and training costs
- Software and technological costs
- Hardware and office costs
For instance, a worker drawing ₹6 LPA might cost a company much more than that due to other costs as well.
Calculate the Total Outsourcing Cost
Now, find out what the total cost of outsourcing the same process will be for the same period of time.
It is important to look at more than just the monthly fee for the service. See if there are any implementation fees, onboarding fees, technology fees, or other fees involved.
Let us assume that the internal process costs ₹20 lakh annually and the external outsourcing firm charges ₹14 lakh for the same. There is an immediate saving of ₹6 lakh. This is just the beginning, though.
Include Productivity Gains
One of the greatest advantages of outsourcing will not likely be listed on the bill.
If routine work is outsourced, the in-house staff can concentrate on their core functions. For instance, managers may be able to devote less time to administrative chores and more time to selling strategies, customer relations, and business development.
When determining ROI, it is necessary to evaluate how outsourcing allows the staff to:
- Work on more income-producing functions
- Finish more critical tasks quicker
- Eliminate unnecessary administrative duties
- This improvement in productivity can be highly profitable.
Consider Recruitment and Scalability
Recruitment and employee turnover can also cause the cost of managing internal staff to go up. The process of recruiting includes advertisement, selection, interviews, induction, and training. In case of employee turnover, all these costs have to be incurred again.
Outsourcing can also help in reducing the internal effort needed to recruit and manage resources, especially in case of departments which require a bigger team size and specific skill set.
Scalability is another issue. Companies might need extra resources at certain times of the year or when expanding operations.
Measure Quality Alongside Cost
Cheaper doesn’t always equate to improved ROI.
Where outsourcing results in delays, mistakes, or unhappy customers, the cost reductions can turn out to be just illusory. You need to set performance standards before going into outsourcing in terms of turnaround time, productivity, mistakes, and customer satisfaction. Then, after outsourcing, check how you measure up against your standards.
Use a Simple ROI Formula
Once you have the appropriate figures, apply the following simple formula:
ROI = (Total Benefits – Total Outsourcing Costs)/Total Outsourcing Costs * 100%
The total benefits may consist of actual cost reductions, increased efficiency, etc.
The effectiveness of your ROI calculation will depend on the realism of the figures used.
Review Your ROI Regularly
ROI for outsourcing should not just be computed before signing an agreement. The needs of the business and cost considerations may change over time.
Evaluate the agreement after some time and compare the reality against the expectation. Consider the factors of costs, productivity, quality and scalability in determining if the relationship still offers benefits.
It is the true ROI of outsourcing that takes into consideration more than just the monthly rate charged by the outsourcing partner and considers its overall effect on the business. With the assessment of internal costs, productivity, hiring, quality and scalability, organizations will be better off making outsourcing decisions. Incinque Business Solutions provides assistance to companies that would like to outsource important functions of their businesses.
