Global Sourcing, Out-Sourcing & Offshoring Cost reduction Information for European Companies   

will Outsourcing reduce your costs?

Opinions are varied on this topic. Some will show you reports claiming a huge savings for enterprises that outsource and others will point out that wages in offshore and nearshore locations are on the rise. Outsourcing is not something to rush into, but requires very careful detailed strategy, which needs to be part of your organization's overall long-term strategy.

For example, a 2006 study by Mckinsey Global Institute shows that the potential cost savings from a typical offshoring engagement will be in the range of 45 to 55%.

Offshoring with a focus on transformation, they claim, will add another 15 to 22% in the total cost savings!

Setting key objectives for an offshorization strategy and performing a detailed analysis of business and IT practices, IT portfolio and needs for business/IT alignment will help in identifying an effective offshore engagement model and potential list of offshore vendor/ outsourcing provider candidates.

Based on these key objectives, organizations should assign weights to each evaluation parameter and identify the fitment of a particular offshore engagement model in their scenario.

This will result into a best-fit offshore engagement model and potential offshore candidates, based on which a detailed cost-benefit analysis should be performed and a final decision should be taken.

You should further protect yourself by covering your vendor decisions from all angles, whether you are a consultant advising on an outsourcing project or a company wishing to outsource. A good way to ensure your recommendations/ outsourcing decisions are well founded is to support any short listing you have reached by assessing and evaluating your possible vendor & software solutions through an unbiased 3rd party. (See our technology evaluation center).

The cost for this kind of research tool is really minimal and it could save you from joining the statistics of failure or heavy loss in terms of time and money. If you are an outsourcing consultant- this could help improve your success record.

Subsequent to this, the client and offshore vendor can focus on application and knowledge transition and ongoing management of relationship with the help of a structured Vendor Management Team (VMT) or Offshore Program Management Office (PMO).

Organizations deciding to go offshore should also plan for change management in the internal IT department and the way IT and business (end-users) interact with each other.

Important also is how you'll be managing your employees at home and your offshore/ nearshore or even onshore vendors once outsourcing gets underway. Correct practices could save your organization money, headaches and help reduce costs..

Is price reduction king? Focus: procurement
According to Aberdeen's latest findings (June 2006), more companies are thinking beyond tactical price reductions for their procurement functions and looking at how they can use outsourcing to refocus internal staff on strategic activities.

Aberdeen says that no matter the enterprise's position on outsourcing, the amount of spend under procurement organization management is one of five critical strategies underlying procurement's transformation into a major contributor to enterprise value.

Aberdeen believes it critical that any enterprise looking to outsource a procurement function or process place as much spend as possible under procurement management in order to make the best informed decision on what may be a critical undertaking. 

Outsourcing should be viewed as a long-term strategy. Please read why companies outsource >>

Leading reasons according to Aberdeen findings, why some 50% of surveyed companies will nor outsource Procurement Functions:

Perceived loss of control (59%)
Procurement is their core competency (57%)
Already invested in procurement applications/systems (41%)
Unable to build a compelling business case (33%)
Inability to measure savings, improvement, opportunities (30%)
Fee structure for outsourcing services is unclear (28%)
Company strategy to build capability in-house (26%)
Fees for outsourcing services are too high (26%)
Procurement doesn't own/control the spend and can't get adequate stakeholder buy (25%)

(Read the full report here)

The other 50% who do outsource procurement show, according to Aberdeen, that Outsourcing within the procurement function is growing:

• Within a year, enterprises that are already outsourcing will have farmed out an average of 21% of their procurement activities, up from 18% today.
• Enterprises are placing more strategic emphasis on their procurement functions. To help, they're outsourcing more of the tactical procurement activities, such as payment, transaction execution and management, and invoice reconciliation and auditing.
• Most Best in Class enterprises that outsource procurement functions share the following characteristics: They're led from the center by a VP or director and have better spend visibility and market knowledge than Best in Class enterprises that are not planning to outsource. 

Whether your company is outsourcing or not, it's important to have as much visibility and control of spending and contractual commitments.

Aberdeen's survey found a clear difference in degree of spend visibility between companies that outsource and those that don't plan to outsource: Outsourcing companies, on the whole, have better detailed visibility, which allows them to have more information on which to base outsourcing decisions.
Aberdeen's research finds that a lack of sufficient visibility is a reason more companies won't outsource procurement.

Bottom line: Careful outsourcing decisions, based upon detailed visibility and in-depth vendor solution research backed up with 3rd party solutions and combined with best practices the outsourcing winners and leaders use in handling staff and managing vendors is all critical to your successful outsourcing.