How to Reduce Outsourcing Hidden Costs

This presumably highly paid manager spends anywhere from three to nine months learning about the offshore industry, talking to 20 or 30 vendors, implementing a detailed vendor selection process with multiple short-listing phases, and finally in site visits, contract negotiations and selection of the vendor. This method is often filled with risks. There are many hundreds of offshore service providers spread across India, China, Russia and other parts of Eastern and Central Europe. Even though most of the vendors claim that they can do everything, the needed domain expertise typically only resides with a select few. There's a high probability that the vendors that will quickly fall out of the running are those that have contacted the company directly or those the company heard about via the media.

Companies spend anywhere between $20,000 and $70,000 on the salary of the internal vendor selection manager. (That assumes that vendor selection is one of several projects handled by that person.) Travel, communication and the time-cost of senior management and engineering resources increases the price tag.

Onsite Consultant

Companies are increasingly starting to hire consultants to advise them in their offshore strategy and help them select the vendor. The high price of the consultants oftentimes offsets the advantage companies gained in reducing the internal management time and overall vendor selection time. Frequently, the consultants hired don't have an offshore presence and lack timely knowledge of current offshore market realities.

Service Provider Selection Cost Reduction Strategies

2. Use specialist consultants. Another emerging option is the use of consultants that specialize in developing an offshore strategy and doing vendor selection. Offshore consultant costs are often only a fifth to a third of the expense of an onsite consultant. Due to their geographic proximity to the vendors, they often have current information about prospective vendors and can help companies make better choices.
Companies that follow these cost reduction strategies can effectively bring down the cost of service provider selection to $10,000 to $20,000 -- a considerable reduction from the $20,000 to $200,000 quoted by CIO.

Next Area of Hidden Expense: Transition Costs

The success of the transition process often defines the success of the offshore initiative. To be on the safe side, companies are increasingly spending more during the transition process. Arranging for onsite or offshore team visits or a combination of both is a key transition mechanism that has proven to have a high success rate. However, the associated costs can sometimes be prohibitive.

Best Practices To Reduce Transition Costs

1. Frequently, companies can find expert members of the client team that want to move back to the country to join the offshore team. Those people should be leveraged for knowledge transfer and to act as liaisons between the onsite and offshore teams.

2. Only a part of the offshore team should be hired during the transition phase. The rest of the team should be hired only after the knowledge transfer to the core offshore team is complete. This will save as much as 4% to 5% of the transition cost.

3. Use collaborative tools such as Webex, Microsoft Office Live Meeting, Windows NetMeeting and other video conferencing technologies to lessen the need for people to be present at the same location. These technologies can be used to conduct training sessions and code walkthroughs to help in the transition process.

4. A few members of the client's team should be moved offshore for at least a year so that they can take ownership of the offshore projects and accelerate the knowledge transfer. The salary for the resources moving offshore should be structured competitively to the existing offshore salary, not to their onsite salary. If not, cost savings from going offshore will be reduced.

5. The offshore team should be involved in projects that will provide value add from the first day and still help them in the knowledge transfer. Some examples are architecture review, bug fixing, and source code and functional documentation.

6. Using online tutorials or webinars, you can devise a mechanism for the offshore team to become certified based on the requirements (technology, product familiarity, etc). This certification process can speed up the transition cycle and address a possible skills gap with offshore resources.

7. Service providers usually want the client to pay the transition costs against actuals. However, it's possible to negotiate the contract with the vendor to achieve some of the following:

1. The transition cost should be added to the monthly billing rate and spread across the duration of the project.
2. Initially, the service provider should absorb the transition costs. The transition cost can then be factored into the contract as an incentive to the vendor, depending on the schedule and quality of its deliverables.
3. Some vendors that are keen on getting the project might be willing to absorb the entire transition expense.

These best practices can help reduce transition costs to 2% to 3% of the entire project cost and shrink the initial investment needed for those expenses.

Get Started