Outsourcing ROI: Measuring Strategic Value Beyond Cost Savings

Businesses across industries around the world turn to outsourcing various processes and functions within their organizations for two compelling reasons: cost reduction on IT operations/infrastructure and access to specialized skill sets from experts and professionals.

Apart from initial expense reduction, does outsourcing offer cost advantages and value to meet business mandates from the C-suite? The short answer is yes. Especially if there are quantifiable metrics and goals in place to measure the contributions made through outsourcing to achieve business goals.

Outsourcing as a Strategic Objective

Successful outsourcing relationships drive organizational transformation and help achieve business goals. The following three key dimensions will allow an organization to reap the full benefits of outsourcing:

1. Outsource for the right reason

   While cost reduction and skills access are two of the primary motivations for outsourcing, as with any business partnership, an organization must ensure that their outsourcing partner is aligned with their overall business strategy. This will make it easier to determine which capabilities to look for or which kind of outsourcing services are needed to achieve the company’s end goals.

2. Clearly define expectations for the outsourcing partnership

   It’s one thing to expect the desired output from the function that has been outsourced; it’s another to presume that it will bring the business value in the long run. Therefore, it is crucial for the outsourcer and the client to actively collaborate while drafting the project agreement so that requirements and expectations including roles, goals and results are clearly defined.

3. Communication is key

   Many companies harbor regret and disappointment from previous or existing outsourcing contracts. A productive and healthy client-vendor relationship is built upon a foundation of trust and two-way communication. While a client engages in constant performance management and monitoring unforeseen delays or problems may occur. Instead of pointing fingers, work towards identifying the root cause and finding the best remedy to ensure that the service provider can deliver according to the company’s expectations. In the end, this enables the client to stay true to its outsourcing strategy and experience the competitive advantage of outsourcing.

Measuring What Matters

The collaboration between Fortune 500 company Cognizant and market research firm Forrester Consulting resulted in the creation of the Return on Outsourcing (ROO) Calculator, a measurement tool for the current and projected ROI of outsourcing. It allows clients to:

• Analyze the operational conditions involved in outsourcing and best practices that can be adopted to achieve sustainable growth and success.
• Make a comparison of potential financial returns with other companies that may or may not be outsourcing.
• Recognize cost advantages and business value of outsourcing.

The ROO Calculator will factor in an organization’s existing business objectives as well as its IT strategy and expenditure to enable companies access to:

1. Advanced Data Collection: The web-based version provides an accelerated, updated view of outsourcing data and computation results.
2. Vendor Scorecard Analysis: Offers a bird’s eye view of multiple vendor engagements and accomplishments to help stakeholders in making objective comparisons and informed decisions.
3. Repository of Past Performances – By tracking previous outsourcing projects and programs stakeholders are empowered to evaluate effectiveness and recalibrate outsourcing objectives as necessary.

The ultimate goal is to shift thinking from the narrowly-defined cost reduction focus of outsourcing to a strategic business value, operational flexibility, and future-readiness that comes from having a healthy outsourcing relationship with a world-class provider.

In what ways can the ROO Calculator expose the strategic value of outsourcing?

Outsourcing goes beyond IT infrastructure and overall operations cost reduction – it provides a positive economic impact for the organization due to access to highly skilled workers and technology applications which can ultimately lead to business efficiency and optimal productivity. The ROO Calculator can be used to:

• Set initial expectations that can be generated by partnering up with an industry-leading outsourcing providers.
• Create a roadmap of detailed outsourcing objectives to help in finding a suitable third-party partner with the competencies and skills fit for the organization’s needs.
• Reveal other underlying factors that lead to sustainable success of outsourcing.

The ROO Calculator can help in exposing not just the short-term savings associated with labor arbitrage but also assess future and continuous value derived from outsourcing applications development, IT infrastructure management, and other business functions. In the end, what an organization has saved on an outsourcing-related endeavor can be used to bolster core competencies, drive investments on IT learning, or implement planned upgrades within the company.

Enduring Strategic Value of Outsourcing

1. Inside-Out TransformationThere is no doubt that reduction of overall operational expenditures is a main reason for outsourcing. Additionally, there is the benefit of cost control flexibility as many outsourcing firms offer comprehensive project packages that can be scaled up and down depending on budget and need.

   By outsourcing non-core processes or even core business functions, companies can focus on strengthening workforce capabilities and expertise and make substantial improvements to IT systems, applications, and infrastructure. All of these work together in making a tangible impact on the bottom line.

2. Outside-In TransformationThe ability to compete and stay ahead comes from having the knowledge about a competitor’s many daily decisions and the capability to create a context from relevant facts to help with an informed decision-making process. Through outsourcing, a company can use data aggregated from other stakeholders in the industry to compare their current and projected performance which will aid in planning a better project management and governance strategy.

   Rather than relying on an internal team to examine business opportunities and challenges which is both difficult and time-consuming, this can be done through an outsourcing partner who can deliver knowledge repository covering all business aspects from across networks and geographies. This can help an organization create efficiencies and boost productivity.

   Additionally, a third-party service provider can contribute by augmenting a sub-optimal corporate skills set within a specific department. Knowledge specialists can organize virtual seminars to domain knowledge, qualitative skills, and a full range of industry capabilities.

   Through outsourcing, knowledge processes are easily scalable regardless of a company’s location or time zone. The right outsourcing partner has a strong commitment to the business of knowledge discovery which a client can benefit from – strengthening its organizational capabilities company-wide and achieving a low-cost, high-quality level of customer service delivery of business products and/or services.

Given the powerful and diverse impact that outsourcing can have for your business, it’s more important now than ever to take advantage of the business benefits and cost advantages outsourcing provides. With the right outsourcing partner, vendor-client relationship can go from mere transactional partnerships to strategic collaboration to maximize value delivery and ROI. Subscribe to Outsource Asia for more outsourcing information.