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When it comes to managing your outsourcing agreement, you’re sure you have done everything right…right? So why aren’t you seeing the savings that you promised your CFO?
“One of the toughest jobs in outsourcing is tracking the impact material changes will have on your business case,” says explains Ben Trowbridge, CEO of Alsbridge, Inc. “Knowing what those changes are and how to manage them will make a meaningful difference to your bottom line.”
According to the latest report from Alsbridge, Inc., “Outsourcing Strategy: How to Make Your Business Case,” there are 13 key questions every business every organization must evaluate before creating a fully functional outsourcing arrangement. These questions will allow decision makers to anticipate any potential changes to the business case, which in turn can affect the level of savings.
First, says Alsbridge, it’s important to define costs of outsourcing by two categories: addressable and un-addressable. Defining these helps refine the business case and make it more accurate.
Addressable costs are directly tied to people and can further be broken down into labor (employee salary, benefits, bonuses, taxes) and non-labor (travel, supplies, software tools, necessary technology).
Un-addressable costs remain regardless of who performs the work; these are costs such as network transport, facilities overhead, selected software and technology expenses.
Another key item to consider in an outsourcing business case is the inflation rate. For modeling purposes, most business cases are “inflation neutral.” However, according to Alsbridge, most providers insist on an inflation clause, which means the business case should be revised to include the impact of inflation.
Other important factors to consider are foreign exchange rates and growth rates. If there is an offshore component to your outsourcing agreement, providers usually call for a percentage that impacts what is paid based on the foreign exchange rate.
When it comes to growth rate, estimating business growth beyond about one year is difficult, so the business case should be updated to reflect changing needs for project work, additional equipment or new business applications.
Corporate overhead can also affect your original business case. If unplanned allocations have been assessed to your department after you locked in your business case, there will be an unplanned cost that will impact the savings line.
Staffing issues are also major factors. If the size of your retained organization has grown, or if plans to downsize were not followed, the bottom line could change.
“There are a huge number of variables to plan for when deciding to outsource,” says Alsbridge. “When choosing the processes and projected bottom lines of outsourcing, having a solid Vendor Management Office (VMO) is vital to transition planning. A good VMO will be accountable for re-casting and maintaining the outsourcing business case after a contract is signed.”
Additional perspective can be found in the newest article from Alsbridge: “Outsourcing Strategy: How to Make Your Business Case.”