What are two potential hidden costs of outsourcing production to a foreign location?

For an industry that has been on the rise for several decades, outsourcing shows no signs of slowing down. Valued at $187 billion in 2018, the outsourcing market is expected to reach almost $315 billion by 2025 as companies are increasingly drawn to its ability to reduce costs, increase efficiencies and boost productivity. Even organizations that have traditionally shied away from looking offshore for business support have started to glance outside their borders for workforce options as a range of events combine to create unprecedented pressures.

From the global impact of the COVID-19 pandemic and war in Ukraine to the economic pressures of rising inflation and supply chain issues, the second half of 2022 is shaping as a tumultuous period for many companies. The old saying about needing to ‘work smarter, not harder’ will become a common refrain in boardrooms as executives do their best to balance the books in an increasingly fraught environment. Frighteningly, that is without even mentioning arguably the greatest threat to the workplace landscape – the global labor shortage.

Studies have shown there will be an estimated shortage of 85 million workers around the world by 2030 but the here-and-now is equally concerning. In the United States alone, there are nearly 11 million job vacancies in 2022 but only 6.5 million workers listed as unemployed. It is not just a crisis restricted to the US, with European employers battling to fill more than 1.2 million vacant jobs in the early months of 2022 and Australia recording nearly 400,000 job vacancies.

As the labor market continues to tighten, it is little wonder more organizations are turning to outsourcing providers to complement in-house staff, recruit specialists or receive much-needed assistance with managing repetitive and time-consuming tasks. Countless articles have been written about the benefits of outsourcing and there is no doubt that working with the right provider at the right time can deliver a significant return on investment.

This article is different though. In the expected mad scramble to join the outsourcing revolution, it aims to highlight the need for organizations to be aware there are often overlooked costs amid the many benefits. Don’t get us wrong – the pros outweigh the cons but decision-makers should be fully informed before making the decision to sign on with or retain an outsourcing partner. While many providers may choose not to bring such financial risks out into the open, the best outsourcing partnerships are just that – partnerships built on mutual respect and with both organizations invested in each other’s success.

That being the case, here are eight examples of hidden costs in outsourcing that companies should look out for as they can result in significant savings when reduced or eliminated.

What are the hidden costs of outsourcing?

1. Getting started: while one of the great benefits of outsourcing is letting someone else worry about onboarding and training staff, it still takes time, energy and financial resources to educate a new outsourcing partner about the work they are expected to perform. They will be across the key skills needed to fulfill their commitments but also need time to gain an understanding of your company and its specific processes. Depending on the complexity of the work required, this could mean weeks or even months of paying for less than 100% efficiency. It is important not to become disheartened though as the financial rewards will come in the long-term and it is also advisable to engage an outsourcing provider with a proven track record of hitting the ground running.
2. Unanticipated changes: it is one thing to deal with the fallout of unforeseen circumstances in-house. It is another to be forced to do so while also juggling the impact of such events on outsourcing partners. The global COVID-19 pandemic is a prime example of the cost of dramatic change that no outsourcing agreements had likely accounted for. As businesses around the world rushed to implement their own work-from-home technologies and procedures, many organizations faced the double-whammy of dealing with the ability of their providers to do the same. At a time of significant change, it was a great reminder of the need for businesses to ensure their outsourcing partners have strong and relevant continuity plans in place for when unexpected events unfold.
3. Poor performance: quality outsourcing providers are worth their weight in gold when they perform to the standard expected of them. Indeed, outsourcing destinations such as the Philippines regularly source enthusiastic and hard-working talent who provide a level of service beyond what would be delivered by more costly in-house staff. Of course, the catch is some outsourcing partners overpromise and underdeliver when it comes to performance, which can have a detrimental effect on one’s bottom line. There are two crucial steps to avoid this scenario. The first is to do your research before teaming with an outsourcing provider. Seek testimonials, ask important questions and set clear KPIs. The second is to take action sooner rather than later should concerns arise. Being proactive is a far better way to avoid quality-related costs than dealing with them after the fact.
4. Morale concerns: it is no secret that talk of outsourcing can send a shiver down the spines of one’s employees. There is a stigma that partnering with offshore providers means less jobs in-house, which can result in staff losing motivation, dropping standards or even leaving an organization. While outsourcing has been proven to actually complement existing employees and give them greater opportunities to focus on more rewarding tasks, many people often feel threatened and seek other employment options. To avoid such negative impacts, clearly outline how offshore teams can help benefit their daily workloads, introduce in-house teams to their outsourced colleagues and encourage team-building efforts that create a sense of unity.
5. Outdated strategies: for organizations that have already embraced outsourcing, one factor to consider is that nothing stays the same. Whether it is the labor market at home or the cost of doing business abroad, markets evolve and it is important to regularly review one’s outsourcing contracts to ensure the best return on investment. An in-depth analysis can result in both minor and major adjustments to an outsourcing strategy, which in turn can lead to crucial cost savings that would have otherwise gone unrealized. It is not necessarily about returning jobs onshore but more so maximizing the potential to get the most out of your resources.
6. Failure to innovate: the world is constantly evolving when it comes to technology and it is essential that companies do not fall behind their competitors. One potential negative effect of outsourcing is the risk of becoming complacent and simply trusting that one’s offshore providers are keeping pace with opportunities such as artificial intelligence and automation. Rather than falling into the trap of ‘out of sight, out of mind’, businesses need to ensure their outsourcing partners are embracing innovation on their behalf and, importantly, passing any related savings on to them. Team with outsourcing providers that promote innovation and foster a culture that sees discussions about such opportunities become a standard feature of the relationship.
7. Cost of upgrades: partnering with an outsourcing provider has a habit of shining a spotlight on a company’s legacy systems. Aging hardware and software may suffice when operating in a bubble but new outsourcing projects can lead to changes in infrastructure and business processes that require short-term expenditure. Be it new productivity tools, security protocols or data integrations, many companies make the mistake of not factoring in the cost of installing and training on vendor tools into their outsourcing budgets. The long-term benefits of such change are almost always worth the initial outlay but it is an outlay that executives need to be prepared for.
8. Surprise expenses: when signing an outsourcing deal, it should go without saying that companies need to know exactly where they stand on billing. Agreeing to a fixed fee arrangement may not always mean no extra costs as some outsourcing providers charge for work not outlined in the original contract. They have a view that extra tasks mean extra expense and that is why the best outsourcing partnerships are built on a clearly defined approach to billing rather than businesses being surprised by additional charges contained in the contract’s fine print. It is ultimately about establishing strong communication from the outset and looking to work with outsourcing providers with a proven track record of doing what they say will do – and charging accordingly.

But, what about the benefits?

Having outlined several potential disadvantages of outsourcing, it is now time to state the obvious - there is much more upside to be found in looking offshore than not. The ability to tap into labor and infrastructure cost savings of up to 70% is enough of a reward, without even factoring in the impact it can have on productivity and efficiency. Like any business decision, it is simply a matter of not rushing into an agreement and instead taking the time to research both outsourcing models and providers. Being aware of these eight hidden costs of outsourcing is a great starting point and making a serious effort to reduce or eliminate their impact can lead to valuable savings and, ultimately, greater profits.

Outsourcing can be a complex industry, hence why executives appreciate simple and definitive insights. Discover five ways outsourcing saves money, where such savings can be directed, another five benefits and how to nurture a successful outsourced team. This is also a handy resource for determining how much your business can save by outsourcing.

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