One of the best approaches to calculating outsourcing cost savings is through differential cost analysis. This approach helps in accurate evaluation of the outsourcing cost and how much a company would save from the same. Here’s a four-step approach to determining the outsourcing cost:
1. Analyze Task
Analyze the core operation to be outsourced and specify its quantity and quality along with your business preferences. This would help you differentiate between the core operations that you can do in-house and services you might need to outsource.
2. Outsourcing Cost
The next step you need to take is to calculate the overall cost of outsourcing the development work. It would include everything from the bid price, contract administration cost, hourly rate multiple hours of work, transition cost to the cost of the administration of the tasks and much more. From the total amount you have calculated, minus the amount that you might receive from selling the existing supplies and software.
3. In House Cost
Now that you know what functions you need to outsource and what quantity and quality you are looking for, it’s time to how much you can save by not getting those operations done in-house. This would include the hiring cost, salaries, software, equipment, supplies, benefits, etc. Avoid including sunk costs in this cost analysis.
4. Final Cost Savings From Outsourcing
Now comes the part where you get the final cost savings from outsourcing. This could be deduced by getting the difference of the total in-house costs and the total outsourcing cost.
Staying unbeknownst of the actual costs of the services might lead to false savings. Do not assume the potential savings! Do the math’s! Know the numbers and make calculations to know how much your company can save by outsourcing software development to countries like India, China, etc. In order to know the actual, it is imperative you also know the hidden costs in outsourcing.
Daven Michaels is a New York Times Best Selling Author and CEO of premiere global outsourcing company, 123Employee. The company employs hundreds of young bright individuals on three continents. His International event, Beyond Marketing Live! inspires entrepreneurs to build & grow their business with revolutionary new theories and systems allowing them to design the business and personal lifestyle of their dreams.