Measuring your savings in Outsourcing can be a bit tricky as you need to look at more than just the monetary gains. It is easy to count the numbers associated with expenses incurred and profits earned after you went into the agreement with your service provider. The challenge is identifying the unquantifiable improvements.

To create a balanced measurement process,  it is important to identify the factors that you need to measure. Let us start with the quantifiable ones: Manpower salary, downsizing effects and overhead costs. All three are related because of the need to remove redundancies that are a result of the outsourced arrangement.

For the unquantifiable aspect, you firslty need to focus  on productivity and the factors associated with its improvement. For instance, if you outsourced the customer service function of your company, customer satisfaction will be the foremost gain you will see. It is not easily measured or directly associated with profits, but it is a catalyst for a lot more improvements. Brand image, product patronage and other positive effects can be generated from good customer service.

Another unquantifiable aspect is the reduced workload within the company that then allowed the remaining resources to focus on their core competencies. Check the growth in the other departments that benefited from the reduction and resource focus and you will see where your savings are evident. That could also include overall job satisfaction, and growth in the expertise within the company.

It is also important that you know the factors that can affect your cost savings. If your figures are not going as planned, it might be hindered by one of these:

1. Outsourcing costs. It is important that you protect yourself from unforeseen costs that the provider  may pass on. These could include additional infrastructure investments that were not included in the service proposal during the pre-agreement stage. A clause or two in the contract should cover against this. Not only should you look into the service provider, but you should analyse the costs in-house as well. Is the Vendor Management Team more costly than expected? If yes, then you need to re-evaluate the arrangement.

2. Transition Costs. The transition cost is also a factor. It is a one-time, big-time expense that  is necessary as a hastily carried out, poorly organised transitioned function can ultimately cost you more. At the same time, a long transition will only incur costs while  you are waiting for the outsourced function to swing into full effect. You need a balance to minimize the costs and maximize your transfer resources.

3. External Costs. The external costs include the inflation rate and exchange factors that can affect the savings in outsourcing. Especially if the service provider is offshore, then the exchange rate will certainly affect the cost of outsourcing. Like the outsourcing costs, this can be included as a clause in your contract so the client and the service provider can re-negotiate the terms in case of a major inflation or exchange rate difference.

For more detailed information, read our White Paper on “How to Monitor Your Savings in Outsourcing”.