Hidden Cost of Outsourcing
Offshore outsourcing

Hidden Cost of Outsourcing

By Mainak Biswas November 09, 2006 - 1,348 views

We pioneered a service called “Dedicated Hiring” that allows you to hire a blend of resources as per your requirements for a fixed contract period. This service starts at $8.25/hr and requires a minimum commitment of 176 hours. 

Theoretically, the dedicated hiring service should deliver a savings (or, more profits in case of software services firms) of atleast 22.5% on fixed price projects in comparison to other offshore vendors and around 70% in case of onshore vendors. Besides projects, this service is extensively used by ISV and Software Services companies as an alternative to in-house staffing and the cost incurred is literally one-third of what it would have been if they decided to hire resources locally.

However, in practice we have rarely seen such high cost savings. The reason now seems well justified. According to Meta Group, Gartner and Renodis, there are few hidden costs which cause the profits to fall short of expectations. They are listed below:

Hidden Cost Best Case Value Worst Case Value
Vendor Selection 0.2% 2%
Transitioning the work 2% 3%
Layoffs and retention 3% 5%
Lost productivity 3% 27%
Improving development process 1% 10%
Managing the contract 6% 10%
    15.2% 57%

Layoffs and retention cost are the cost incurred at the end of the contracting organization while they shift roles and right-size the staff. Lost Productivity refers to the loss of work due to turnover among workers at our end. Depending on the maturity of the organization that you work with, this value can be between 3% and 27%. Thus working with an organization that has a very high turnover rate or that does not does not have a way to manage this, cuts your profit expectation to two-third.

Let’s analyze this with a one year contract with 2 dedicated resources for which the billing is $1450 per month. The total contract size is 2 (People) X 12 (Months) X 1450 (per month cost) = $34800.

Hidden Cost Best Case Value Worst Case Value
Vendor Selection $69.6 $696
Transitioning the work $696 $1044
Layoffs and retention $1044 $1740
Lost productivity $1044 $9396
Improving development process $343 $3480
Managing the contract $2088 $3480
Total Contract Cost $40089.6 $54636

Indus Net Technologies proactively manages the risk of Loss Productivity to ensure that your organization does not have to suffer such huge losses and you could enjoy greater profitability.

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