Based on survey results by Deloitte Consulting, a significant proportion of respondents (64%) were bringing back outsourced services in-house because of hidden costs. Additionally, another 44% indicated that they did not realize cost savings with outsourcing; therefore, they prefer bringing back the services in-house. Companies outsourced some of their services to establish their presence in high-growth countries such as India, China and Brazil with the aim of creating a high demand for goods and services. They also outsourced to reduce costs and increase profitability because of cheap labor ( Sodhi & Tang, 2012). However, companies have started to bring back outsources services because of hidden costs that may add up to 14 to 60% of the purchase price. Companies failed to incorporate all the costs factor associated with outsourcing.
One hidden cost associated with outsourcing is the cost of using outdated outsourcing strategies. Markets change over time, which in turn increase logistics, in-transit handling, transportation costs, and other management expenses. Outsourcing is a cost reduction plan; therefore, reevaluation of existing revenue versus sourcing decisions is necessary. Some of the market changes that have been witnessed in the last two decades include an increase in wages in outsourcing destinations such as China and continuous improvements in productivity that have made labor savings insignificant (Rubin, 2013). Furthermore, the labor cost that makes low-cost countries attractive destinations for outsourcing are undermined by overhead costs needed to make the overall supply chain efficiency. Companies are bringing back some services in-house to respond to market changes in their home countries.
Delegate your assignment to our experts and they will do the rest.
The other hidden costs that undermine the cost savings associated with outsourcing is the cost of selecting a vendor. Companies may ignore these costs, but they can be significant. Selecting vendor requires time and resources because they must be evaluated to determine whether they have the resources and infrastructure to deliver ( Sodhi & Tang, 2012) . Furthermore, the outsourcing company must evaluate the various outsourcing models to determine the model that suits the services they plan to outsource. Companies look for vendors who have the ability to develop infrastructure quickly to meet the needs of the outsourcing agreement and wants to develop a successful business partnership (Rubin, 2013). Research studies have revealed that outsourcing companies may incur additional costs ranging between 1 and 10% of the total outsourcing cost of vendor selection alone. It is necessary for outsourcing companies to select the right vendor because choosing the wrong vendor may have adverse consequences in the future. It is an up-front investment that will prevent problems in the future.
Managing cultural difference is another important hidden costs associated with outsourcing. Regardless of where a company outsources, they must undergo a period of solving the cultural differences between them and the vendor. Outsourcing destination such as foreign countries have unique cultural differences that determine business practices, for example, an American company planning to outsource some of its services to India must understand the cultural differences between the two countries. Outsourcing to other companies within the same geographical location is also associated with the challenge of dealing with differences in organizational culture. Studies have shown that cultural difference costs can add 3 to 27% to the total outsourcing costs (Intetics, 2013). Companies must take the time to understand the culture of the vendor and explain their own culture to the vendor. It is advisable to choose an outsourcing location founded on its cultural proximity to lower the chances of miscommunication. Cultural proximity simplifies the task of aligning the vision of the two companies. Outsourcing companies travel to the outsourcing site to understand their culture, which increases the cost of outsourcing. Although video conferencing and other technologies may reduce the need to travel, it is important to see firsthand the culture difference between the outsourcing company and the vendor.
Transition and relationship building costs is also another hidden cost associated with outsourcing. Transition costs are significant and should not be ignored because companies must spend time and money during the start of the business relationship in training and explain business practices to the new employees. Studies estimate that companies spend a further 2 to 3% on transition costs alone (Intetics, 2013). Although a company may lower the cost of transition by selecting a vendor with responsive business practices and experienced employees, it must explain its business practices to the new vendor. Therefore, it is important to account for the costs and time of this transition period. For some outsourcing relationships, the transition period may be three months, but for others, it may take longer.
Managing the outsourcing relationship is also another cost that should not be ignored. Correct management of contracts, invoices, and times sheets are necessary for the outsourcing relationship to work. A project manager must handle the outsourcing relationship to ensure that projects are moving forward promptly. For the outsourcing relationship to be successful, companies spend an additional 6 to 10% on managing the outsourcing relationship (Rubin, 2013). It is a significant cost that increases the total cost of outsourcing, but it is vital to the success of outsourcing.
In conclusion, the decision by some companies to bring back outsourced services in-house is due to the hidden costs of outsourcing. Initially, outsourcing some services was seen as the most suitable strategy for lowering business costs. However, companies have started to realize that hidden costs such as cultural difference costs, the cost of managing the relationship, transition costs, and the cost of selecting a vendor are significant. These costs undermine the cost savings associated with outsourcing; therefore, companies prefer bringing back outsourced services.
References
Sodhi, M. M. S., & Tang, C. S. (2012). Managing supply chain risk . New York: Springer.
Rubin, J. (2013, March 29). The hidden Costs of Outsourcing. Forbes . Retrieved August 9, 2017, from https://www.forbes.com/sites/forbesinsights/2013/03/29/the-hidden-costs-of-outsourcing/#1fbf8a6171c7
Intetics. (2013, December 4). Outsourcing Risk Management: Hidden Costs of Outsourcing. Intetics . Retrieved August 9, 2017, from https://intetics.com/blog/outsourcing-risk-management-hidden-costs-of-outsourcing/
