Whether you are looking to outsource the work of a 1 man team … or a 1,000 person work-force … picking your outsourcing budget can be tricky.
There are many factors involved, but at the end of the day, the one that is most important is your company’s bottom line. Outsourcing must only be done as a result of careful cost-benefit analysis. Only upon achieving near certainty that a long-term profit will be achieved should you even consider starting outsourcing campaigns.
I’ve already written about the disaster of focusing on short-term outsourcing benefits.
The problem is, when it comes to Business Process Outsourcing, you’ll have to be clairvoyant to accurately predict long-term profit before getting started.
There are lots of moving pieces when it comes to BPO (or even just hiring a Virtual Assistant or two). You have human beings, foreign nations, technical infrastructure, timezone disparities, cultural and language barriers, and who knows what else all contributing to the success or failure of your outsourcing efforts.
That’s why the single most important factor in your long-term outsourcing success (or failure) is systematization.
Predict Outsourcing Systems Before The Budget
Reverse Engineering Results-Based Budget Projections
It may seem backward to imagine your outsourcing system(s) before ever even considering your budget, but in a best case scenario that is exactly what you should do.
The good news about outsourcing is you can guarantee the final cost is going to be lower than getting the work done locally. That is the whole point.
What you can’t be sure of is exactly how efficient or effective your outsourcing efforts are going to be. Cheap work isn’t cheap when it causes you bigger problems down the line. In fact, cheap work that leads to missed deadlines, client dissatisfaction, negative PR, etc is actually more expensive than expensive work.
Let me repeat that, because it is the reason for determining your outsourcing systems before guessing at your outsourcing budget… namely that:
Cheap work that causes problems down the line is more expensive than expensive work!
The good news for you, if you are considering outsourcing for your business, is that work can cause problems at any price. It can also produce efficient & profitable results. The difference in outcome, if you haven’t guessed it, are the systems.
Understanding Business Process Outsourcing As A System
Determine a repetitive task that occurs on-site in your business which does not require a workers’ physical presence to complete.
Quantify & qualify this task, defining the specific skills required to complete it and the criteria for a successful outcome. Make sure to calculate exactly how often this repetitive task needs to be done (ideally with an estimate of work-hours per week or per month).
Break down the repetitive task step-by-step, calculating minutes / hours required to achieve outcome benchmarks.
Once you have pinpointed a repetitive task that can be effectively completed off-site, you’ll need to determine some type of basic performance metrics by which to measure it (i.e. – calls / hr. for a telemarketer, or entries / hr for data entry, or words / minute for typing, etc), and then measure this for your on-site team to have a baseline by which to compare potential outsourcing candidates.
Calculate the total number of work hours your on-site staff currently devotes to the task, and calculate the current cost.
Once you have a step-by-step breakdown of the task in question, and a performance metric by which to measure it, you can determine the current cost of this one specific task (even if it is generally indistinct from other costs incurred during work hours of the same employees). While this cost information can be helpful in your operations overall, we are determining it here for the purpose of calculating outsourcing budget in the next two steps.
Create a range of potential outsourcing work hour scenarios based on multiples of your on-site staff output baseline.
In other words: on-staff work hours * 2 = virtual staff work hours required to achieve the same task.
This step is potentially the most important, and where far too many people fall off the boat. In this step, you basically ask yourself:
How many work-hours will this task require if my outsourced staff takes 50% longer than my local staff? What if they take twice as long? Three times as long???
For now, you just need the numbers of hours.
Calculate outsourcing budget projections based on a simple formula using local wage and performance baselines from above.
Here’s the formula:
L * (1 – B) * H * R = x
L = Local rate per hour (i.e. – $15 / hr)
B = BPO % savings per hour (i.e – 50% off)
H = Local hours (i.e. – 80 hrs / month)
R = BPO inefficiency ratio (i.e. – BPO takes 1.5 times as long to achieve same task)
x = Outsourcing budget
Here’s a simple example. Let’s say your Local rate per hour (L) is $15. So your on-site staff gets $15 / hr to do this task. Perhaps your BPO service is 50% cheaper ($7.50 / hr) … that gives us our B of 50% or 0.5. If your local worker takes 80 hrs / month to complete this task, our H = 80. If the BPO service takes 120 hrs for the same task, our inefficiency ratio would be 1.5 (120/80).
That leaves us with this:
$15 * 0.5 * 80 * 1.5 = $900 (a savings of ~$300 or ~25%)
This type of calculation will tell you a lot about your prospects when it comes to outsourcing.
If you contact us and request it, I’m sure someone from our Consulting Department can give you a spreadsheet to do the calculating yourself.
For instance, using that simple equation, you can see that the break even point occurs whenever the discount on the wage is equal or greater than the inefficiency ratio on the work hours.
For instance, the outsourcing ceases to be cost effective at the 50% discount as soon as the BPO service takes twice as long as the local team:
$15 * 0.5 * 80 * 2 = $1200 (no savings)
The most important factors, obviously, are determining the cost of off-shore staff (for an example, see AdminBetter pricing here) and determining how they compare to your on-site teams.
I’ve Determined My Outsourcing Budget…
As I’ve written about elsewhere, and will continue to emphasize ad infinitum:
The sole purpose of outsourcing in your business is to boost your profits.
That means it must either decrease the cost of achieving the same income, or boost the income you receive, or both. Outsourcing, Virtual Assistants, and / or BPO can be useful for achieving both types of profit growth, but you need to be precise in determining how you go about it, or you could see the whole endeavor simply adding an entry to the expense column.
Obviously, the ideal situation is seeing the same or better output from your back-office staff for a steep discount of 50 – 80% off the cost of achieving that output locally. Can this be achieved? Most definitely. The question is (obviously):
How can I see discounts from outsourcing of 50 – 80% off the cost of achieving the same objectives locally???
Well, friend … this post is about determining your budget. To determine how to spend that budget profitably, you better continue to read some of the related posts (or some of the other categories on the sidebar). Of course, you could always contact us directly to have the unfettered feedback from one of our Outsourcing Consultants (absolutely free).