Every company aims to improve core processes and save money at the same time. This is why more businesses are relying on outsourcing strategies to make relationships with clients better. Service providers nowadays offer cost-effective solutions to reduce labor and operational expenses. More importantly, being knowledgeable with the costs associated with outsourcing contributes to transparency, which strengthens outsourcing relationships.
If you’re not familiar with the additional costs hidden in most outsourcing services, your finances might be at risk. This article helps you understand outsourcing fees and avoid unexpected costs that could harm your business.
7 Hidden Costs of Outsourcing You Need To Know
1. Getting started
Starting your outsourcing journey can be expensive, regardless of the products and services you want to offer your customers. It is crucial for you to communicate your business goals and expectations with your service provider. This means that you should invest in providing training materials and organizing meetings and webinars for skills development.
New outsourcing clients must be able to categorize project goals based on priority levels. These goals might include recruiting skilled resources and choosing an outsourcing model that fits your business.
One of the key benefits of outsourcing is cost savings. But during the initial phase of your outsourcing journey, you need to allot funds to make sure that your outsourcing team can keep up with your needs. When training your remote team, make sure your outsourcing partner understands your services well.
This is one of the hidden outsourcing costs that might surprise you upon signing the contract. Don’t worry because when outsourcing is done right, it’s definitely worth all those startup costs.
2. Unforeseen Circumstances
Outsourcing your office functions to destinations with different time zones and topography is always a challenge. And this is when unexpected circumstances take place. From power outages, economic pressures, typhoons, pandemics, and natural disasters, these situations could cost a lot. Making sure that your remote team can work efficiently just like your in-house team is crucial.
A concrete example of this is the COVID-19 crisis that affected the world. Companies maximized all available financial resources to help remote teams operate under strict government protocols. Offshore resources increased, but maintaining consistent service quality was a challenge. There was an increase in offshore resources, but there were also issues in sustaining the same level of quality among services. Be ready for serious situations requiring financial resources despite cultural and language differences.
These unforeseen circumstances cause minor to major errors, and the cost of negligence is certainly a huge price to pay. This could also lead to conflicts between client and vendor, and increased costs.
3. Software and Equipment Upgrades
To optimize business processes and streamline office functions, businesses need advanced software and equipment. Business units spend millions of dollars to adopt the latest technologies to boost customer service performance and initiate process improvements.
Sure, traditional call centers still do their work. But it is also a common practice for modern BPO companies to transition from basic approaches to more advanced strategies. Transition costs include software and equipment expenses, subscriptions, and labor costs to hire tech experts. These upgrades are essential for companies to thrive even during unexpected events.
Several outsourcing agreements include fixed fees to ensure thorough documentation processes and consistent software development for maintaining high quality. It’s important to coordinate with your tech partner about the specific technologies and people needed for each project scope. Companies might need a special software or system to perform talent gap analysis, in addition to the usual software and equipment upgrades.
4. Lack of Innovation
Just like other business trends and technologies, every outsourcing project needs innovation to succeed. You might be complacent about the status of your project because using traditional strategies could mean fewer expenses. However, as time goes by, you can observe how the lack of innovation could slow down tasks.
Failure to innovate in terms of technology and outsourcing techniques will push you into purchasing new equipment and software. The primary purpose is to keep up with the new trends and match the efforts of your competitors. This abrupt change will certainly cost you more than the gradual transition that outsourcing experts recommend.
Choosing a service provider with clear and direct innovative solutions can prevent this mistake. Keep in mind that opportunity costs will always be higher when you missed the initial chance to upgrade your methods.
For example, the outsourcing market is expected to reach 512.4 billion in size by 2030. It’s important to regularly review industry trends and prepare for innovative solutions within two to five years.
5. Poor Performance
The outsourcing process requires certain levels of skills and expertise to be deemed successful. Perhaps, the evidence of failure lies not just on poor sales, but most importantly, the lackluster performance of remote teams. This is where management costs could cause bigger problems.
Customer complaints are a direct consequence of poor performance. And when there are multiple complaints, the company will suffer. Now, you might be thinking how this could affect your financial resources? Here’s the thing. It is a common practice for companies to consider unsatisfactory performance as a major ground for termination.
In addition to the demanding nature of BPO jobs, high attrition rates can also be attributed to underperforming staff. Every outsourcing firm should be prepared for the challenge of hiring and training new employees to replace the terminated ones. And who will shoulder this burden? The client.
Outsourcing providers are in charge of the selection and training process. Stay updated on changes to employee pay and related matters when hiring new employees. And depending on the economic status of your outsourcing provider’s host country, the expected costs change from time to time.
Quality-related costs can damage your relationship with your outsourcing partner and harm your reputation with your clients. Indicating quality and performance expectations in outsourcing contracts to ensure proper understanding of business goals is a must.
6. Differences in Currency
When you’re planning to outsource your business operations, you have to be knowledgeable about differences in currency. Business experts advise owners to understand how fluctuating exchange rates can affect their resources and local staff with domestic currencies. When the local currency loses value, your offshoring partner pays less for its local resources, while you still have to pay the same or even higher amount.
One good example of this is when the Indian Rupee fell 23.3% against the US dollar in 2008. The vendor was able to secure an IT services contract valued at $10 million for only $6 million, a significant savings compared to the typical cost of $8 million. This guaranteed the vendor a whopping $2 million in addition to the profit stated in the agreement. That would have been huge potential savings for the company.
7. Outdated Outsourcing Strategy
Financial risks are common in almost every type of business. Still, the production and manufacturing industry takes the cake. Even if outsourcing is cheaper in terms of labor and materials, there are additional costs related to how and where the products will be sold, and where they will be produced. Choosing different locations for each phase of the business process is no longer a viable or practical strategy.
For example, if your products are manufactured in China, transporting them to Brazil or countries in North America is not a practical decision. Why? Because transportation and logistics expenses increase from time to time. Besides regular expenses, there are also unexpected issues and costs such as damage risks, in-transit handling problems, and instances beyond the control of your service provider.
With traditional outsourcing strategies still being practiced, many companies often overlook the importance of adopting innovative approaches to outsourcing. Innovation involves creating new roles and responsibilities, determining project costs based on complexity, and conducting a thorough analysis of potential hidden expenses. In the BPO industry, it is important to act promptly instead of making changes and modifications after making significant mistakes. Simply put, you have to ‘WORK SMARTER, NOT HARDER’
Tips to Reduce Costs in Outsourcing
Actual costs of outsourcing projects might be higher than most agreements and contracts state. Dealing with the heavy costs associated with your outsourced team can be frustrating. Here are some tips to increase potential savings and get rid of those hidden fees:
Prioritize employee well-being and encourage healthy engagements
In the outsourcing world, relationships are everything. Remote and in-house teams should have strong chemistry to work well together, just like any relationship. But more than the expected communication between teams, there must be a rightful balance in terms of skills. Offshore teams can help benefit the company when all members are competent and committed to work.
Recruiting offshore team members with strong work ethics and technical skills is an excellent starting point. If teams don’t deliver, the time and resources invested in recruitment and training will be wasted. Always be updated with BPO companies’ portfolios, to check if their teams could fit perfectly, skills and character-wise.
Unsatisfied employees who are not performing well often neglect their duties, leading to a significant decrease in performance quality and resulting in high disengagement costs. This phenomenon was rampant during the weeks or even months after the Covid-19 pandemic.
Measure, but don’t pressure
One of the most common problems in the BPO industry is employee burnout. Outsourcing has become one of the leading industries in the world, and globally competitive talents are its greatest investment. Caring for employees is crucial for your business to avoid high attrition rates and unexpected costs. But does this mean that you should take employee mistakes lightly? Absolutely not. You can still measure their performances and assess their skills without pressuring them.
Assessing employee performance over time and helping them learn new skills can benefit both your team and your business. In order to do this correctly, you must set clear KPIs that teams can refer to. In addition, it would be beneficial to implement programs that foster skills development and recognize employees for reaching significant milestones. Take care of the employees, so they can take care of the business. And that might be the best return on investment for anyone.
Set your goals clear
Misunderstanding between the business and the service provider is often caused by unmatched expectations and a vague set of goals. If the service provider delivers services which are not outlined in the original contract. Scope creep becomes the problem. Setting clear goals can help you discover costs that are most likely delivered without your authorization.
Scope creep is when additional features or functions are added to a product or service without permission. Be careful not to get unexpected charges for work that was not included in the original contract. Make sure to specify only the services you require to avoid this. And of course, have them in black and white.
Make use of technology
Every outsourcing agreement involves planning for the best and the most effective technologies to keep a business running. Communication plays a pivotal role in ensuring that all important data will be successfully transferred to your remote team. This will also help you set expectations and relay them to your outsourcing partner. By doing so, you can avoid financial risks caused by underperforming staff and poor management decisions.
You can help educate your remote team by holding webinars and virtual training programs. This is an ideal opportunity for you to form a competitive team and build a relationship with your staff. Make sure to use the best hardware and software solutions to guarantee smooth performance of tasks. While extra tasks mean extra expense and extra tech requirement, trust us that it’s totally worth it.
Don’t rush
Starting outsourcing ventures sounds like a fun and exciting decision for businesses. But did you know that going all out in joining the outsourcing market isn’t advised by most business leaders?
Most companies outsource their operations during the transition period. This period is perfect for you to learn more about the outsourcing process without going all out with expenses. For example, if you want to outsource your content creation team, start with the component processes first.
Instead of hiring an entire content team, try outsourcing your graphic design unit first. You can evaluate your service provider’s ability to meet your performance and skill requirements. This will also prevent the business from high financial risks.
Establish remote teams for important tasks.
There’s always a popular misconception about outsourcing only being appropriate for component processes and not for the core business functions. Truth is, you can outsource even your core processes and let your remote team take charge of your major tasks. This might seem like a perilous move, but this is ideal for long-term projects that require huge manpower.
Outsourcing your core activities can help reduce development costs in the long run. You may also access extra features at a minimum price, compared to hiring in-house experts to do the work. One important benefit of outsourcing is reducing costs. Outsourcing allows you to hire experienced remote workers who can support your internal staff, which can help you save money.
Don’t be afraid to innovate
As mentioned in the earlier parts of this article, the lack of innovation could make your business suffer. Just like most business decisions, outsourcing entails a lot of changes and upgrades. Not following outsourcing trends can lead to unexpected risks, even if you’re trying to save money.
Regularly updating your sales plan or manufacturing strategies and practices could benefit your company. It can also help you reach out to individual clients better and keep up with their ever-changing needs. Markets evolve and the preferences of clients and other stakeholders evolve as well.
Changes can have both positive and negative impacts on a business, so it is always recommended to take action sooner rather than later. Don’t be afraid to go on a new route. Challenging yourself can benefit your business, but make sure to do it smartly.
Have two or more potential vendors
Listing two or more potential vendors can help you choose the best outsourcing provider for your business. Even when negotiating about the cost, avoid going into extremes. Avoid extremely expensive or cheap services as they can harm your business operations.
As a service buyer, you always have the upper hand in picking the right outsourcing partner for you. Whether you’re preparing to work with an onshore or offshore team, having backup plans is always the way to go.
To start outsourcing, make a list of your expectations, budget, and required skills for your remote team. Compare and contrast vendors, and coordinate with them and their suppliers. Outsourcing is challenging, but the right provider can be beneficial.
Key Takeaways
Knowing the hidden costs associated with your initial outsourcing project is a crucial part of your productive outsourcing journey. These often overlooked costs could make irreparable damages to your organization’s financial security and profitability.
Common business costs that are often overlooked include startup expenses, performance problems, outdated technologies and strategies, currency disparities, unexpected events, and a lack of innovation. And when neglected, these could cost a lot.
To save money and succeed in outsourcing, follow these steps: find a trustworthy service provider, regularly update technology and equipment, and set clear project goals to avoid problems.
Digital Minds BPO can help you kick-start your outsourcing journey.
Excited to outsource your business operations? Digital Minds BPO offer a wide range of services perfect for all your needs and your budget. We are a Filipino outsourcing company that offers affordable and high-quality services. We specialize in customer support, data entry, and content moderation.
Our customer service team is skilled and experienced, always ready to help you. With the latest call center technologies and Filipino hard work, we can help build your dreams.
Contact us today for the most reliable and cost-effective outsourcing solutions to make your brand shine even more. We look forward to leading you to successful and productive milestones!