With every project, there are hidden costs we didn’t expect. With 542,000 IT jobs moving overseas in 2015 (Source), there will be a lot of hidden outsourcing costs not anticipated by CIO’s. One major area that get’s underestimated is outsourcing transition costs.
What are outsourcing transition costs? They occur during your transition period, usually 3-12 months after you’ve agreed to outsource. They aren’t contract related, and many are opportunity costs.
There are 6 key areas during the transition period that can blow up your budget. During this period of the outsourcing processes, you should not expect to save money. In fact, you’re going to incur heavy expenses. Per CIO.com, you should expect at least 2 – 3% of your signed agreement costs to occur during this transition period.
Here are the 6 areas you need to make sure you factor appropriately when budget time comes around…
#1 — Communications
Internal, external and marketing communication costs are going to hit during the transition process.
Internal costs are communications between departments, both written and verbal. When you’re dealing with an outsourcing project at an enterprise company, your senior level people will need to be in constant communication with lower-level employees.
These stakeholders need to be around to maintain morale. They should meet with individuals constantly to understand hiccups. This is time they normally could spend performing other activities, so you’re losing productivity from your best people.
Your external and marketing costs are designed to protect your business. Your PR firm or marketing department will probably be writing about an outsourcing of this size.
If you’re a major company, you should expect to deal with some negative feedback from media as well since if you’re sending jobs out of the country. Even if the jobs aren’t going overseas, you might need to deal with local media.
External communication costs can tally up, especially if your shutting down a major location to outsource those jobs. The problem with this is you can never accurately estimate the cost since you don’t know the media impact before hand.
#2 — Travel
Travel will hurt, especially if you’re outsourcing overseas. You’ll bring people to the U.S. to train them on your product. You will send your best people overseas to check in with the new group and check out facilities.
Travel costs are obvious. But productivity lost from travel is a hidden cost as well. This will make your people tired and often frustrated.
Don’t forget about breakdowns in communication due to travel. Projects will go slower and problems will occur.
#3 — Knowledge Transfer
During this on-boarding process, there will be a knowledge transfer that won’t go as fast as you’d like. That’s because your employees that still have a job might lack motivation and you’ll be dealing with cultural and language differences.
With regards to motivation, even if the individual won’t be let go, they might miss their co-workers. They might think their going to eventually be terminated. This is again why communication is so important.
With regards to cultural differences, there’s a lot of variables. For instance, if you outsource development, in some countries developers tend to do exactly what the client asks — even if they think it can be done better, where as developers in the west are more likely to offer better solutions. You need to train outsourced developers to do things your way.
The cultural barrier can occur for local outsourcing as well. You might have company policies or security requirements that need to be adhered too that might take time for your outsourced employees to get used to.
#4 — Salaries
During this period you’ll also have to pay appropriate wages. If you fly a foreigner into the country, they will probably need to be paid the US hourly minimums. If this wasn’t discussed in your contract, you might end up paying this.
Depending on your agreement, you might need to pay for travel visas as well.
Since you’ll be paying some of your current employees to train these individuals, you’ll be paying double while getting less productivity (since there will be an on-going teaching/learning process).
If you retain some of your employees for the transition period, expect to pay them extra not to leave. These are your most valuable employees during this entire process, and losing a few critical individuals could set you back months.
Pay these people well during this period and try to keep their morale up. Promise good recommendations. Help them network. But again — all this costs money and time.
Expect your salary costs to at least double during the outsourcing transition period.
#5 — Hardware Transitions
If your transition period includes switching from your hardware to the outsourced company hardware, you’ll find a lot of hidden costs as well.
This includes electricity, transfer of data, integrations between new and old systems, failover, etc…
Your on-going hardware maintenance budget might double as you pay for both new and old equipment and you deal with any problems integrating new infrastructure.
#6 — Meetings
There will be lots of meetings, usually with strategic people in your organization. If you don’t plan meetings well, you might lose a lot of productivity from some of your best people.
Make sure you understand the purpose of meetings, who needs to be invited versus who just needs to be informed, and take careful notes on what the next steps are and when they’re supposed to be done.
If you don’t follow these routines, you’ll cost yourself tons of money with regards to lost productivity.
While outsourcing jobs can save you money in the long run, you should expect heavy costs in the initial 3-12 months.
In fact, it might take up to 2 years to save on an outsourcing project. If you’re an executive making this decision, make sure you consider all the costs and your own personal timeline with company before shipping jobs somewhere else.