Outsourcing’s Cost Savings Magic | Article

outsourcing rabbit magic trickThis issue of Outsourcing Journal discusses the heart and soul of outsourcing: cost savings. Although there are other reasons to outsource — the need to focus on a core competency or the desire to standardize your applications platforms to prepare for e-commerce — cost is still the driving force.

Are the cost savings real? Many people view outsourcing like a card trick. You saw the result with your own eyes but you KNOW it was an illusion. Or was it?

Here at Outsourcing Center we’ve spent years going backstage and watching the magician from the wings. We know exactly what he’s done to work his wizardry. And yes, when he’s through, he’s left tremendous value at a lower cost. This issue of the Outsourcing-Journal takes you backstage, too, and shares with you the steps to save significant sums through outsourcing.

How does outsourcing save money? Let’s start with our definition of outsourcing: It is the transfer of the ownership of a process to an expert outside your organization. How can someone else do a process better than you can? The answer is: they have leverage. Outsourcing exposes leverage that is not available to an internal department. This leverage includes:

  • Economies of scale. A provider, for example, will use one server farm to help multiple clients, thus leveraging its skills and capital investment. In this issue you will read about the Coleman Group, an ASP that saves insurance companies from 30 percent to 50 percent of their costs in the human resources area.
  • Process expertise. Today in the U.S., 350,000 IT jobs are begging for qualified engineers to fill them. The best talent is flocking to outsource providers, where their specialty is the firm’s core competency. Most aspiring software engineers find better career paths this way. But the same applies to airplane mechanics. This issue discusses how the U.S. Air Force outsourced the maintenance of a special cargo aircraft. Management of these specialized employees also tends to be better with an outsourcer. The bosses make it their job to keep up-to-date with the newest in their industry. The bottom line: These people know how to do this better than you.
  • Access to capital. Tier one software packages are expensive. So is the hardware to run them. The outsourcer invests its capital in your business; your business enjoys the results without the expense. (That’s why you have to let them do it their way.) In this issue you will read how AT&T Solutions built and manages a global network for Acer. Acer estimates it will save $15 million over the life of the contract.
  • Access to expensive technology. Outsourcing allows the provider to purchase more expensive equipment than a single client could afford. Better equipment and software produces better results for the client. In this issue, the Port Authority of Allegheny County doubled its processing time when it scrapped its antiquated mainframe and began to outsource. And its computer availability jumped from 70 percent to 99.9 percent with outsourcing.

The combination of these four factors creates the cost savings inherent in outsourcing. Using this leverage, outsource providers can complete non-core services better, faster and cheaper than you can. If you follow these principles, I’m convinced you’ll find the cost savings inherent in every outsourcing contract.

This issue of the Outsourcing Journal just touches the tip of iceberg. I will discuss outsourcing cost savings in much greater detail in my new book, “Turn Lead Into Gold,” which will be published by Business Excellence Press in September. The book will also be available at this web site.

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