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How Much Can Outsourcing Really Save?

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I set this article aside some time ago with the intention of commenting on it at some point.  Now is as good a time as any.

The story, “Survey: Outsourcing saves less than claimed” is based on a survey conducted by TPI.  The gist of the story is summed up in the lead:

“Outsourcing of information technology and business services delivers average cost savings of 15 percent, a survey found on Thursday, disproving market claims that outsourcing can reduce costs by more than 60 percent.”

Now I don’t know about anyone out there reading this blog, but I’ve never really heard claims of 60% savings through outsourcing.  So I went to Google and started looking for myself.  Then I went to Yahoo and continued looking; and darned if I couldn’t find any study or article or blog entry or anything claiming that companies can save more than 60% through outsourcing.

In all, I tried about 20 search strings.  Now granted, some of the searches yielded a lot of results, but the first few pages didn’t show anything so I moved on.  If any of the 1.2 million people reading this article can cite a study claiming such huge savings, please let the rest of us know.  And when you do, you’ll win the door prize for most effective web search guru.  Of course, people do tend to exaggerate at times.  For instance, I know that just slightly over 800,000 people are reading this now.  That’s nowhere near 1.2 million.  So maybe our friends at TPI were just exaggerating. 

Maybe they’ve seen claims of massive savings from offshoring (for a refresher on the difference between offshoring and outsourcing, click here).  I hesitate to believe that TPI, one of the leaders in the sourcing consulting business, would confuse offshoring with outsourcing.  But even if they did, I found this article which claims “that India’s wage rate for computer programmers is 15% that of a programmer in the United States. But in that same article, we hear from an industry expert that ‘Realistically, a company might expect to save about 20% through outsourcing.’” 

The TPI study article goes on to say that “savings range between 10 percent and 39 percent, with the average level at 15 percent.  These are very interesting numbers to me.  Why?  Because I have conducted three Total Cost of Ownership (TCO) studies over the past three years.  In all, over 260 companies have participated.  Each of the companies had over 1,000 employees.  In other words, these weren’t small companies.

The studies looked at the TCOs of delivering payroll services, HRIS, and benefits administration in both the inhouse and outsourced environments.  In the weeks to come, I will write more about TCO and the studies specifically.  What I want to point out today is that the studies showed that on average, outsourcing saved 17% on benefits administration and 37.5% on payroll administration.  The TPI numbers, as I said are very interesting to me.  They validate what I have seen with my own research.

For goodness sake, the “Lift and Shift” BPO outsourcing model typically goes for a cost minus 15%- 20%.  So where does that 60% claim come from?  Maybe it was just an uninformed middle manager at a company that was in the process of outsourcing who made the claim.  Maybe it was a bad business case someone once saw.

Wherever it came from, the healine Survey: Outsourcing saves less than claimed does everyone a diservice. 

Headlines like this really get to me for many reasons.  I’ll talk about these in the weeks to come as well, but the biggest reason is that very frequently, the most effective outsourcing is really cost neutral as savings which are realized can be very effectively “reinvested” in the transformation of the HR function.  And especially important in the success of any major outsourcing initiative is the proper management of expectations.  How many people out there see this headline and simply think outsourcing really doesn’t help companies achieve their goals?

Shame, really.  Maybe someone out there can shed some light on this 60% claim and together – 800,000 strong – we can educate the public on the real benefits that outsourcing can bring when done right!

About the author – Donald Glade is President and Founder of Sourcing Analytics, Inc., an independent consulting firm specializing in helping companies optimize their HR / benefits / payroll service partnerships through relationship management, financial analysis, and process improvement.


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5 responses to “How Much Can Outsourcing Really Save?”

  1. How Much Can Outsourcing Really Save? July 11, 2006 on 2:00 am | by Donald Glade I set this article aside some time ago with the intention of commenting on it at some point.  Now is as good a time as any. The story, “Survey: Outsourcing saves less than claimed” is based on a survey

  2. elaine Avatar

    Frankly, there are so many articles published stating different outcome of offshoring and outsourcing ventures. More often than not, people are confused on which side to believe in and which is telling the truth or lying.

  3. […] In Systematic HR, it talks about finding how much companies are really saving in regards to their outsourcing ventures. It also talks about the results of the recent study done by TPI. Know more about it by reading the blog post entitled How Much Can Outsourcing Really Save? […]

  4. systematicHR Avatar

    True Elaine – Brings to mind a book out there somewhere “how to lie with numbers” or “statistics” or something like that.

    I think the key to the quote was not that there’s a variation in how much you can save, but that the article Donald pointed to was still indicating a general savings to outsourcing.

    Depending on your assumptions to the ROI/TCO study, you can have wildly varying results. For example, if you are only looking at hard dollar savings would be a major contributor to the total cost study.


  5. […] Introduction to TCO Earlier this week, Elaine commented on my article from last week How Much Can Outsourcing Really Save. Elaine writes: “Frankly, there are so many articles published stating different outcome of […]