When laborious and repetitive business tasks like data entry, email monitoring or IT services become a distraction from the core functions of a company, it’s time to consider outsourcing. Doing so can bring significant advantages like increased productivity and cost savings.
All business owners enjoy cutting back on costs, but it’s also important to know how much you’re saving exactly. While there are many ways to calculate the cost of outsourcing, the fundamental approach is known as the Differential Cost Analysis. This concept shows the difference in total costs between two acceptable alternative courses of action. Here’s how to do it:
Specify the functions you want to outsource
Before anything else, it’s important to determine the specific business functions that you are considering to outsource—you need to keep in mind the quality and quantity of the tasks, too. This step will help you achieve a fair comparison between what you can do in-house and what can be provided by a third party.
Compute the in-house costs that could be avoided by outsourcing
Next, you need to identify the costs you would be able to avoid if you outsource. You can do this by listing down direct costs (supplies, salaries, equipment, etc.) and indirect costs (internal services) then taking out the variables that you no longer need to pay for.
Calculate your total outsourcing fees
The third step is to calculate the total costs of outsourcing the specific business function. You can do this with the help of your outsourcing partner as they can provide complete pricing information inclusive of building and managing your team.
Subtract total outsourcing fees from in-house costs
Lastly, you need to calculate the difference between costs saved and costs incurred from outsourcing. Subtract the total costs of outsourcing from the in-house costs that could be avoided—if the result is favorable, you can justify your decision to outsource to a third party.