In many ways, the trickiest part of the outsourcing ROI assessment lies in correctly capturing the TCO – Total Cost of Outsourcing. Implemented without outsourcing domain expertise, the real costs of outsourcing can actually exceed any savings on wages or other benefits. Again, the components of TCO will depend upon what process or transaction is being outsourced. To avoid nasty surprises, it is critical to establish clearly where the outsource partner’s job begins and the nature of their interface to the enterprise. Transaction processing, for example, may require the bulk of costs around technology interfaces with fewer people involved. Business process outsourcing, however, can have other hidden costs. Clear definition of the business processes to be outsourced and how they feed back into the enterprise is a must.

According to a study conducted by Watson Wyatt (“Understanding Strategic Outsourcing – Canadian Benefits Outsourcing Study”, March 2004) companies outsourcing HR benefits administration were not well informed of the very costs they were trying to reduce. “Overall, companies do not have as precise a handle on costs as might be expected, given the stakes involved,” said technology solutions practice leader, Ed McMahon. “Despite their strong interest in reducing costs, this lack of awareness makes it difficult for companies to understand the total financial impact of sourcing decisions and to benchmark performance over time.”

The message is clear: take the time and spend the money to assess the current and expected costs of affected business processes. One way to ensure this is to hire an expert in the process domain who can help predict outcomes, reveal costs and establish a set of vendor selection criteria. The “hidden costs” should include - but not be limited to - costs such as:

• Travel expense – whether the partner is domestic or off-shore
• Severance pay, benefits, and employee attrition should staff reduction be implemented
• Regulatory costs for foreign partners
• Additional telecommunications costs (phone, fax, Internet, mobile, etc.)
• Contract management
• Relationship management
• Project management
• Hardware/software transition costs
• Interface implementation (e.g. data feeds from enterprise systems)
• Fee of an outsourcing consultant to advise on provider search and selection

On the TCO side of the ROI equation, more companies err by underestimating costs than by overstating benefits.

The goal of conducting an ROI assessment to ensure meaningful evaluation of benefits and costs is, ultimately, to reduce risk – both financial and operational. In addition to the tangible ROI determination, knowledgeable enterprises will take measures to ensure quality control, of services or products, and facilitate the integration of the outsourcing partner with company culture. The importance of this cannot be overstated.

As outsourcing is apparently expanding rather than receding, the line between what should and should not be outsourced is shifting quickly. Where at one time HR outsourcing basically referred to third party payroll administration, there are now companies considering outsourcing the entire HR department. Where ERP applications were once considered a corporate asset, they are now a commodity expense outsourced to shared services providers.

Just as the outsourcing of manufacturing went through initial growth pains as relationships, quality control standards and their enforcement were established, so too will business process outsourcing. An ROI assessment is an important tool to deal with the growth stages of process outsourcing, requiring enterprises to carefully and thoughtfully examine both their objectives, and current and expected costs. Hopefully this process, in turn, will guide enterprises to either develop well-planned process outsourcing strategies that will generate real returns, or keep the process under consideration in-house if the ROI so dictates.

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