15 hidden costs of outsourcing and how to mitigate them

For an industry that has been on the rise for several decades, outsourcing shows no signs of slowing down. Valued at $187 billion in 2018, the outsourcing market is expected to reach almost $315 billion by 2025 as companies are increasingly drawn to its ability to reduce costs, increase efficiencies and boost productivity. Even organizations that have traditionally shied away from looking offshore for business support have started to glance outside their borders for workforce options as a range of events combine to create unprecedented pressures.

The old saying about needing to ‘work smarter, not harder’ will become a common refrain in boardrooms as executives do their best to balance the books in an increasingly fraught environment. Frighteningly, that is without even mentioning arguably the greatest threat to the workplace landscape – the global labor shortage.

Studies have shown there will be an estimated shortage of 85 million workers around the world by 2030.

As the labor market continues to tighten, it is little wonder more organizations are turning to outsourcing providers to complement in-house staff, recruit specialists or receive much-needed assistance with managing repetitive and time-consuming tasks. Countless articles have been written about the benefits of outsourcing and there is no doubt that working with the right provider at the right time can deliver a significant return on investment.

This article is different though. In the expected mad scramble to join the outsourcing revolution, it aims to highlight the need for organizations to be aware there are often overlooked costs amid the many benefits. Don’t get us wrong – the pros outweigh the cons but decision-makers should be fully informed before making the decision to sign on with or retain an outsourcing partner. While many providers may choose not to bring such financial risks out into the open, the best outsourcing partnerships are just that – partnerships built on mutual respect and with both organizations invested in each other’s success.

That being the case, here are fifteen examples of hidden costs in outsourcing that companies should look out for as they can result in significant savings when reduced or eliminated.

What are the hidden costs of outsourcing?

1. Prioritizing lowest cost over best fit: focusing solely on the bottom line can backfire, leading to communication issues, cultural mismatches, and other problems that end up costing you more in the long run. Don't sacrifice quality for the sake of a quick price tag. Evaluate vendors holistically, weighing factors like quality, reliability and alignment with your business goals, not just the bottom line.
2. Vendor selection costs: the time and effort required to thoroughly evaluate and select the right outsourcing partner - from drafting RFPs to on-site visits - can really add up. Don't overlook these upfront costs when budgeting for your outsourcing initiative. Factor in the time and expenses of the vendor selection process when budgeting for your outsourcing initiative to avoid underestimating the true total cost.
3. Insufficient preparation: skimping on the critical early stages of aligning teams, processes and goals can cause major delays, rework and higher management costs down the line. Invest the necessary time and resources upfront to align teams, define processes and ensure a shared understanding of project goals.
4. Staff transition challenges: when you bring on an outsourced team, it can mean extra work and transitions for your in-house staff. Account for the costs of retraining, schedule changes and other internal disruptions when bringing on an outsourced team.
5. Infrastructure and operations realignment: integrating a new outsourcing partner often requires updating your own systems, tools and workflows. Proactively assess the technological requirements and budget for the necessary system upgrades and integration efforts.
6. Contract and relationship management: proper oversight, communication and change management within the outsourcing relationship takes dedicated resources. Don't underestimate the ongoing costs of managing the partnership effectively. Dedicate adequate resources to oversee the outsourcing relationship, monitor progress and manage contractual changes.
7. Cultural and organizational misalignment: differences in norms and structures between your team and the outsourced one can hinder collaboration and productivity, leading to hidden expenses. Prioritize cultural fit and organizational alignment when selecting an outsourcing provider to minimize collaboration challenges.
8. Excessive intermediaries: adding extra layers of oversight between you and the outsourced team can diminish communication and increase costs. Strive for more direct communication and engagement between your team and the outsourced provider to avoid the added costs of intermediaries.
9. Unanticipated changes: unexpected events can disrupt your outsourcing arrangements.  Ensure your outsourcing partners have robust business continuity plans in place to mitigate the impact of unexpected disruptions.
10. Poor outsourcing partner performance: an underperforming outsourcing provider can mean rework, lost productivity and intensive oversight - expenses that add up quickly. Thoroughly vet potential providers, set clear performance indicators and be proactive in addressing any quality or productivity concerns.
11. Negative morale impacts: outsourcing can spark fears and resentment among your in-house staff. Address these concerns proactively to maintain team morale and productivity. Communicate how the outsourcing partnership can benefit existing employees and foster a sense of unity between the in-house and outsourced teams.

12. Outdated strategies: markets and technologies are constantly evolving, so regularly review and optimize your outsourcing approach to ensure you're taking advantage of the latest conditions and emerging opportunities. Missed optimization opportunities can equal missed savings.

13. Stagnant innovation: don't let your outsourcing partners get complacent. Ensure they're driving continuous improvements that benefit your business, not just theirs.
14. Upgrade investments: integrating new outsourced work often requires upgrading your own systems and tools. Budget for the necessary one-time costs of integrating new systems and tools to support the outsourced work.
15. Watch for hidden fees: thoroughly review outsourcing contracts to understand all potential charges, not just the quoted rates. Unexpected fees can balloon your expenses.

But, what about the benefits?

Having outlined several potential disadvantages of outsourcing, it is now time to state the obvious - there is much more upside to be found in looking offshore than not. The ability to tap into labor and infrastructure cost savings of up to 70% is enough of a reward, without even factoring in the impact it can have on productivity and efficiency. Like any business decision, it is simply a matter of not rushing into an agreement and instead taking the time to research both outsourcing models and providers. Being aware of these fifteen hidden costs of outsourcing is a great starting point and making a serious effort to reduce or eliminate their impact can lead to valuable savings and, ultimately, greater profits.

Outsourcing can be a complex industry, hence why executives appreciate simple and definitive insights. Discover five ways outsourcing saves money, where such savings can be directed, another five benefits and how to nurture a successful outsourced team. This is also a handy resource for determining how much your business can save by outsourcing.