Sometimes when using outsourcing services a client can be shocked and even struck dumb with astonishment when they get a bill payable. Statistics show outturn costs can exceed expected by 65%. That does not mean a vendor wants to fool you, not at all.
The thing is many clients do not take into consideration unobvious outsourcing principles. They see only costs that lie on the surface. That’s why, when the work is done, they often get blindsided by the huge sums of money they need to pay for the services as this may not fit their budgets.
This is precisely why we want to tell you which hidden costs are at the back of outsourcing procedure, so that in future you could effectively distribute your own or company money.
So, first to expect is additional costs of 1-10% during the process of outsourcing vendor choice. These costs are associated with workflow management, RFP preparation, also vendor’s feedback evaluation and analysis.
Next item of additional expenditures of 2-3% is work transfer to the outsourcing company. This process of function transfer can take from 3 months to one year and is the most important and expensive outsourcing stage. Project management during transfer, control over all processes, client communication organization and support, staff arrangement of work and labor force administration, juridical and technical aspects – all these can take more time than you expect.
It’s necessary to take into account that it’s almost impossible to avoid cultural and language difficulties. Very often misunderstanding caused by them can lead to a dismissal of this or that employee, delay in the workload delivery, and thus, loss of efficiency. In this case be ready for additional costs of 3-5%.
What else one can expect? 1-10% of additional costs for software development processes improvement. By that we mean software debugging and this can force a vendor to hire extra employees to balance work and improve its quality. Also, one can refer expenses for any development testing and specification failure correction to these costs, which are sometimes called Ramp-up costs.
And finally, 6-10% of additional costs can lurk during offshore contracts and business processes management. This item of expenditure is one of the most substantial. This is due to the fact project manager takes huge responsibility for intervening work. They should not only control production process, but also plan project financing, resolve conflicts, watch expenditures and deadlines, etc.
Let’s sum up. Expenditure planning is a crucial stage when deciding whether start outsourcing or not. In this respect, one should know exactly where and how much the funds should be channeled. We hope these “cunning” hidden expenditures will help you draft a budget in a right way, so that you could avoid unforeseen expenses in future.
Please, do not hesitate to contact us if you have any questions, or would like to get any clarifications or consulting.
4 thoughts on “Drafting the Budget for IT outsourcing”
I often work as an expert witness in outsource projects that go sour. If you would like a paper on the four most common problems that show up in litigation, send an email with a valid return address to Capers.Jones3 at Gmail.com.
The stats are not that correct. Many time the vendor try to fool the client, but client need to be aware of the agreement that he signed with the vendor. It is also a responsibility of client to make sure that the cost will not go up.
I have a Outsourcing company , we do outsourcing work but we never come up with any issue of cost. I believe the vendor also need to inform the client before taking the project, about when, where and how the cost might go up to certain percentage.
Interesting article. I have been part of a few out-sourcing/ off-shoring projects and like all business processes, it is a learning experience. The list in the article is a good starting point and rest will come with experience. And as any good/ experienced manager will tell you – Always keep margin for errors.
I disagree with sahil on vendor trying to fool the client. Such vendors go out of business very fast.
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