For many industries, outsourcing can mean big gains in terms of revenue and can help ease the burden of certain processes along the supply chain. In some cases, outsourcing can save your business big bucks, especially when it comes to labour costs. For example, in information technology, many companies have turned to India and the Middle East regions with highly skilled workforces, relatively weak job markets, and lower costs of living to meet the demand for apt workers who don’t cost as much as workers in the UK or other areas. And we probably don’t have to explain why many companies often look to China and other economies with more affordable labour standards for manufacturing.
When doing your homework regarding outsourcing, it’s important to look into all of the costs associated with the transition. Comparing factors like the cost of production and hourly wages are, of course, extremely important to helping you determine whether outsourcing is a smart move, but there’s more to the story.
Outsourcing can be costly up-front when you’re working to find the appropriate suppliers, distributors, and factories. It can also drain your resources long after you’ve settled in. David Madden, the efficiency expert at Container Exchanger highlights all the hidden costs of expanding your business internationally.
Forbes cited “a failure to meet expectation” including the fact that outsourcing deals cost significantly more than originally referenced due to hidden costs, as a primary reason for why more businesses are giving up on outsourcing. Unfortunately, despite our globalized economy, extreme geographical differences can equal issues with currency, language, culture and, of course, the high cost and burden of international shipping. Here are a few of the hidden costs you should consider before taking the next step in your outsourcing research.
Offsetting poor quality
We all know the old adage, “You get what you pay for,” and this may be especially true in terms of outsourcing manufacturing. When you take your operations overseas, the first thing that happens is a loss of control.
You’re no longer able to closely monitor every rung of the supply chain, which can lead to a lower-quality output. Companies who have outsourced work may deal with cultural and language barriers that make it hard to communicate effectively, and companies may not use the same high-quality warehouse supplies, equipment and software you’re used to.
It’s difficult to quantify what these issues will cost you, but consider that you may have to compensate for costs associated with repairs, reworks, and scrapping products altogether. This is an especially important factor to consider if your business is quality-conscious and if you think that your customer base prioritizes quality over price.
Managing offshore operations
Although taking your company oversees may provide some easy benefits in terms of management, it’s also likely to incur some new ones. Managing an offshore contract can cost between 6 and 10 percent more than managing one at home, according to a whitepaper by OSF Global Services. This is because there’s a large amount of work in auditing offshore contracts. You’ll have to spend extra time double-checking records and invoices.
But before you get to that point, you’ll have to consider the high cost of transitioning your workforce. This is the most expensive stage of the offshoring journey, you’ll have to incur huge costs on communications, human resources, legal fees, technical costs, third-party consultants, and oversight. But perhaps the most budget-sucking (and personally challenging) element of the transition phase is the cost of layoffs. You’ll often be required to compensate laid-off workers with severance and other fees.
Compromising for lost business
Some customers may be inclined to buy products made in their home country over imports from foreign countries. And we don’t have to explain why keeping customers happy and creating an ethical and socially conscious brand can seriously boost your bottom line. When you take your business overseas, you risk losing essential business. The costs of acquiring new customers can be high, depending on your business, and one that you probably won’t account for when you outsource operations.
If you do think that you can safely outsource without losing a big chunk of business, make sure that you heavily research the best place to do it. Corporate social responsibility (CSR) isn’t just a fleeting buzzphrase; it’s actually something that can make or break your business.
A Nielsen study showed that 66 percent of consumers are willing to pay more for products and services made by companies that are committed to positive social and environmental impact. This is why it’s important that you outsource to regions that have strict labour laws and ethical standards.
Dealing with lags in production
One of the most-cited reasons businesses seek offshore resources is because they want to increase productivity while decreasing cost. But this may not be the case for every industry, and some businesses may even see a decrease in productivity after outsourcing. Part of this comes down to the quality aspect. When your outsourcing team is forced to correct or scrap inventory as a result of lower-quality equipment and poor training (which often occurs due to remote management and language barriers), they must compensate the time, which can lead to lower productivity.
Another major cost-sucking issue associated with outsourcing comes from the shipping side of things. Shipping risks come from trade laws and customs requirements, and costs are obviously much higher when shipping abroad when compared with shipping domestically.
In most cases, you’ll have to work closely with an international logistics company to help manage this facet of your business. And, as you probably know, shipping goods from overseas can create a serious lag in shipping time. If you need to be able to quickly fulfil orders at the drop of a hat and, if you’re like many e-commerce businesses that rely on shipping, then outsourcing is likely to be much more costly than you’d expect.