Are you paying too much for outsourced resources?

CIOs need to check for “outsourcing bloat.”

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Many companies in mature, offshore, FTE-based outsourcing environments experience substantial bloat. From our knowledge of our clients’ situations and our research for companies seeking objective data to help them determine the return on investment in outsourcing, it’s clear that many companies today are paying too much for the resources. And they’re blissfully unaware of the outsourcing bloat — which means that they are paying for 30 percent or more of FTEs than they need. Moreover, they don’t have visibility into what could be done to rationalize the bloat. This is a significant problem. 

The outsourcing bloat grows in two dimensions: (1) paying for too many FTEs and (2) paying too much per FTE. The problem has an even bigger impact when you consider that outsourced FTEs will cheerfully respond to system problems, but not address the underlying issues which cause them. Our observation is companies that have fixed underlying systemic problems are operating with 30 to 40 percent fewer FTEs.

We’re finding this situation across most of the industry. Every company is different; but if yours is in a mature FTE-based outsourcing situation, there’s a good chance you have substantial FTE bloat.

The problem is exacerbated in that companies are paying more than market rate. Here’s why. Typically, when a company signs an outsourcing contract, a cost-of-living (COLA) adjustment is applied, which ratchets up the cost. But over the last three years, market costs for these services have been dropping between one and three percent a year. Yet the COLA has been going up between three and five percent a year.

Companies sign a COLA agreement because they believe they want to retain the people. But even if this is the aspiration, most companies experience significant churn in the offshoring factory model. So they’re paying for something they’re not getting (retention of people) and also paying higher costs even though the provider’s costs aren’t rising. Although wages are increasing in India, wages for the freshers (the people coming out of college) haven’t been increasing, and that’s often the resources the customer pays for as the provider’s model is to keep lower-priced people doing the work. 

Finally, rupee depreciation is a factor. Since the customer pays for more resources than are necessary, this offsets the depreciation impact on the provider’s rates.

My advice: If your company has a mature, FTE-based outsourcing relationship, you need to take a close look at it for possible bloat. Obtain objective market data to help you determine whether you’re paying for too many resources and too much for those resources.

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