People compare "apples to oranges" and mistakenly conclude that outsourcing your function will save money.

Challenge

You know you're frugal, your staff are hard working, and you're already making use of vendors whenever it's economic to do so. You know you're delivering good value.

But others believe the enterprise will save money by outsourcing all or a major portion of your organization, despite the fact that vendors have to make a profit on the deal.

Why do they think this? Vendors may tell them:

• "We'll give you 50% of what you're getting today for 80% of the cost. That's a 20% cost savings!"

• "We'll do it for 25% less. (Just don't ask us about the quality of service.)"

• "We'll give you the base work for 30% less than your internal costs (and then charge a huge premium whenever you ask for anything else)."

• "We'll give you everything for 35% less than internal costs (this year... with escalcation to make the deal very profitable by the end of the contract)."

• You may have burdened too many costs on part of your product line (and underpriced other parts), subjecting the overpriced part to outsourcing.

• You may have burdened your products and services with costs that vendors won't incur, like enterprise-good activities (such as policy, corporate committees, coordination of decentralized counterparts, community-action programs) or the full cost of capital for infrastructure (which should be depreciated).

You know there's a catch, but you don't have the data to refute their claims.

How can you ensure that any outsourcing decisions are made on a like-for-like basis?

Solution

Rates are the most meaningful basis for benchmarking.

Simply comparing the total spending on a function with other industry counterparts of similar size can be very misleading, since many factors other than the efficiency of the internal service provider drive its total budget. For example, a company may be spending more on IT than industry counterparts because it has found ways to utilize technologies to leverage strategies, or because it's chosen a strategic niche (such as locale or geographic dispersion) that increases IT costs. In such cases, limiting spending to industry averages would undermine corporate strategies.

Furthermore, comparing internal costs to industry counterparts is fruitless, since companies typically cannot buy support services from their competitors.

The most meaningful way to benchmark internal costs is to compare them to the cost of buying similar products and services from vendors. This answers the pragmatic question, "Can I buy the same thing for less elsewhere?"

Thus, the only way to be sure that comparisons are fair is to know the costs of all your products and services, with a transparent and valid cost model.

Then, if a vendor offers a price on a subset of what you do, you can isolate the internal cost of that same subset of your deliverables.

If they offer a lower quality of service, you can isolate your costs for that same service level.

If they bid only the base (with a premium on additional requests), you can add up their total costs for your total package.

With internal product/service cost data, you can compare fairly to outsourcing alternatives over the life of the contract.

Comprehensive solution....

Other Resources

How to calculate comparable rates....

Column: Outsourcing....

Anecdote: The Outsourcing Shell Game
how to fairly compare internal IT staff to outsourcing, apples to apples

Anecdote: You Cost Too Much
internal IT can appear too expensive if you're comparing apples to oranges

Book on outsourcing versus extended staffing....

Speech on outsourcing versus extended staffing....

Speech abstract: You Cost Too Much!
how to ensure fair comparisons to benchmarks and outsourcing