"…don't own a cafeteria: let a food company
do it! Don't run a print shop: let a printing company do
that. Understand where your real value added is and put
your best people and resources behind that." - Jack
Welch (former Chairman & CEO - General Electric in his
book "Straight from the Gut")
A quantified analysis listing the typical non-core activities your
business handles on a daily basis can help
evaluate the "outsourcing decision making process."
The following example will provide a framework from which
a risk vs. reward determination can be made regarding the
cost of outsourcing a business process.
First, determine the variables:
NE = Number of Employees involved in task
AS = average Annual Salary of individuals performing
the task ($/year)
TS = estimated Time Spent on the task each month
(hours/month)
CA = annualized Cost of Alternative solution ($/year)
Next, determine the estimated Annual Benefit Cost (ABC)
by multiplying average Annual Salary (AS) by a factor of
.35 (35% represents the industry standard of 35 cents of
benefit costs for every dollar of employee wages):
ABC = $50,000(example) * .35 = $17,500/year
The average Total Compensation (TC) includes both AS and
AB, or:
TC = $50,000 + $17,500 = $67,500/year
Assuming a 40-hour workweek, the Hourly Rate of the employee
(HR) is calculated as follows:
HR = $67,500 / (52 weeks/year * 40 hours/week)
= $32.45/hour
Total Time spent annually (TT) is estimated in Time Spent
per month (TS):
TT = 20 hours/month * 12 months/year = 240 hours/year
The total Labor Cost per year (LC) to accomplish the task
is then calculated by multiplying TT by Hourly Rate (HR):
LC = 240 hours/year * $32.45/hour = $7,788/year
In addition to the Labor Cost, one must consider the average
cost associated with errors. The estimated Error Rate (ER)
is found by multiplying the Number of Employees (NE) by
the National Average in employer costs for such errors per
employee ($3300/year) times the National Average error rate
(3%) as follows:
ER = 300 employees (example) * ($3300/employee/year
* .03) = $29,700/year
Finally, once one has these main components for reconciling
the costs of handling the task in-house, a company can determine
the Annual Total cost by adding the Labor Cost (LC) to the
cost due to Error Rate (ER):
AT = $7,788/year + $29,700/year = $37,488/year
Now, take a look at the CA Alternative.
The annual Outsourced Cost (OC) is calculated by multiplying
the new Time spent after Outsourcing (TO) (here ½)
by the comparative Hourly Rate of an in-house employee (HR)
times the number of months in a year:
OC = $32.45/hour * .5 hours/months * 12 months
= $194.70/year
Adding the annualized Cost of Alternative (CA) (charged
by the provider) by the annual Outsourced Cost (OC) can
determine the Total Costs due to Outsourcing (TCO):
TCO = $15,000/year (example) + $194.70 = $15,194.70/year
It is now possible to visualize the Outsourcing Savings
(OS) by subtracting the Total Costs due to Outsourcing (TCO)
from the Annual cost of the Task in-house (AT):
OS = $37,488 - $15,194.70 = $22,293.30/year
The company's Return On Investment is over $22,000 annually
for an "average" employee.
This exercise can help your company determine:
