Preparing For Outsourcing: How To Build Your Base Case For A Cost/Benefit Analysis

Is your company considering outsourcing? There are a number of benefits that can justify outsourcing and most organizations in the United States outsource at least one of their non-core business functions.

Approximately 72% of top decision makers in the U.S. said their companies have already outsourced one or more business processes to external service providers according to the Global Top Decision-Makers Study on Business Process Outsourcing conducted by PriceWaterhouseCoopers .

However, if your company is new to outsourcing, or if you are considering outsourcing an internal function or service for the first time, one of the first steps to take is to create a business case.

A business case is an internal document used by your organization to determine the fiscal need to outsource. It serves as a tool to justify the decision to move from an in-house to an outsourced model and helps protect against unnecessary spending. A business case should include what you spend today (your base case) and what you would spend if you outsourced the function or service to a supplier.

Part 1: Determining your Base Case

The first step in creating a business case is determining the current costs of the function or service you are looking to outsource. You must indentify the scope of services, break them down into elemental functions, and then assign cost estimates based on the current costs without outsourcing.

Use the five steps below to help determine your current costs

1. Identify the services your organization would like to outsource
2. Identify personnel costs
   • Identify who in the organization delivers the services
   • Determine the labor costs of the personnel, including: Salary, Benefits, and Overhead
   • Determine the additional support costs including: Accounting, Payroll, Training, etc.
3. Identify non-personnel costs
   • Identify hardware and software required and determine the costs associated, including: Equipment, Upgrades and Licenses
   • Determine all other related costs including: Real Estate, Overhead, Travel, Training, etc.
4. Determine the total costs by adding the personnel and non-personnel costs.
5. Use the total costs to create cost projections for the next 12 months and at least the next three years.
   • The immediately approaching year is considered your base year.
   • The base year should be used to estimate costs in the subsequent years, keeping in mind growth and shrinkage assumptions.

The projected cost estimate that you develop in Step 5 is your base case of costs. Your base case is a critical first step in the outsourcing process as you will use this data to compare to proposed prices from prospective suppliers.

Part 2: Supplier Pricing

Now that you have determined your fully-loaded base case costs for each function, you can begin contacting suppliers for pricing information. In order to receive an accurate comparison, you will need to share information researched during the base case exercise. At a minimum, you should share your assumptions about the quantities of services you will require under a contract agreement.

*When comparing your base case to suppliers’ proposals, remember to include retained organization and ancillary costs in the overall costs. These costs may not be coming from the supplier, but they are part of the overall outsourcing initiative.