Wish to track the real costs of Outsourcing?

Outsourcing for the first time and wary about what would be the costs involved for setting up outsourcing works. Continue reading this and it may help you resolve some doubts on the costs, to set up outsourcing requires various transition costs. Mainly there are two broad categories of outsourcing costs such as transition cost and base costs. But they are often altered or made to fit as per the contracts results in degradation of work quality or leaves stained relationships.

Transition costs are probably the first cost to the outsourcer and it may leave you surprised as clauses which you never saw pops up. While signing and negotiating a contract keep in mind of even the smallest or single sentences involving costs or legal issues. If it’s somewhat ambiguous ask the service provider to clarify the point and give a proper written explanation with it. Various other costs part of this transition bracket is various on-site visits and workshops and presentations by service provider. Very often delegates or experts from the provider side go on-site probably to discuss the technological aspects, requirement analysis, to validate in-scope services, assign project teams, frame communication plan, creating milestones for the project etc. This is one place we can focus and track all the transition outsourcing costs. Data center migration is included as part of the transition, it will also include planning and testing of systems, acquiring and transferring of licenses, installation and a stabilization period. If service desk is part of the outsourcing deal, documentation of call flow processes, implementing the service desk & desktop automation and monitoring tools as well the development of the policy and procedure manual can be expected.

So when is the time, this transition costs comes into picture? These costs being the initial expenses are obviously to be paid at first; these costs are often paid during the first year of contract, though there is a constant risk with service provider of losing out on terms with change in business scenario over the business period. But there is a new trend of paying my milestones, so this ensures providers of timely payments. The benefit of paying by completed milestones ensures delivery according to the Transition Schedule and Master Service Agreements (MSA’s). The advantage of this policy is it reduces paying high charges up front and decreases the risk by delaying payment of work left incomplete. It also keeps a check on the deliverable s and payments and if promised deliverable s are not completed the invoices shouldn’t be paid for that period.

The doubt which may still persist is the difference between transition costs and base costs. The foremost difference is that they are not paid together and transition costs are simply paid before base costs. Providers often don’t differentiate between the two and during negotiation overlap both the transition and base costs. Just as a simple reminder, Base costs are generally not paid until the service is online. The difference between Effective and Commencement dates should be clear to understand this difference. Effective date is when the contract is signed according to Master services Agreement and the Commencement date is when the provider actually assumes the responsibility for the services. Example a 10 year deal with 1 year of transition is actually worth 9 years of base charge and 1 year of transition costs.

Just a simple suggestion, costs analyzed would be always on the lower side of costs finally incurred. The original costs would be at-least 10-15% higher than costs estimated. So to minimize the costs a constant scrutiny is required.

For more good articles on IT, SMBs and outsourcing refer to Dr. Subbu Murthy's blog