Cost savings continue to be the most important reason behind outsourcing decisions. But how much money are you actually saving?
Even though organizations increasingly are using outsourcing as a strategy to increase profitability, access new skill sets, re-focus on their core business and improve competitiveness, various surveys show that cost reduction still remains on the top of the agenda.
Despite the enormous focus on cost reductions, one element of cost seems to be almost completely overlooked in outsourcing. Namely, indirect costs.
When surveyed, a large majority of managers only included direct cost savings when evaluating the business case for outsourcing. The few who consider indirect cost savings seem to purposely underestimate their size.
Defining indirect costs
An indirect cost is a cost that represents the expense of doing business that is not readily identified with a particular project or activity, but is necessary for the general operation of the organization and the activities it performs.
At their nature, indirect costs can be either fixed or variable, and are located in departments other than the ones where the activity is performed. It is often the case that indirect costs include overhead costs, capital costs and personnel-related costs.
Despite the fact that allocating indirect costs is important – it is also difficult. A popular and robust method is Activity Based Costing (ABC), which allows an organization to gather data about its operating costs and assign them to each activity. Activity Based Costing can be used in various ways, but the simpler time-driven ABC method may be the best as it only requires two inputs: 1) cost per time unit to supply resources to this activity and 2) how much time each activity takes.
Identifying cross-organizational indirect cost savings
When examining the indirect cost savings connected with running an average Facility Management department, it is necessary to look at all other departments to capture all relevant cost savings.
The graphic below shows an overview of indirect cost saving potentials in different departments when outsourcing a Facility Management division.
Outsourcing frees capital, lower invoicing costs and relieve HR resources
Some of the largest indirect cost savings will often be found in the finance department.
As part of the outsourcing contract, the service provider may purchase various assets such as machines, tools, and even buildings from the customer.
The customer will thus save the depreciation charges on these assets, as well as the cost of capital tied up in these assets.
Other cost savings include payroll processing costs for the outsourced workers as well as budget management and cost control resources.
A final but not least important source of savings lies in lower invoicing costs. These cost savings are often realized for at least two main reasons;
- There will be fewer contracts to manage which equals fewer contracts to pay
- The service provider will often take over a significant number of invoices, which in turn will save customer transaction costs.
Similar to the financial department, outsourcing will also help the HR department to free up resources used to manage personnel issues for the facility management division. These typically include staff recruitment, development, retention as well as various administrative tasks.
As HR often is brand sensitive, the HR department will often help drawing up job descriptions, advertise the job, do the application screening and in some cases also carry out some initial interviews.
Outsourcing releases procurement and legal resources
The procurement department develops and carries out the organizations’ acquisition of assets and purchase of out-tasked services.
Even though the newly Integrated Facility Services contract may turn out to be more complex and comprehensive than any of the previous contracts the procurement department has ever worked with - it will save a significant amount of money overall.
The main reason for this is that compared to before there will be only one contract with a single point of contact.
This will naturally release resources from contract management communication and coordination. Secondly, as the contract will be integrated – many acquisitions and services will no longer be needed.
Similar to the procurement department, the legal department will also be positively impacted by outsourcing as the number of facility management contracts will be reduced through Integrated Facility Services.
Outsourcing externalizes IT equipment and licenses
The IT department will potentially save money from three source: hardware, software and licenses as well as IT support. The reason for this is that the service provider often will supply its own computers, laptops, PDAs and pay for the software installed upon the various devices.
The service provider will also often bring its own proprietary facility management software and operate its own central IT support desk. This will in turn save the customer’s IT department the resources previously used to support these systems.
Outsourcing reduces space utilization and internal services
Also the Corporate Real Estate (CRE) department will save money. This is especially from space consumption and internal services. Space consumption will be reduced as the outsourcing exercise in most cases leads to a reduction in on-site facility management employees. The reason for this is that a service provider often can do the job more efficiently (thus a lower number of employees is needed), and some management functions can be carried out centrally.
Internal services including postal services, reception service and maintenance services, will be saved for the people no longer employed as a result of the outsourcing process. As with space consumption, this saving only applies for the employees where actual space is saved.
Outsourcing will free up time from management
Senior management spends plenty of time on developing strategies, overseeing and reviewing strategic and investment decisions. In many cases, senior management is also involved in the review of top-level operations of the facility management division.
The facility management division is one of many divisions that senior management focuses upon, and as many regard this as adding little strategic value to the core of their organization, they may not spend the expected amount of time on it. The indirect cost saving caused by outsourcing is therefore the time spent x the total compensation of the management involved.
Outsourcing will improve business continuity
Business continuity activities are often spread among a number of departments, so the savings are often activity-based. Most costs associated with facility management continuity projects can be saved post-outsourcing, and will no longer form a part of the overall business continuity program. This will free up time for the people involved. In this context research show that service providers perform facility management with better quality and care which often results in fewer accidents, fires and service degradations for the customer. Even though the savings can be hard to quantify, estimates can be made using benchmark data.
Would you like to know more about the economies of outsourcing? Please download our White Paper: Indirect Cost Savings When Outsourcing or explore our Outsourcing Insights.