Support function outsourcing: the hidden costs

Outsourcing support services such as payroll is a popular way for a firm to reduce costs and allow focus on the core business(es). Unfortunately, many firms do not realise the hoped-for savings, often because certain costs were overlooked during the planning process. Ignoring these costs can distort return on investment and cost/benefit calculations, which in turn leads to unrealistic expectations and poor decision making. This article examines six types of costs that are often overlooked when outsourcing support functions. These costs include those that may: 1) be hidden by overhead allocation techniques; 2) be unanticipated; 3) arise from decreased employee morale; 4) stem from compliance with Sarbanes-Oxley legislation (for US-based companies); 5) be created through contingency factors such as system incompatibility; 6) surface from ethical issues, such as health concerns among vendors' employees. Failing to consider these costs could generate an inappropriate cost-benefit analysis in favour of outsourcing.