The formula for minimizing outsourcing expenses

Outsourcing cost reduction is typically about comparing the costs of outsourcing a particular task or function to doing it in-house. A general formula for calculating the cost reduction when outsourcing might look something like this:

Outsourcing Cost Reduction Formula:

Cost Reduction Percentage=(In-house Cost−Outsourcing CostIn-house Cost)×100\text{Cost Reduction Percentage} = \left( \frac{\text{In-house Cost} – \text{Outsourcing Cost}}{\text{In-house Cost}} \right) \times 100Cost Reduction Percentage=(In-house CostIn-house Cost−Outsourcing Cost​)×100

Where:

• In-house Cost: The cost of performing the task or function within the company (includes labor, overhead, equipment, etc.).

• Outsourcing Cost: The cost of contracting an external company or provider to handle the task or function.

Example:

Let’s say your in-house cost for customer service is $100,000 per year, but outsourcing the task would cost $60,000 per year.

Cost Reduction Percentage=(100,000−60,000100,000)×100=40%\text{Cost Reduction Percentage} = \left( \frac{100,000 – 60,000}{100,000} \right) \times 100 = 40\%Cost Reduction Percentage=(100,000100,000−60,000​)×100=40%

So, by outsourcing, you would reduce the cost by 40%.

Key Considerations:

1. Direct Costs: Include labor, training, and overhead.

2. Indirect Costs: You may have reduced management costs, but there might be hidden costs like loss of control, quality risks, or the need for vendor management.

3. Scale and Efficiency: The larger the scale of the outsourcing, the greater the potential for cost reduction due to the vendor’s economies of scale.

Does that cover what you’re looking for, or do you need it applied to a specific scenario?