ROI Calculation Unveiled: How to Measure Returns on Your Outsourcing Investments

Understanding the financial impact of outsourcing is vital for businesses considering services from a BPO company in Phoenix. Collaborating with business process outsourcing (BPO) providers boosts efficiency and trims costs, fostering revenue growth in a fiercely competitive market.

However, the success of outsourcing ventures depends on effectively analyzing returns on investment (ROI). 

This article explains the complexities of ROI calculation, highlighting the significance of well-crafted outsourcing strategies and budget allocations.

Read until the end for ROI calculation examples and valuable tips to maximize outsourcing returns.

What Is Outsourcing ROI?

Outsourcing ROI calculates the financial rewards of delegating operations to service providers, such as BPO companies. It determines how profitable outsourced services are by comparing the benefits gained, such as lower costs and higher efficiency, and the investments made to get those benefits.

However, what is BPO? Outsourcing helps enhance operational efficiency, cost-effectiveness, and overall business performance. BPO companies try to get the most money back by making the best use of resources, streamlining workflows, and using specialized skills to improve key performance indicators (KPIs) in a way that can be measured.

Calculating the ROI for outsourcing requires a careful methodology. Compared to conventional investments, where financial returns are directly related to capital spending, ROI calculation in outsourcing includes tangible and intangible advantages.

Optimizing Returns: Factors to Consider in Outsourcing ROI Calculation

Define clear objectives for your outsourcing endeavor before calculating ROI. Determine your outsourcing goals, whether cost savings, efficiency, access to specialist skills, or a mix of these elements. Simple criteria should serve as the basis for your ROI measurement.

As mentioned above, ROI calculation in outsourcing consists of quantifiable (tangible) metrics and intangible benefits:

• Quantifiable metrics. Tangible benefits are more straightforward to quantify, and incorporating these metrics into your ROI calculation is essential. For example, if your outsourcing goal is cost reduction, track the direct savings from reduced operating costs, labor expenses, and overhead. 
• Intangible benefits. While quantifiable metrics are straightforward, intangible benefits are challenging to gauge but are equally significant in outsourcing. Improved customer satisfaction, enhanced quality, and accelerated time to market are intangible benefits contributing to the overall ROI.

Measuring Quantifiable Metrics

Below are the metrics needed for the outsourcing ROI calculation. Document these measurements meticulously to facilitate a comprehensive ROI analysis.

• Cost savings. This is the most apparent and measurable aspect of outsourcing. Examine the cost differences between in-house and outsourced procedures. Include direct labor, infrastructure, and any other relevant overhead expenses. A transparent cost comparison provides a clear picture of the financial gains from outsourcing.
• Efficiency gains. Assess the impact of outsourcing on operational efficiency. Measure the time saved and improvements in productivity and workflow. Efficiency gains can result in faster project completion, reduced time to market, and enhanced overall productivity.
• Quality improvement. If your outsourcing strategy includes tasks directly impacting product or service quality, track the progress over time. Such metrics include reduced error rates, improved accuracy, or better adherence to industry standards. A higher-quality output satisfies customers and contributes to long-term business success.

Measuring Intangible Returns

Consider the following intangible returns when performing an outsourcing ROI calculation. While they are complicated to quantify, recognizing their significance is vital for a comprehensive profitability appraisal.

• Customer satisfaction. Outsourcing can indirectly impact customer satisfaction by assuring prompt service delivery, higher product quality, and better customer assistance. Implement customer feedback tools and evaluate patterns to see how outsourcing affects customer satisfaction.
• Innovation and flexibility. Assess the BPO partner’s contribution to your organization’s creativity and adaptability. Check whether third-party expertise has provided new ideas, technologies, or processes that improve your company’s agility and response to market changes.
• Risk mitigation. Outsourcing can serve as a risk-reduction strategy by offering access to specialized talent and resources without the long-term commitment and hazards of running an in-house unit. Analyze outsourcing’s impact on risk control, averting the costs and liabilities of maintaining in-house staff for specific tasks.

ROI Calculation in Outsourcing

Now that we have identified the critical components of outsourcing ROI, let us explore a step-by-step guide to conducting a comprehensive ROI calculation.

Calculate Total Costs

Compute the total expenses to initiate a comprehensive evaluation of an outsourcing initiative. This step entails a meticulous examination of the various expenditures associated with outsourcing. Direct costs, including outsourcing fees, infrastructure expenses, and additional costs incurred during the transition phase, should be quantified precisely.

When collectively assessed, these costs provide a holistic understanding of the financial investment required for the outsourcing endeavor. By breaking down and quantifying each component, businesses can gain valuable insights into the overall financial implications of outsourcing, aiding in informed decision-making and effective resource allocation.

Assess Quantifiable Metrics 

Calculate the tangible benefits of the outsourcing initiative. This process involves a comprehensive assessment of cost savings, efficiency gains, and enhancements in quality. Assigning a monetary value to each measurable improvement is essential, providing a clear financial representation of the advantages gained through outsourcing. 

By measuring the real benefits, companies get a numerical idea of their return on investment (ROI) and valuable information about the areas where outsourcing has added value. This makes it easier to make strategic decisions and improve operational processes.

Evaluate Intangible Benefits

Analyze intangible benefits to fully understand outsourcing’s impact on business. Despite the inherent challenges in quantifying these factors, try to assign value to elements such as improved customer satisfaction, innovation, and risk mitigation. 

The qualitative study gives more detailed information about the bigger effects of outsourcing, including how it changes customer relationships and how flexible and strong an organization is when faced with uncertainty. This thorough assessment guarantees a nuanced grasp of the genuine value within the intangible aspects of outsourcing.

Use ROI Formula

Apply the ROI formula to determine the overall return on your outsourcing investment:

ROI = [(Total benefits − Total costs)/Total costs] x 100

The result is a percentage indicating the return on every dollar invested in outsourcing. A positive ROI signifies a profitable outsourcing initiative.

ROI Calculation in Outsourcing Example

Consider an example situation to demonstrate using the ROI calculation in outsourcing. Assume TechSolutions Inc., a mid-sized software development firm, intends to deploy back-office outsourcing services by teaming with a third-party provider, UCBPO. 

Scenario

Objective:

TechSolutions Inc. aims to improve customer satisfaction and operational efficiency by delegating customer support services to UCBPO.

Costs:

1. Outsourcing fees: $100,000 annually
2. Infrastructure costs: $20,000 annually (additional servers, software licenses, etc.)
3. Transition costs: $30,000 (one-time expense for training, system integration, etc.)

Quantifiable metrics (tangible benefits):

1. Labor cost savings: $80,000 annually (compared to in-house customer support team)
2. Efficiency gains: Reduced average handling time per customer inquiry, resulting in an estimated savings of $20,000 annually.

Intangible benefits:

1. Customer satisfaction improvement: TechSolutions Inc. conducts customer surveys, and the results indicate a significant improvement in customer satisfaction, although quantifying this improvement proves challenging.

ROI Calculation

Total costs:

$100,000 (Outsourcing fees) + $20,000 (Infrastructure costs) + $30,000 (Transition costs) = $150,000

Total quantifiable metrics:

$80,000 (Labor cost savings) + $20,000 (Efficiency gains) = $100,000

Total intangible benefits:

Difficult to quantify, but acknowledged as positively impacting customer satisfaction.

ROI formula:

ROI = [$100,000 (Total benefits) − $150,000 (Total costs)/$150,000 (Total costs)] ×100

ROI calculation:

ROI = [($100,000 − $150,000)/$150,000] × 100 = −33.33%

Analysis

The calculated ROI is -33.33%, indicating a negative ROI. While the quantifiable metrics or tangible benefits from cost savings and efficiency gains amount to $100,000, the total costs incurred, including outsourcing fees, infrastructure, and transition costs, exceed this amount. The negative ROI suggests that more tangible benefits are needed to offset the total costs.

TechSolutions Inc. should reconsider the outsourcing initiative with UCBPO. They should find areas for improvement and determine if the intangible advantages, notably the favorable influence on customer satisfaction, outweigh the expenditures invested.

In practice, this study would urge TechSolutions Inc. to undertake a thorough evaluation. Perhaps they can renegotiate outsourcing terms, improve efficiency measures, or investigate other techniques to achieve a positive ROI and assure the long-term viability of their outsourcing venture.

ROI Calculation in Outsourcing Example Using KPIs

Let us look at an example of how KPIs can be used to calculate the ROI of outsourcing. Picture the scenario: ProTech Manufacturing outsources its information technology (IT) support functions to ABC BPO. 

Since the third-party vendor offers contact as a service (CCaaS) and IT solutions, it was hired to increase ProTech’s operational efficiency and eliminate IT-related downtime.

Scenario

Objective:

ProTech Manufacturing aims to enhance operational efficiency and reduce IT-related downtime by outsourcing its IT support services to ABC BPO.

KPIs defined:

1. Incident resolution time (IRT):

• Target: Reduce average incident resolution time from four hours (in-house) to two hours (outsourced).
• Importance: A shorter resolution time indicates improved efficiency and minimized disruption of manufacturing processes.

2. System uptime percentage:

• Target: Increase system uptime from 95% (in-house) to 99% (outsourced).
• Importance: Higher system uptime ensures smooth operations and reduces manufacturing downtime.

3. Customer satisfaction score (CSAT):

• Target: Based on user feedback, achieve a CSAT score of 90% or higher.
• Importance: CSAT reflects end-user satisfaction with IT support, directly impacting overall employee productivity and morale.

4. Cost per ticket:

• Target: Decrease the cost per support ticket by 20% through outsourcing.
• Importance: Lowering the cost per ticket demonstrates cost efficiency in IT support operations.

Quantifying Benefits and Costs

Quantifiable metrics (tangible benefits):

1. IRT improvement. If the average incident resolution time decreases from four to two hours, calculate the time savings per incident and convert it into monetary terms based on the average labor cost.
2. Improvement in system uptime. Calculate the additional production time gained from the increase in system uptime and quantify it in monetary terms.
3. CSAT improvement. A higher CSAT score positively impacts employee productivity. Though challenging to quantify precisely, the improvement in CSAT indirectly contributes to reduced downtime and increased efficiency.
4. Cost per ticket reduction. Calculate the percentage reduction per support ticket and convert it into monetary savings.
5. Total tangible benefits. Sum up the monetary values of the improvements in incident resolution time, system uptime, and cost per ticket.

Total costs:

1. Outsourcing fees: Include the annual fees paid to ABC BPO.
2. Transition costs: Include any one-time transition costs associated with onboarding the outsourcing partner

ROI calculation:

ROI = [(Total quantifiable metrics − Total costs)/Total costs] x 100

Example Calculation

Quantifiable metrics:

1. IRT improvement: $50,000
2. System uptime improvement: $30,000
3. CSAT improvement: Difficult to precisely quantify, but let us estimate $20,000.
4. Cost per ticket reduction: $15,000

Total quantifiable metrics: $115,000

Total costs:

1. Outsourcing fees: $80,000
2. Transition costs: $15,000

Total costs: $95,000

ROI = [($115,000 −  $95,0000)/$95,000] × 100 = 21.05%

Analysis

A positive ROI of 21.05% indicates that the outsourcing initiative is profitable. The improvements in incident resolution time, system uptime, and cost per ticket, combined with the estimated positive impact on customer satisfaction, justify the costs incurred through outsourcing.

The favorable ROI means that the financial advantages of outsourcing surpass the expenses, confirming the choice to outsource IT support services.

In practice, monitoring these KPIs and making strategy adjustments based on performance evaluations would be necessary to ensure continued success and optimize the outsourcing operation’s ROI.

Best Practices for Maximizing Outsourcing ROI

Follow these tips to make the most of your outsourcing ROI: 

• Review potential BPO partners. Conduct a thorough analysis of potential outsourcing partners, considering their capabilities and alignment with organizational objectives.
• Emphasize KPIs. Prioritize quantifiable metrics for regular monitoring and evaluation against established benchmarks, facilitating data-driven decision-making.
• Establish effective communication and collaboration. Foster open interaction and coordination with outsourcing partners for a transparent and mutually beneficial relationship.
• Be flexible. Embrace adaptability by regularly reassessing the outsourcing landscape to seize emerging opportunities and address evolving business needs.
• Conduct post-implementation reviews. Perform periodic evaluations to gain reflective insights, identifying successes and areas for improvement.

The Bottom Line

Measuring outsourcing returns requires a multifaceted approach involving clear objectives, quantifiable metrics, and intangible benefits, such as enhanced customer satisfaction and innovation.

ROI calculation acts as a compass, offering insights into the success and profitability of outsourcing initiatives. Maximize outsourcing ROI by rigorously evaluating partners, prioritizing KPIs, fostering communication, adapting flexibly, and conducting post-implementation reviews. These practices secure informed decision-making and sustained outsourcing success.

Let’s connect if you want to learn more about ROI calculation and maximizing returns on outsourcing investments!