How to estimate your outsourcing savings

In the dynamic world of transportation and logistics, outsourcing certain operations can be a game-changer for medium-sized companies. By keeping costs related to time-consuming processes but essential in check, you can increase your profit margins. However, accurately estimating the potential savings is crucial for making informed decisions. In this blog post, we will guide you through the process of calculating your potential outsourcing savings, helping you determine if it's the right move for your transportation business.

In the dynamic world of transportation and logistics, outsourcing certain operations can be a game-changer for medium-sized companies. By keeping costs related to time-consuming processes but essential in check, you can increase you profit margins. However, accurately estimating the potential savings is crucial for making informed decisions. In this blog post we will guide you through the process of calculating your potential outsourcing savings, helping you determine if it's the right move for your transportation business.

If you are responsible for operations in a logistics company, at some point you may be tasked with evaluating different ways to optimize operation costs or improve efficiency. One solution you may consider in this scenario is outsourcing. Here is a short guide to estimating potential savings. We also included some tips to make this process easier.

1. Identify your current costs

Start by thoroughly analyzing your current expenses. This includes:

• Direct labor costs (wages, benefits, overtime)
• Equipment and maintenance costs
• Facility expenses (rent, utilities, insurance)
• Technology and software expenses
• Management and overhead costs
• Training and recruitment expenses

Be sure to account for hidden costs that might not be immediately obvious. This step provides a baseline for comparison.

2. Determine the scope of outsourcing

Clearly define which functions you're considering outsourcing. Typically you should be looking at processes that are labor intensive, essential and that don’t necessarily have to be completed in-house. The list could include:

• Back-office operations (billing, accounting, customer service)
• Fleet maintenance
• Warehousing and distribution
• Last-mile delivery
• Driver management and recruitment
• Dispatch and track & trace

The more specific you are, the more accurate your savings estimate will be.

3. Request and analyze vendor quotes

Obtain detailed quotes from potential outsourcing partners. Ensure these quotes cover all aspects of the services they'll provide, including:

• Base costs for services
• Any volume-based pricing tiers
• Additional fees for special requests or peak periods
• Technology integration costs
• Transition and onboarding expenses

Compare these quotes to your current costs, making sure you're comparing apples to apples. To do it, make sure that the quote reflects all the costs related to the specific number of positions you would be outsourcing. When we quote our customers at AmeriPol, we keep it simple - you get a flat monthly fee per employee and a one-time startup fee. This last element differs depending on the position we are filling.

To make a comparison, take all the costs directly related to the positions you are considering outsourcing and a percentage of the remaining costs attributable to these positions.

4. Factor in transition costs

Outsourcing isn't instantaneous. Signing a contract with an outsourcing service provider is a beginning of a process that takes time. Consider the costs associated with:

• Contract negotiation and legal fees
• Knowledge transfer and training
• Potential short-term productivity losses during transition
• Possible severance or reassignment costs for affected employees

These one-time costs should be amortized over the expected duration of your outsourcing agreement. The transition costs can be minimized if you select a vendor who knows your industry and knows that time and efficiency are critical to your business success. We at AmeriPol make the knowledge transfer and training seamless by bringing a selected staff member to your office to learn the processes and systems. This person is then responsible for transferring the knowledge to subsequent team members. We call this process "Train the Trainer".

5. Calculate potential indirect savings

Luckily, the transition costs listed above can be offset by indirect savings generated by outsourcing. Outsourcing can lead to savings beyond direct cost reductions:

• Freed up capacity of your employees
• Reduced management time spent on outsourced functions
• Improved focus on core competencies
• Access to specialized expertise and technology
• Increased scalability and flexibility

While these can be harder to quantify, they're important factors in your overall savings estimate.

6. Project long-term savings

Develop a multi-year projection of your savings, taking into account:

• Potential cost increases from your outsourcing partner over time
• Anticipated growth in your business volume
• Projected inflation rates
• Potential efficiency improvements as the outsourcing relationship matures

This long-term view helps in understanding the true value of outsourcing beyond immediate cost reductions.

7. Perform a risk assessment

Consider potential risks that could impact your savings:

• Service quality issues affecting customer satisfaction
• Hidden costs or unexpected fees
• Vendor financial stability or business continuity risks
• Data security and compliance concerns

Factor in potential costs of mitigating these risks or the impact they could have on your projected savings.

8. Calculate your net savings

Using the information gathered, calculate your estimated net savings:

Net Savings = (Current Costs + Indirect Savings) - (Outsourcing Costs + Transition Costs + Risk Mitigation Costs)

Remember to calculate this on an annual basis and project it over the expected duration of your outsourcing agreement.

9. Conduct a sensitivity analysis

Test your savings estimate by adjusting key variables:

• What if outsourcing costs increase by 10%?
• What if transition takes longer than expected?
• What if indirect savings are lower than anticipated?

This helps you understand the robustness of your savings estimate and prepares you for various scenarios.

10. Review and refine

Once you've completed your initial estimate, review it with key stakeholders in your organization. Their insights might reveal additional factors to consider or areas that need refinement.

Estimating outsourcing savings is a complex but crucial process for transportation and logistics companies. By following these steps, you'll develop a comprehensive understanding of the potential financial impact of outsourcing on your business.

Remember, while cost savings are important, they shouldn't be the only factor in your outsourcing decision. When considering outsourcing, look for a provider that is ready to align with your overall business strategy. One that can provide a level of delivery that will allow you to maintain or even increase your quality of service, and drive innovation in your operations.

Ultimately, a well-executed outsourcing strategy can not only reduce costs but also enhance your company's agility and competitiveness in the ever-evolving transportation landscape.