Yesterday we spoke a bit about the rise of “Regulators” in Fortune 500 Firms. In the past service managers would periodically see directives for firm-wide budget controls, freezes for new hires, or (during especially difficult economic times) special committees that control expenses. These initiatives ruffled a lot of feathers but were able to deliver savings… even if they were only short term. When the crisis is over everyone goes back to their old way of doing business. That may have been a good thing, since those short term solutions were not sustainable. As an experienced manager you knew that taking benefits or wages away from your staff would come back to bite you when the economy turned around. These new Regulators are different. They have a permanent mandate, and they are procedurally based; Regulators have credentials in Six Sigma, Lean or similar methodologies. Regulators have a mandate to comb through the firm and identify opportunities to cut costs and increase performance. They also serve a new function: Ongoing monitoring. In previous programs you often just saw that you took the steps you said you would, and you assumed that you received all the benefits. Regulators are beginning to analyze costs to see if all the benefits have actually been delivered… and if they will continue to bedelivered onced the project is over.
That means that your cost of operation, and especially your unit cost, become a lot more important. You not only need to know your unit cost, you need to know what the market rate is you’re your services. In the past, we often looked at other corporate service groups (either in our firm or at competing firms) for a comparison price, but that has its limits. Corporate services do not directly pay certain costs (such as rent or electricity) or are not required to fully recover costs; as a result, the rate they charge for their services often does not reflect real costs. If your services were performed by an outside group, what would they charge for the same service? An outsourcer needs to include their entire cost structure… salaries, equipment, rent, taxes, heating, etc. (we discussed how to collect comparable costs for an outsourcer in yesterday’s Blog, “The REGULATORS: Who Are They And Why Are They Interested In You?”).
If you aren’t allowing for these costs, your internal rates and your total cost of operations are lower than they should be. As Regulators look at more and more improvement projects, these forgotten costs are moving back onto the table and cost comparisons are getting more accurate. As an example, the cost of space (rent, power, etc.) for a typical 8×8 cubicle is about $10,000 in most major cities. In the next Blog we’ll do a deeper dive into costs, but for today pull together the numbers that you have and see what your cost looks like. How does it compare to outsourcer rates now?
If your cost of operation is high compared to an outsourcer, quality issues may account for some of that difference. You may be providing more quality, or a larger range of services, than your users need (24 x 7 coverage, overstaffing to reduce queue times, too many managers, etc.), or you could have a lot of production problems that require the application of people hours and other resources. If you these issues make you less efficient than your competitors, you will see this in the pricing you get from outsourcers. Now, let’s look on the flip side of costs. Is there a value to your services that hasn’t been accounted for? Can employees provide a higher level of security… how? What would it be worth? Do you have proprietary processes that cannot be shared with an external provider? Think about it; are there aspects to you services that can only be delivered by you, and how would you price the value of this service? Add and subtract from the market price. Where does that leave you?
Well, it should leave you in three different places! When you compare yourself to an outsourcer rate, you should get three different rates.
- First, what is the rate for providing the service in your (local) market? If an outsourcer provided the service in your current space or in a nearby building, what would they charge? Ideally, you should be fairly close in price, since labor and key costs come from the same market. If there are significant differences, it should come from the service model. How is an outsourcer’s model different than yours?
- Second, what is the rate for providing the service at a “nearshore”” location? For a New York based operation you could nearshore in New Jersey or perhaps in Alabama. How much of a price advantage is there in a more remote nearshore location? Here, you should see a larger difference in costs. How much of a savings could nearshore deliver?
- Third, we have the offshore rate. This should be the lowest price. However, the father you move a service, the more up-front costs you are likely to incur and the higher the possibility that the service will not be a fit. It’s not that a distant location cannot provide a service, it’s more that there are small cultural and training issues that can be overcome… but it takes more time than most people realize and these costs are often inadequately budgeted. This results in lower than expected service levels. Also, easy project went offshore years ago. Services that are being offshored today tend to be more complex, more costly to replicate, and more likely to miss key training (cost) elements. Consider some adjustments to the initial offshore rate you are given.
Naturally, when you move a service away from a major metropolitan areas cost equations change. The further away you can move, the lower the cost. Can you meet the cost of offshore locally… probably not. However, you can probably come pretty close to the rate of a local provider. If you run an exceptionally efficient service you might be close to the nearshore rate. If you can’t match the offshore rate, how much could you improve your price point? What improvements could you make to half of the financial advantage of moving your service offshore. How about just a third? How much you leave on the table is a pretty good indication of how much interest the Regulators will have in your operations. We’ll pick up the theme of costs in our next Blog, but keep collecting in formation and building your cost models. And that’s my Niccolls for today!