The Total Cost of Outsourcing: The Rural Advantage

December 10th, 2009 by May Advincula Leave a reply »

In an IMF Web Forum, Martin Gardocki from Rural America Onshore Sourcing, discussed the rural alternative in the total cost of outsourcing. Rural America Onshore Sourcing is responsible for finding and aggregating rural talent to provide customers with contract assistance as required for their businesses.

The different types of outsourcing that exist include:

• USA Urban Outsourcing (domestic, urban firms contracted to provide a service)
• Offshoring (contracting with firms in places such as India and China)
• Nearshoring (outsourcing to firms in Central and South America)
• USA Rural Onshoring (domestic firms in rural communities or distributed rural teams contracted to provide a service)

According to Gardocki, “the opportunity of outsourcing is to actually use the capacity and the capability of the outsourcer to drive even further benefits going forward.”

There are 4 basic costs associated with outsourcing which include the following:

1.      Labor (cost of personnel and source of savings generated through arbitrage)

2.      Transition (cost of identifying, negotiating, and moving work to the outsourcer,

3.      Operation (ongoing cost of the relationship)

4.      Management reserve (cost of managing the unexpected)

ARBITRAGE: “The simultaneous purchase and sale of an asset in order to profit from a difference in the price. It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets or in different forms. Arbitrage exists as a result of market inefficiencies; it provides a mechanism to ensure prices do not deviate substantially from fair value for long periods of time.” –From investopedia.com

Gardocki explains that the evolution of outsourcing began with contracting with urban vendors where good work came at a premium price. With offshore sourcing there was significant cost savings in comparison to urban vendors, but the overhead costs of governing communication and productivity generally add themselves to the equation. Gardocki states, “As people have become more comfortable with the offshore model and companies become more global, the whole concept of having captive offshore development centers has crept up over the last 5-10 years. Basically [you avoid] the middle man markup and [do] it yourself.” In Gardocki’s own experiences, he has known many owners of small to medium sized business where low cost providers did not necessarily work out and their productivity dropped dramatically for every transition which delays the promise of ongoing benefits and a wealth of capability and capacity. According to Gardocki, what is more alarming is the effect on the customers because “they feel the pain in delayed delivery, they feel the pain in increased costs, and basically you’re the one who has to tell them why,” Gardocki explains. As a result, people look for other areas in which they can reduce some overhead of the operation and still get some of the savings.

The Rural Alternative involves domestic firms in rural communities or distributed rural teams contracted to provide a service. There are millions of people willing and able to work from their homes or local offices with strong work ethic and speak the same language. They are technically skilled to meet the demands of today’s information technology and business process outsourcing environment.

The “3 Ps” of rural onshoring include:

• Proximity to broadband (access to internet at speed capable of sustained operation)
• Population Density (depending on the skill and number of personnel required, you can work in a single community or require personnel across multiple regions or states)
• Process disciple (dispersed or remote teams require process rigor to ensure efficient operation. This includes the infrastructure to support collaboration, project management, document management, and standards).