Title: Support function outsourcing: the hidden costs

Authors: Cecily A. Raiborn, Janet B. Butler, Marc F. Massoud

Addresses: Department of Accounting, McCoy College of Business, Texas State University – San Marcos, 601 University Drive, San Marcos, TX 78666, USA. ' Department of Accounting, McCoy College of Business, Texas State University – San Marcos, 601 University Drive, San Marcos, TX 78666, USA. ' Peter F. Drucker Graduate School of Management, Claremont McKenna College, Bauer Center 307, Claremont, CA 91711, USA

Abstract: Outsourcing support services such as payroll is a popular way for a firm to reduce costs and allow focus on the core business(es). Unfortunately, many firms do not realise the hoped-for savings, often because certain costs were overlooked during the planning process. Ignoring these costs can distort return on investment and cost/benefit calculations, which in turn leads to unrealistic expectations and poor decision making. This article examines six types of costs that are often overlooked when outsourcing support functions. These costs include those that may: 1) be hidden by overhead allocation techniques; 2) be unanticipated; 3) arise from decreased employee morale; 4) stem from compliance with Sarbanes-Oxley legislation (for US-based companies); 5) be created through contingency factors such as system incompatibility; 6) surface from ethical issues, such as health concerns among vendors| employees. Failing to consider these costs could generate an inappropriate cost-benefit analysis in favour of outsourcing.

Keywords: outsourcing; hidden costs; support services; support service offshoring; unanticipated outsourcing costs; ethical issues; service outsourcing savings; IT outsourcing; HR outsourcing; information technology; human resources; return on investment; ROI; cost-benefit calculations; overheads; employee morale; Sarbanes-Oxley legislation; contingency factors.

DOI: 10.1504/IJSBA.2009.025356

International Journal of Strategic Business Alliances, 2009 Vol.1 No.2, pp.205 - 216

Published online: 19 May 2009 *

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