Discover the true cost comparisons between in-house teams and BPO providers. Explore the advantages of each approach, and make informed decisions for your business.
The comparison between running a function internally and outsourcing it is almost always made on the wrong basis. Somebody puts a provider's monthly fee next to a salary, notices the fee is higher or lower, and treats that as the answer.
It is not the answer, because a salary is a fraction of what an internal function costs and a fee is not the whole of what an external one costs. The comparison that matters includes several items on each side that never appear in the conversation.
This article sets out how to build the comparison properly. It deliberately contains no figures, because costs vary enormously by function, headcount, complexity and location, and a fabricated benchmark would be worse than no benchmark. The framework is what transfers. The numbers are yours.
Start with the visible items, which are the ones people already count.
Salary is the obvious one, and it needs the on costs attached. Superannuation, leave loading where applicable, workers compensation and payroll tax where the threshold is crossed. That combination adds a meaningful proportion on top of the base figure.
Recruitment cost belongs here too, amortised across the expected tenure. Advertising, agency fees where used, and the time spent interviewing.
Software and tooling that exists specifically for the function. Licences, subscriptions, and any infrastructure they require.
Training and professional development, which is not optional in functions where rules change, and which depreciates continuously.
And workspace, equipment and the general overhead that a headcount carries, which businesses account for centrally and which is nonetheless real.
This is where the comparison usually goes wrong, because every item below is genuine and none of them appears on a budget line.
Time from people who are not the function's owner. Managers approving things, finance reviewing outputs, somebody answering questions, somebody reconciling. Across a year this accumulates into a substantial figure that nobody attributes.
Cover during absence. The function does not pause for annual leave, illness or a resignation. Either a second person is trained, which costs training time and carries risk because they perform the task rarely, or the work waits, or somebody is engaged externally at short notice at an unfavourable rate.
Error correction. Mistakes made by a generalist doing specialist work cost more to fix than to avoid, and in areas like payroll and tax the correction extends across every affected period rather than the current one.
Keeping current. Somebody has to read what changed, understand what applies, and implement it before the transaction it affects. That reading time is real and it is invisible.
And key person risk, which is the largest and hardest to price. Where one person holds the knowledge, their departure creates a period of genuine exposure, and businesses that have been through it will tell you the cost was not theoretical.
The single largest item in most internal comparisons is what the person doing the work is not doing instead.
Where a management accountant spends a day a week on payroll administration, the business is paying accounting rates for administration and losing a day of accounting. The relevant cost is not the proportion of their salary. It is the value of the analysis that did not happen.
Where an owner does the bookkeeping in evenings, the cost is whatever they would otherwise have done with that attention, which in a small business is usually the highest value time available.
This item is uncomfortable because it cannot be calculated precisely. It can be estimated, and an estimate included is considerably more accurate than a precise figure omitted.
Businesses that leave it out systematically favour the internal option, which is why the comparison so often concludes that internal is cheaper.
The external side is more visible and not entirely so.
The service fee is the main item, usually structured per unit of volume, per employee, per transaction or as a monthly retainer against a defined scope.
Transition cost is real and one off. Discovery, setup, data migration, parallel running and verification. It is front loaded, it distorts a first year comparison, and it should be budgeted explicitly rather than discovered.
Variable charges sit alongside the base fee. Off cycle work, corrections, year end processing, anything outside the defined scope. These are legitimate and they belong in the comparison, which means asking for the full schedule rather than the headline rate.
And internal time does not go to zero. Somebody still supplies inputs, reviews outputs, answers questions the provider cannot, and owns the relationship. Expect a substantial reduction rather than an elimination, and be sceptical of anyone who suggests otherwise.
Three things have to be held constant or the comparison is not a comparison.
The same scope on both sides. If your internal figure excludes the manager time spent approving, and the provider's quote includes approval workflow, you are comparing different things. Write down what is included before pricing either side.
The same time horizon. Transition costs distort year one and disappear from a three year view. Look at both, and be explicit about which you are using.
The same risk position. Outsourcing transfers some continuity and expertise risk to a provider, and that transfer has value even though it does not produce a number. Name it explicitly rather than omitting it because it is hard to quantify.
The comparison behaves differently at different sizes, and the pattern is consistent enough to be useful.
At small scale, the function does not justify a dedicated person, so it sits with somebody who does something else. The internal cost is dominated by opportunity cost and the risk position is poor, because there is no cover. Outsourcing usually wins comfortably once the true internal figure is counted.
In the middle band, where the function would justify one person but not a team, the comparison is genuinely close on direct cost and the risk position usually decides it. One person with no cover is an exposure that a provider does not have.
At larger scale, a dedicated internal function generally makes economic sense, and the question shifts from whether to outsource the whole thing to whether to outsource parts, such as specialist areas, peak capacity or leave coverage.
Complexity moves those bands. A complicated function at small headcount behaves like a larger one, because the expertise required is the same regardless of volume.
Beyond cost, several things are worth valuing explicitly because they change the decision.
Expertise depth is the first. A provider working across many businesses encounters edge cases regularly rather than once, which means they have a considered position where a generalist has to research one.
Continuity is the second, and it is the benefit businesses value least in advance and most after they have needed it. Cover is built in rather than being something you keep meaning to arrange.
Scalability is the third. Volume that fluctuates seasonally is absorbed by a provider and is a capacity problem internally, arriving at the busiest point of the year.
And currency with changing rules is the fourth. A provider maintains it as part of the work rather than as an additional burden on somebody who has other things to do.
The honest counterpart, because the decision is a trade rather than an improvement.
Immediate availability. An internal person can be asked a question across a desk. A provider works to agreed response times, which are usually adequate and are not the same thing.
Contextual knowledge. Somebody embedded in the business picks up things nobody told them. A provider knows what they have been told.
Direct control. You set priorities within a scope rather than absolutely, and where your urgent need conflicts with their other commitments, the scope is what governs.
And a degree of institutional knowledge, unless the arrangement is deliberately structured to leave you documented. That is worth insisting on rather than assuming.
The framing as a binary choice is usually false, and the arrangements that work best are frequently mixed.
An internal person handling the routine and the relationship, with a provider covering specialist areas, peak volume and leave. That combination gives you the contextual knowledge and the availability without the key person exposure.
Or a provider handling processing with an internal person owning oversight, decisions and anything requiring judgement about the business.
Or a transitional arrangement, where a provider covers a function while internal capability is built, with a defined handover point.
The useful question is not whether to outsource a function but which parts of it belong where, and that question produces better answers than the binary one.
A consideration that affects both cost and flexibility and is frequently overlooked during selection.
Where a provider works in their own system and reports back to you, you have a dependency. Your data lives somewhere you do not control, visibility depends on what they send, and ending the arrangement means a migration rather than a handover.
Where they work in your system, you retain visibility and control, the data is yours, and changing provider is a change of who does the work.
That distinction also affects ongoing cost, because a provider working in your system does not require you to maintain an integration or reconcile between two places.
It is worth establishing during selection rather than after, since it is difficult to change later and it materially affects what leaving would involve.
Worth asking explicitly, because the answer tells you about the relationship as well as about the mechanics.
What would you hold if the arrangement ended. What data could you extract and in what format. How long would a transition take. What documentation would you have.
A provider comfortable with that conversation is confident in the value they add rather than in how difficult they are to replace. One who deflects is telling you something about the business model.
The same question applies to the internal option in reverse. If your one internal person left tomorrow, what would you hold. In many businesses the honest answer is worse than the provider's, which is a finding worth surfacing.
The comparison takes an afternoon and produces a defensible number.
List every activity in the function across a normal cycle. For each, note who does it and how long it takes. Multiply by frequency and convert to cost using real salary figures including on costs.
Add software, training, and a realistic allowance for cover and error correction.
Estimate the opportunity cost of the time, as a range rather than a point.
Then obtain two quotes on exactly that scope, including the variable charges, and add the transition cost and the internal time that would remain.
Most businesses find the internal figure is larger than they assumed, because it has never been assembled in one place. Whichever way the decision goes afterwards, it is at least informed.
In practice, the direct cost comparison is frequently close enough that it does not decide the question, and two other factors do.
The first is risk. A function that depends on one person with no cover is an exposure, and businesses tend to weight that more heavily after they have experienced it than before.
The second is attention. Functions that must be right and that do not differentiate the business are candidates for outsourcing regardless of the arithmetic, because the management attention they consume is worth more elsewhere.
Payroll, bookkeeping and compliance processing generally fall into that category. Anything that touches how the business competes generally does not.
The comparison is worth doing properly whichever way you expect it to come out, because the exercise itself surfaces things worth knowing about how the function currently runs.
Most businesses have never counted the full internal cost, and the counting is the part that changes the conversation.
Our piece on comparing the cost of outsourcing payroll applies this framework to a specific function, and outsourcing bookkeeping covers the adjacent one.
Our payroll and bookkeeping service covers what an outsourced arrangement looks like where it sits on the same platform as your finance systems.
If you would like help building the comparison for your own business, get in touch.
