As companies rush abroad to cut back-office document processing costs, one fact gets forgotten in the fray. Costs of small increases in error rates are enormous and can easily wipe out cost reductions from cheaper labor.

A data-entry error in a document such as a loan application may make it impossible to process the document automatically, incorrect loan documents may be created, the end customer may call with complaints, and there might be soft costs as well. BeyondCore’s interviews with more than 50 financial services firms showed that if the data-entry associated with one document costs $1, the downstream costs incurred for one document with a data-entry error can easily add up to $300. This means that if outsourcing increases the error rate by just one-tenth of a percentage point, the resultant costs wipe out the benefits of a 30 percentage point reduction in labor costs. Thus, in back-office outsourcing, quality is 300 times more important than labor costs. [See Case Study]

If executives truly want to save money from outsourcing, they need to place far greater emphasis on quality than on processing cost. They may even find that their existing workers, by improving quality by just a few tenths of a percentage point, can provide them similar overall cost reductions without outsourcing. This focus on quality aligns the executives’ interest, namely shareholder value creation, with their employees’ interest, namely a fair chance at competing in this globalizing world. American workers would welcome an opportunity to compete with the rest of the world on quality rather than on labor cost.

To enable an objective discussion of this issue, we need a framework such as the Total Cost of Errors™ (TCE) to help identify and quantify the costs incurred due to low quality. This is not about being pro or anti-outsourcing, it is about moving towards Rational Outsourcing.