The opportunity cost of doing everything in-house

Key takeaways

The opportunity cost of doing work in-house is the value of what your people could have done instead. When skilled staff or owners spend hours on admin, the real cost is their loaded rate plus the revenue they did not generate. For many UK SMEs it is the largest cost in the in-house vs outsourcing comparison.

• 10 hours a week of a £45,000 manager's time is about £13,900 a year.
• The lost output is usually worth more than the salary cost.
• Outsourced admin costs an indicative £9–£18 per hour.
• Only count it if the freed time will go on higher-value work.

What is opportunity cost in an outsourcing decision?

Opportunity cost is the value of the best alternative use of a resource. In an in-house vs outsourcing decision, it is the revenue, delivery or growth work your people could do with the hours they currently spend on tasks a provider could handle. It is real, but it only turns into money if the freed time is used.

• In-house vs outsourcing: which model is more cost-effective?

How do you calculate the opportunity cost?

Start with the hours spent on work that could be outsourced, then value them two ways: the loaded cost of the person, and the value of what they would do instead, such as billable hours or sales. The difference between that value and the outsourced cost is the opportunity gain.

• Hours per week on outsourceable work.
• Loaded cost per hour of the person doing it.
• Value per hour of their alternative work (billable rate, sales per hour).
• Outsourced cost per hour for the same work.
• Opportunity gain: alternative value minus outsourced cost.

• What is your time worth as a business owner?

What does a worked example look like?

A consultant billed at £90 an hour spends 8 hours a week on proposals admin, scheduling and invoicing. If 6 of those hours could be billed instead, that is £540 a week, or about £24,800 over 46 working weeks. Outsourcing the 8 hours at £14 per hour costs about £5,150. The net gain is nearly £20,000.

Who carries the highest opportunity cost?

Owners, fee earners, sales staff and skilled specialists. Their time either brings in revenue directly or delivers the work customers pay for. Admin that sits with them is the most expensive admin in the business.

• Skilled staff stuck doing admin? What it costs you

When is opportunity cost not real?

When the freed hours will not be used on higher-value work. If there are no extra clients to bill, or the person simply works fewer hours, the opportunity gain is zero and only the direct cost saving counts. Be honest about this in any business case.

• How to build a business case for outsourcing

How do you make sure freed time is used well?

Decide in advance what the freed hours are for, and track it. Set a target, such as billable hours, sales calls or projects delivered, and review it monthly alongside the outsourcing cost. Without a plan, freed time tends to fill with other low-value tasks.

How do you show opportunity cost in a business case?

Keep it separate from the direct cost saving and state the assumption behind it. For example: moving 8 hours of admin frees 6 billable hours a week at £90, worth about £24,800 a year if the hours are billed. Show the direct saving as the base case and the opportunity gain as the upside, with a named owner for using the freed time.

• How to build a business case for outsourcing

What does this look like in practice?

A pattern we see in UK trades firms: the owner spends evenings on quotes, invoices and callbacks. Moving callbacks, booking and invoice chasing to a managed team gives back several evenings a week, which the owner uses for surveys and quoting, the work that wins jobs.

Across our client work, owners have got 31 hours a week back once admin moved to a managed team.

• See client work
• BPO Solutions for UK businesses

Opportunity cost checklist

Use these steps to size it.

• List outsourceable tasks done by senior or billable staff.
• Measure the hours each week.
• Value the hours at loaded cost and at alternative value.
• Get an outsourced price for the same work.
• Set a target for the freed time.
• Review the target and the cost monthly.

Next step

Tell us who is doing the admin today and what they would do instead. We will size the opportunity cost and the outsourced alternative in a 30-minute call.