The Economics of Outsourcing: How Businesses Save Money Through Outsourcing

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Do you wonder how much outsourcing is and how much you can save by outsourcing business and information technology or IT processes? 

The answer will vary depending on your outsourcing location, model and provider.

 

Cost-Efficient and Cost-Effective Outsourcing

If you want maximum cost savings, you must outsource to a location that offers a significant price discount on salaries and operational costs. Since you need to maintain a particular level of quality, however, you must ensure a minimal language and cultural barrier. Time, specifically time zone differences, should also not be a problem.

 

These factors—cost savings, quality, minimal language and cultural barrier—intersect in outsourcing locations like the Philippines. This is the reason the Philippines is a popular outsourcing destination.

 

That said, you should be careful about choosing your outsourcing solutions provider. Make sure you evaluate potential outsourcing vendor candidates against the following criteria:

 

1. Talent Quality

Can your vendor provide top talent? What you want is the best value; that means top-tier talent at outsourced prices.

 

2. Data Privacy and Security

Work with a company that has established logical and physical security protocols to ensure your clients’ privacy and data security. Check if your vendor complies with security and privacy best practices.

 

3. Administration and Retention

Does the vendor take care of its employees? You want a company with a dedicated human resources department, IT support, and established employee well-being and engagement initiatives.

 

4. Flexible terms

Flexibility in pricing and terms of engagement, even the option to custom-tailor solutions, will let you maximize the benefits (including cost savings) of outsourcing. You don’t want a vendor that will tie you up with inflexible terms, preventing you from scaling up or down as needed.

 

5. Transparent Pricing

Won’t it be nice if you know exactly how much you’re paying your outsourced staff and how much you’re paying in service fees? Such pricing transparency provides valuable information you can use to make your operations more efficient.

 

How Can You Save Money Through Outsourcing?

Outsourcing can help you save money; that’s a fact. Again, how much you can save will depend on your outsourcing model, partner and location.

 

According to Zippia, companies can cut costs by up to 90% when they outsource. These are the different ways outsourcing can help a company save money.

 

1. Salary Differences Between Locations

The wage disparity among countries is a primary motivator for outsourcing and the main driver of outsourcing cost savings.

 

For instance, suppose you are a New York-based due diligence and document verification company. Countries like Antigua and Barbuda hire you to conduct background, criminal, financial, character, and security checks on its citizenship-by-investment applicants.

 

Instead of hiring more investigators in-house, you can outsource. You can delegate repetitive due diligence steps like checking education transcripts, employment histories, addresses, and more to a third-party outsourcing provider in the Philippines.

 

Doing this will save you the difference between the salary of an investigator in New York and the salary of an investigator based in the Philippines.

 

Salaries in the Philippines are significantly lower than in the United States, the United Kingdom, Canada, Australia, and many others. In the Philippines, you pay a bookkeeper only 40% of what you need to pay a bookkeeper in North America. Likewise, a customer service representative in the Philippines earns only 35% of what his North American counterpart makes.

 

Therefore, a company located in North America and similar markets can contract tasks and processes to the Philippines. Outsourcing will drastically reduce payroll expenses.

 

By working with a trustworthy and reliable vendor, you can ensure that you will realize salary savings without compromising on output quality.

 

2. Decrease in Benefit-Related Expenses

Benefit packages differ significantly among countries, and outsourcing lets you capitalize on that. When you outsource, you may not have to offer your outsourced staff the full range of benefits your in-house employees expect.

 

Even if you choose to provide outsourced staff all the benefits you provide your in-house employees, outsourcing will still save you money. Remember the wage differential? That matters when it comes to benefits, too.

 

Paid sick and vacation days will cost you less, as these are computed against the salary. You’ll also need to pay smaller amounts towards retirement accounts.

 

Additionally, the cost of benefits is lower in some outsourcing locations. Health, dental, and life insurance premiums can be smaller offshore.

 

Since providing benefits to outsourced staff costs less than providing benefits to in-house employees, you can provide competitive perks and become a preferred employer in your outsourcing location. This will have the added benefit of attracting top talent offshore.

 

3. Converting Fixed Costs Into Variable Costs

Fixed costs, such as monthly rent, are expenses businesses incur, irrespective of their sales figures. They increase when a company expands its in-house team.

 

The more employees you have, the bigger your office space must be, so rent goes up. You’ll incur higher utility costs; keeping your pantry stocked will take more money. You’ll need to spend money on computers, tables, chairs, and other office furniture and furnishings, and you may also have to pay for additional software licenses.

 

Meanwhile, variable costs depend on sales. Paying a sales representative a 10% commission is an example of a variable cost. If a salesperson sells $100,000 worth of products, they’ll earn $10,000 in commission. If they sell $200,000, they’ll make $20,000.

 

In this model, your cost varies (e.g., $10,000 becomes $20,000). However, since variable expenses are tied to your revenue, a higher cost also means a higher revenue.

 

Fixed costs are at a disadvantage from this perspective. You pay fixed costs even if your new hires fail to generate revenues.

 

Reducing fixed costs by converting them into variable costs can significantly decrease a company’s financial burden. This approach is especially crucial for nascent businesses where liquidity is paramount.

 

Outsourcing is one strategy you can use to accomplish this. The following are examples of how outsourcing can convert fixed costs into variable costs:

 

• Outsource loan processing and arrange it so you pay your outsourcing vendor for the number of loans packaged.
• Outsource sales processes and pay your outsourcing vendor a fixed commission per sale.
• Outsource logistics processes and pay your outsourcing partner for every container filled.
• Outsource graphics design and pay your graphic design outsourcing provider only for the output produced.
• Outsource public relations, and pay your PR outsourcing solutions provider for every media mention.

 

As businesses grow, fixed costs may become more economical than variable ones. That said, any transition should be based on consistent sales performance, not on projections or temporary surges.

 

Prioritizing variable expenses enhances financial flexibility, especially during periods of reduced sales. This ensures quicker break-even points and better margins.

 

The Triple-Advantage of Outsourcing

Outsourcing can provide substantial salary savings by leveraging global wage differences, reducing benefits-related expenses, and converting fixed overheads into variable costs.

Realizing these cost advantages, however, depends on your outsourcing location, model and provider.