Offshoring is a common business process small and large companies depend on to save costs.
But is cost saving the only reason managers engage in offshoring?
In this article, we’ll explore how offshoring can help your company save costs, the hidden costs you need to consider before outsourcing, and the best practices you can follow to get the most from your outsourcing arrangement.
We’ll also explore five common reasons you may choose to outsource, not just cost reduction!
This Article Includes:
(Click on the links to jump to a specific section)
- Exploring if cost saving is the only reason managers engage in offshoring
- Are there any hidden costs in outsourcing?
- 4 best practices to cut costs with outsourcing
- 5 other common reasons for offshoring
Exploring if cost saving is the only reason managers engage in offshoring
The primary reason companies choose outsourcing is cost savings.
This is because many developing countries such as India and Argentina in Latin America have a lower cost of living than developed countries like the USA, UK, and Europe.
As a result, companies choosing to engage in offshore outsourcing can experience significant savings on the entire firm level without compromising the product/service quality.
Learn about the difference between offshoring vs. outsourcing in our detailed comparison.
Some common ways outsourcing can help both small and large companies save money are:
1. Cutting down the hiring cost
Hiring is a time-consuming and potentially expensive process.
You can pass off this burden to your service provider and start working from the first day through outsourcing.
All of this can lead to massive overall savings and even boost employee satisfaction at your company.
You can further outsource your recruitment process to a specialized provider and free up even more resources.
2. Leveraging low labor costs in the offshore location
Finding the right people to work at your company at your budget can be tough. With offshoring, you can take advantage of developing countries and their comparatively low wages.
As a result, you can gain experts in their fields at much lower rates.
For instance, IT services such as cybersecurity are a must for every business. Domestic outsourcing in the US might cost you about 1,01,630 USD per year on one specialist, whereas you can hire one from Ukraine at 22,304 USD per year.
This is a quarter of what American cybersecurity specialists would charge you!
3. Improved in-house operations
Once your employees get used to the offshore team, morale will rise.
Since they no longer have to worry about routine tasks like data entry, which have been offshored, they can focus on complex tasks.
So you may notice a rise in morale and productivity, leading to more sales, productivity, and higher customer satisfaction.
4. No cost of training offshore team members
Any skill can quickly become outdated in an ever-changing IT (Information Technology) world.
In an in-house team, you would have to bear the price of reskilling employees and training them with new systems.
In contrast, the offshore team will hire only the best and showcase those talents. They will also take care of training their employees in new information systems to keep up with market demand.
The result is you can cherry-pick the experts you want from a vast and competitive labor market.
5. Get the latest technology stack at lower prices
Since digital offerings are constantly evolving, it can be difficult for large companies to keep up and constantly replace old technology.
With outsourcing, the service provider is an expert in the given field and will take the initiative to pay for new technologies themselves.
All you have to pay for are the services they provide, allowing you to save thousands of dollars in operational costs.
It’s clear that outsourcing outside of your home country can save you money in nearly every sphere.
But are there any hidden costs associated with this practice?
Are there any hidden costs in outsourcing?
While outsourcing can definitely help with cost reduction, there are some hidden costs – financial and otherwise – that you must be aware of.
1. The cost of selecting an offshore service provider
Choosing a service provider can mean significant time is spent:
- Sending out Request For Proposals (RFPs).
- Interviewing candidates.
- Finalizing and signing an outsourcing contract.
A project manager or Human Resource professional may be working full-time just on this task.
The process of finding your ideal provider can take up to a year, delaying operations till then.
2. The cost of transition
The transition period can last anywhere between a few months to a full year and is an important stage in the outsourcing arrangement.
Here, as both you and your offshore team become comfortable with each other, there may be some growing pains and expenses that follow.
These could include:
- Making a determination on a certain quality standard.
- Moving resources back and forth.
- Addressing supply chain issues.
Forecasting and preparing for these expenses will ensure you’ll experience the cost-saving aspect of offshoring in no time.
3. The cost of layoffs
As you begin offshoring, you may find you now have an offshore counterpart to certain existing roles.
This may lead you to lay off a significant portion of your workforce. Depending on your country’s labor laws, these employees may be eligible for severance packages.
In contrast, you may find yourself requiring specific employees to stay on and take more responsibilities, which may mean financial incentives and promotions for everyone.
Mass job losses can also negatively impact employee engagement and lower productivity at your firm. So we recommend putting in safeguards before you start outsourcing.
4. The cultural cost
One of the biggest barriers to offshoring is cultural and linguistic differences. These cultural differences can create misunderstandings, break down communications, and lead to hurt feelings.
We recommend reading up on the offshore country’s culture to ensure this doesn’t happen. For instance, western countries often have a direct, forthright approach, but many Asian countries tend to be introverted, which may be construed as rudeness.
Brushing up on these differences can help create a mutually fulfilling outsourcing arrangement.
5. The cost of managing an offshore vendor contract
Managing an offshore relationship can be a lot of work.
Understanding their culture, staying up late at times for video meetings, and ensuring all deliverables reach you on time can take a toll on any company.
To circumvent this, you can use project management tools like Asana or ClickUp and time tracking tools like Time Doctor to track your offshore team’s work activities.
Read more about how Time Doctor can help you manage your offshore team.
Let’s look at how you can manage these outsourcing costs and save money.
4 best practices to cut costs with outsourcing
You can avoid the hidden costs of outsourcing by following the best practices details below.
1. Outsource a managed project
A managed project is one where you can hand off the project to the offshore team without much supervision and trust them to deliver the project to your satisfaction.
Let’s use the example of outsourcing your software development needs.
In this case, outsourcing can help you gain access to skilled developers, project managers, and a stack of new technology in one go.
Additionally, since a software development project is usually defined from the beginning, you can rest easy knowing that your outsourced team will deliver the project by the specified deadline.
This is also a good way to establish trust with your service provider.
2. Link service lines together
You can ask your chosen outsourcing company about their other areas of expertise so you can outsource similar projects to the same people.
For example, an outsourcing vendor in Eastern Europe could help with both software development and testing.
Especially after you’ve established trust, this can be a great way to experience significant savings and receive quality new products in the process.
You can also outsource both tasks separately to gain an objective perspective regarding your product.
3. Integrate out-tasking with outsourcing
Out-tasking is a business model where the client company retains its management staff, tools, and processes. The service provider supplies the labor, allowing the client to scale flexibly.
For instance, you can keep core IT functions of developing and testing a new product while offshoring activities such as storage maintenance, backups, and helpdesk functions to a foreign country.
When combined with traditional outsourcing, it can reduce the workload of your in-house team while utilizing the expertise of your service provider.
4. Use the hybrid model
You can benefit from both onsite and offshore delivery models through the hybrid model.
Here, you have an onshore team for immediate support and assistance that your managers primarily communicate with. In addition, you’ll have an offshore team that primarily handles all the technical aspects of the job.
In this way, you can reap all the benefits while also keeping specific processes in-house for security reasons. Overall, it could contribute to significant cost reduction and shortened implementation time.
Now that we’ve looked at the various ways cost plays an important role in the decision to outsource, let’s briefly explore some other reasons companies engage in offshore outsourcing.
5 other common reasons for offshoring
We’ve explored that cost reduction is the primary reason companies offshore operations.
However, there are many other reasons for a company to do so, and some of these are explained below.
1. Access a skilled and specialized workforce
Another important factor for offshore outsourcing is the availability of a skilled workforce.
For instance, in the United States, there were only 2.6 million employed IT professionals in 2020 compared to over 4.5 million in India.
Outsourcing allows you to access this highly educated workforce’s skills, talent, and specialization at a significantly lower cost, giving your firm a competitive advantage in the global market.
2. Focus on core business activities
Besides cost saving, offshoring allows companies to focus on their core competencies.
For instance, outsourcing your Human Resources department can give your employees time to deal with complex tasks.
It can also free up other resources, such as capital that would typically go towards recruitment, to be focused elsewhere, like buying new equipment for your employees.
Another commonly outsourced industry is customer service, often to the Philippines or India.
These countries have a built-in workforce that has experience working in a call center and vendors specializing in providing these outsourcing services.
All of this can increase employee satisfaction, engagement, and productivity, ultimately boosting profitability.
3. 24/7 customer support
Traditionally, businesses stopped operations at the end of the day. But, due to globalization, they can now carry on operations well after their workday is over.
Through outsourcing, business operations can continue as usual in another part of the world. For example, American companies outsourcing their call center services to India can provide around-the-clock service to their customers at a fraction of the cost.
This is a significant benefit as customers expect instant responses no matter the time of day. Due to the time zone differences between you and your offshore team, you can provide 24/7 top-notch service, nurturing customer loyalty.
You can also utilize your relationship with the provider to expand operations into new territory and become a multinational company.
4. Improved operational control
Businesses are often scared of outsourcing as they feel it means they’ll have lesser control over their operations.
However, you can actually gain more control over your operations through a proper Business Process Outsourcing (BPO) agreement that provides clarity over deliverables and deadlines.
For example, you can:
- Outsource an individual project.
- Bundle similar services, such as production and manufacturing of medical devices for nearshore outsourcing to Latin America.
- Outsource an entire department to a specialized offshore development center, e.g., outsourcing call center services to a Philippine provider.
In all these methodologies, you retain the intellectual property of the product/service and the decision-making power of approving or rejecting the provider’s offerings.
5. Scale sustainably
Scaling is typically a challenge for companies as it takes massive financial investment and human capital.
But having an offshore team that works in tandem with your onshore one can help you ramp up business operations at a much faster rate.
Your offshore team can take care of time-consuming tasks like data entry and accounts payable, leaving your onshore team free to focus on core business activities that fuel growth.
While cost saving might be the primary reason managers engage in offshoring, other reasons, such as accessing a skilled workforce and improving operational control, make this practice fruitful.
Additionally, outsourcing without proper offshoring initiatives detailed in your outsourcing contract, you may run the risk of high hidden costs taking over the entire process.
Follow the best practices detailed above to avoid these pitfalls and gain the most from your outsourcing arrangement.
Andy is a technology & marketing leader who has delivered award-winning and world-first experiences.