Cost equation of outsourcing

What is the cost equation of outsourcing?

The cost equation of outsourcing is simple: outsourcing saves money overall, but early setup costs offset some of those savings at first.

Here is the short version:

• Outsourcing cuts salary and overhead costs from day one
• Early setup costs reduce those savings for a while
• Over time, the net cost stays far below an in-house team

Here at Outsource Accelerator, we believe outsourcing is one of the best ways to grow a company. It helps you gain an edge over your peers. There are many reasons for this belief.

For example, outsourcing gives fast access to the resources you need to grow. It can also save a large amount on overhead costs.

Still, it would be unfair to share only the upside. So this article looks at the full cost equation of outsourcing. That way, you can prepare well before you start.

The growing pains of outsourcing

First, one of the biggest draws of outsourcing is its low cost. In fact, this holds true when the provider is in a top destination like the Philippines.

Without this benefit, outsourcing would not be so popular today. After all, cost cutting is key to keeping a business alive. By keeping costs low and staff happy, a firm can stay profitable.

However, in the early stages, outsourcing can cost a bit more than you might like. This is because you must invest in the “soft” setup first. That setup lets your outsourced staff fit in and start to contribute.

A quick in-house example

Let us use an example. Say someone with good funds wants to build a tech company with a customer service team.

In an ideal case, they would build it in Silicon Valley. As a result, they gain access to the world’s most skilled tech workers. In addition, the support team would sit in the same building as production.

This setup allows strong teamwork on customer issues. As a result, customers stay happy.

However, such a company would spend a huge amount to stay afloat. Silicon Valley sits near San Francisco, one of the priciest cities in the US. Rent for even a small office there is steep.

On top of that, the owner must pay Silicon Valley salaries. These can run to six or seven figures. Add other costs, and the overhead could bankrupt almost anyone.

Still, the result is a well-oiled machine. The owner gets top staff and a sharp support team. So this can drive high profit margins if the firm finds its niche early.

The outsourced alternative

Now compare that to the same venture with an outsourced support team. In this case, the owner works with a skilled firm in the Philippines.

Right away, this firm spends far less on overhead and salaries. For example, it does not buy or rent space for an in-house support team. It also skips Silicon Valley pay and health insurance for those roles.

Instead, the owner pays the provider a flat service fee. Because of this, the savings show up at the very start. To see the scale, read how outsourcing can cut labor costs by up to 70%.

However, those savings are offset a little. The owner must spend a bit more on top of the fee to get things going.

The hidden setup costs

These extra costs come from managing a team based overseas. The main challenges are:

• The team sits in a different country, so it works in another time zone.
• Culture and language gaps can make early teamwork harder.
• Face-to-face meetings are tough to set up, which can blur instructions.
• Remote work may feel less smooth than in-house work at first.

These issues sound serious, but you can solve them with soft setup. For example, you can manage time gaps by hiring a few in-house staff on a shifting schedule. That way, someone can guide the offshore team once they log on. So the owner spends a little more on top of the fee. The choice often mirrors the wider offshore vs onshore debate.

You can ease culture and language gaps too. For example, hold more calls over VOIP. You can also hire interpreters or bilingual staff to act as a bridge. Again, these steps mean more spending.

Finally, both teams need to share one direction. So you must invest time in clear policies, guides, and manuals. This is the best way to avoid costly mix-ups.

All of these fixes use up part of the money you saved. In addition, you need a dedicated person to run them.

So we can conclude that outsourcing is cheaper than in-house work. Still, it can cost more than many people expect. This is arguably the biggest downside that fans often skip.

Outsourcing is still worth it

Even so, we strongly recommend outsourcing. Here is why:

• These growing pains are temporary. Once the setup fees are paid and staff learn the ropes, the friction fades. What remains is a smooth machine geared toward profit.
• It forces the business to mature fast. Every company must scale up training and staff at some point. With outsourcing, that need simply comes a bit earlier, which can be a real boon.
• It is still much cheaper. Even with the added costs, outsourcing beats an in-house team. There is no contest, whether you compare gross or net figures.

Most of all, the Philippines remains a top destination for business process outsourcing. So it is well placed to help Western firms grow. For more, see why the Philippines is the top outsourcing destination.

No better time to outsource to the Philippines than now

Meanwhile, outsourcing is now a core part of the Philippine economy. In fact, the industry adds a lot to the country’s growth and standing. In fact, the IT and business process sector is one of its biggest economic drivers.

So we can safely predict that the cost of outsourcing to the Philippines will stay affordable for Western firms. The government and local BPO groups know the stakes well. Rivals are close behind and eager to take the lead.

Because of this, there is pressure to price BPO services well. If costs climb too high, firms may look to other regions instead.

What about quality? Still, we believe it will hold. For example, the BPO industry helped grow the country’s middle class. As a result, many families rose out of poverty through call center jobs.

Each year, hundreds of thousands of graduates seek high-paying work. Many join the BPO industry because it pays well, even at entry level. Their steady wages also reflect the average salary in the Philippines.

Most Filipinos also have strong ties to Western culture and language. English is used widely in schools and colleges. Students use it online and on social media every day. Local TV and film feature it too, so this will not change soon.

All these factors make the Philippines a great outsourcing destination. There is just no contest.

Conclusion

Outsourcing is not a choice to make lightly. It offers big savings and other key benefits. Still, you should be ready for the growing pains and setup costs. Weigh the full advantages and disadvantages of outsourcing before you commit. Once you handle these, the payoff can be huge in both the short and long term.

So if you are keen to outsource, we are here to help you start right. Our experts are on standby to answer your questions and connect you with the right outsourcing team. We also have a wealth of articles and resources about outsourcing that you will find handy.

Frequently asked questions about the cost equation of outsourcing

Does outsourcing really save money?

Yes. It cuts salary and overhead costs from the start. However, early setup costs offset some savings before the full benefit shows.

What are the hidden costs of outsourcing?

They include time zone management, culture and language support, and clear process documents. In addition, you may need a dedicated person to run these tasks.

Why is the Philippines a top outsourcing destination?

It offers skilled, English speaking staff at a fair cost. It also has a mature BPO industry and strong ties to Western culture.

How long do the growing pains of outsourcing last?

They usually fade once setup is done and staff learn the ropes. After that, teamwork becomes smooth and efficient.

Is outsourcing cheaper than an in-house team?

Yes. Even with added setup costs, it beats an in-house team on price. This holds true whether you compare gross or net figures.

Key takeaways

• Outsourcing saves money, but early setup costs offset part of the savings.
• Hidden costs cover time zones, language support, and clear processes.
• The growing pains are temporary and fade once setup is done.
• Overall, outsourcing stays far cheaper than an in-house team.
• The Philippines remains a top, affordable outsourcing destination.