All businesses go through a boom and bust cycle. It is not realistic to expect that business conditions will always be rosy. There are factors that are beyond your control.
For example, the trade war between China and the United States has affected industries other than steel and aluminum. Macroeconomic factors such as the trade war create a ripple effect that can hit even small businesses.
Outsourcing can act as a hedge versus uncertainty. It can help you stay profitable by streamlining costs without compromising the quality of goods and services.
What Is Outsourcing?
Outsourcing is the process of transferring or delegating functions to a qualified third-party service provider. An outsourcing venture can be as simple as hiring a Virtual Assistant to manage administrative tasks like email filtering, calendar management, appointment setting, and phone handling.
Outsourcing can also be a large scale undertaking. For example, in the late 1990s, U.S. companies from Silicon Valley were outsourcing software development and tech support to companies located in India.
Although outsourcing was not officially recognized as a business strategy until 1989, it is not a new concept. Some historians have traced its origins back to the 18th century when explorers would sail across oceans to discover new territories for trade or colonization.
Along the way, the Captain would find talent from different countries who could handle certain tasks onboard the ship at a lower price.
Thus, the underlying function of outsourcing was to save up on costs. During the time of the Great Depression, companies would resort to cost-cutting measures in order to stay afloat.
Instead of hiring a team of accountants, clerks, and payroll officers, companies would delegate these tasks to a company that specializes in accounting services.
What were the cost advantages of outsourcing accounting tasks to a third-party agency?
- Save up on payroll costs; there would be no need to maintain salaries. The accounting agency would be paid on a per-project basis. Often, the payment would be a percentage of the total payroll amount.
- Save up on rental costs; fewer people on payroll means you don’t need a lot of space to run your business.
- Reduce total compensation. By outsourcing accounting to the agency, you save up on paying employee benefits. The agency is contracted, not hired, to manage your accounting needs.
Over time, outsourcing became a stand-by cost-cutting measure for companies that wanted to maintain profitable during periods of economic struggle.
VUCA Creates Demand for Outsourcing
As it turned out, the Y2K Bug or the Millennium Bug, was the least of our worries when the calendar date changed from 31 December 1999 to 1 January 2000.
The new millennium or the year 2000 ushered in events which changed the course of history and transformed the political landscape, business climate, and truly proved once and for all that we are in a global economy.
An event that occurred in one part of the globe was no longer limited in that area. Instead, it would create a ripple effect that would be felt across the world:
- 9/11
- The Invasion of Iraq
- The Collapse of Global Equities Markets in 2003
- The Eurozone Crisis of 2009
- The Greek Bailout Referendum of 2015
- Global Recessions in 2009 and 2014
Business conditions were tumultuous during the early part of the new millennium particularly from 2003 to 2014. Market analysts referred to the new millennium as the “Age of VUCA”.
VUCA stands for Volatility, Uncertainty, Complexity, and Ambiguity.
Many business experts believe that VUCA is not a trend or a temporary condition. They believe VUCA is our current reality. This is the way of the world. Business conditions will be volatile, uncertain, complex, and ambiguous for the long haul.
If you cannot adapt to VUCA, your business will not thrive, much less survive in a global economy. If this is a correct assumption, then we can track the growth of outsourcing as running parallel to VUCA conditions.
From a $45.6 Billion market in the year 2000, the global outsourcing industry grew to $104.6 Billion in 2014.
As business conditions worsened, companies started to outsource more services to qualified third-parties.
Virtual assistants were no longer just personal assistants or secretaries. The role expanded to include more technical and highly-specialized skills such as accounting, customer support, tech support, graphic design, market research, content writing, digital marketing, and transcription services to name a few.
Just like the explorers of the 18th century, companies from North America and Europe crossed oceans to set up large scale arrangements with outsourcing companies located in low-cost countries like the Philippines, China, Malaysia, and India.
Part 1 – How Can Outsourcing Save You Tons Of Money?
If business is bad, the immediate course of action is to cut cost. Labor is usually the first casualty in cost-cutting. The cost of a Full-Time Employee or FTE is calculated at 1.5 times to twice the amount of his/her basic pay.
It is a sad reality that has become a necessary evil during prolonged periods of economic downturn. Massive layoffs were rampant in the aftermath of the 2003 collapse of world equities markets, and the global recessions of 2008 and 2014.
The companies that survived and even thrived during these periods outsourced services to India, the Philippines, and other popular destinations. These companies included Oracle, DELL, Hewlett-Packard, Ford Motors, Cisco, American Express, and Microsoft.
Outsourcing can help you save tons of money by giving you the ability to capitalize on comparative cost advantages and economies of scale that are prevalent in other regions.
The average wage rate in the United States is $18.50/hour. In comparison, the average wage rates in India and the Philippines are $0.48 and $1.01 per hour, respectively.
As you can see, on wages alone, the cost savings are quite significant. And it only gets better!
An outsourcing company in India or the Philippines is usually paid per hour and the fee is inclusive of all standard business costs like rent, benefits, power, utilities, and Internet services.
The charges will vary from $8.00 per hour for basic services and $25 per hour for more technical functions.
Basic services include telemarketing, data entry, and virtual assistance work. Technical functions would cover graphic design, digital marketing, and web development.
Back-Office functions such as accounting and Human Resources would range from $15 to $25 per hour depending on the scope of work. Customer Support and Tech Support will cost $10 to $15 per hour.
In the United States, labor is usually pegged at 20% to 25% of the monthly costs of operation. Thus, assuming an average wage rate of $18.50 per hour, the cost per hour of doing business in the United States is $74 to $92.50 per hour.
The cost per hour covers rent, salaries, benefits, power, utilities, telephone expenses, and Internet service.
In comparison, if you outsourced to the Philippines or India, the cost per hour of doing business will range from $8 to $25 per hour inclusive of rent, salaries, benefits, utilities, telephone expenses, and Internet service.
By outsourcing tasks, you can save anywhere from 196% to 1,056% from your monthly expenses.
Again, the cost savings would depend on the services that you plan to outsource. Technical functions fall under 2 other branches of outsourcing:
- Knowledge Process Outsourcing (KPO) – Web development and management, software development, graphic design, animation, and architectural drawings.
- Creative Process Outsourcing (CPO) – Digital Marketing, content marketing, social media marketing, content moderation, and chat moderation services.
In some cases, the price range for these types of services will be from $25 to $35 per hour which is still cheaper compared to the cost of doing business in the United States.
The second-way that outsourcing can help you save money is by capitalizing on economies of scale.
If you are increasing or “ramping up” the amount of manpower you need, most outsourcing companies are more than willing to adjust the hourly rate in exchange for volume.
Thus, outsourcing can help you scale up your business with minimum risk exposure.
For example, if you initially contracted 10 people to run back-office support at a rate of $15 per hour, the outsourcing company may be willing to reduce the rate to $12 per hour if you ramp up to 15 people.
Part 2 – How Can Outsourcing Build Your Business?
In business, the saying is “You get what you pay for.”
Fortunately, this does not apply to outsourcing.
The developed economies do not have a monopoly on talent. India has developed a reputation for producing the best minds in IT. On the other hand, the Philippines is known for customer service, telemarketing, virtual assistance, and back-office operations.
Even with lower costs, you can be assured of high-quality work and world-class services.
Here are 3 other ways in which outsourcing can help you build your business:
- Focus on Your Business Core Functions – Instead of spending time managing non-core functions such as Digital Marketing, Website Management, payroll administration, market research, phone handling, and customer support, outsource these tasks to qualified third-party service providers. You will increase your productivity and streamline costs at the same time.
- Make Your Business Accessible 24/7 – Whenever opportunity knocks – or emails – you should answer. But what if you are asleep? Outsource inbound customer support services and have your after-office hours covered even while you are in dreamland.
- Your clients and customers can send their concerns and questions through phone, chat support, or email. An agent can attend to these issues right away.
- Repurpose Your Cost Savings – With the massive cost savings generated from outsourcing, you will have the money you need to fund projects that have been on the pipeline.
Are There Risks To Outsourcing?
If something is too good to be true, chances are it is not. That is why even if outsourcing can potentially improve your cost savings by over 1,000% there are inherent risks you should be aware of.
1. Data Security
This is the number one concern raised by companies that did not push through with an outsourcing venture. By the nature of the relationship, an outsourcing arrangement is essentially a strategic partnership.
You have entrusted a defined set of tasks or functions to a third-party service provider. For the outsourcing partner to do its job effectively, you will have to share data and even networks.
Whether you have contracted a Virtual Assistant from across the Interstate or from India, the risk of having your data stolen or compromised remains.
Of course, you can always set safeguards in place such as passwords and restricting access, but these can be bypassed by someone who is determined to pull off his/her malicious intent.
2. Quality of Work
Close collaboration or shared space collaboration is still the best way to oversee the quality of work. It may take time to find the right mix of talent to run your business and during the interim, quality of work may be inconsistent at best.
Other issues such as the quality of Internet service can have an impact on the quality of work. India is notorious for having one of the slowest Internet services in the world.
Conclusion
Outsourcing is a double-edged sword. It can help you reduce business costs without compromising the quality of work. In fact, by outsourcing services, you will increase your level of productivity. It is the ideal strategy to have in place while business conditions remain uncertain.
Our clients have greatly benefited by outsourcing web development, website management, digital marketing, and content writing to us. They are able to realign their assets – time and money – toward the main enterprise of their business while being assured that we will take care of the non-core functions.
If you want to know more about outsourcing and how it can grow your business, please feel free to give us a call.
