The costs of outsourcing

Compared to pre-pandemic conditions, 81% of employers² believe candidates have become more demanding with salary expectations. With organizations around the world struggling to find quality talent at affordable prices, business leaders are turning to outsourced solutions, both onshore and offshore, to solve these labor shortages.

We know outsourcing opens up access to a global talent marketplace, but can it solve the issue businesses are having with rising wage costs? What about the other costs associated with outsourcing? Is it worth it, or does it eventually add up?

In this blog, we discuss just how much it costs to outsource and what your business can expect.

Why do companies consider outsourcing?

Organizations are constantly seeking strategic avenues to optimize operations and enhance their competitive edge. Outsourcing has emerged as a compelling solution, driven by several key factors:

• Cost reduction: outsourcing can significantly reduce operational costs by leveraging economies of scale, lower labor costs in different geographies and reduced infrastructure investment.
• Focus on core competencies: by delegating non-core functions, organizations can free up internal resources and direct their attention towards core business activities, fostering innovation and growth.
• Access to specialized expertise: outsourcing provides access to a global talent pool and specialized skills that may not be readily available in-house, ensuring high-quality service delivery.
• Increased efficiency and productivity: experienced outsourcing providers bring industry best practices and streamlined processes, leading to improved efficiency and productivity gains.
• Enhanced flexibility and scalability: outsourcing allows organizations to scale operations up or down rapidly in response to market demands, ensuring agility and responsiveness.

By strategically leveraging outsourcing, organizations can unlock significant value, improve their bottom line, and position themselves for sustained success in the ever-evolving global marketplace.

What is the cost of outsourcing?

Accurately assessing the financial implications of outsourcing is a critical prerequisite for strategic decision-making. While providing precise figures without specific project parameters is challenging, a comprehensive understanding of the variables that influence cost and the diverse pricing models available empowers informed choices.

Let's delve deeper into the cost components and models:

A dedicated team

This model provides a dedicated team of professionals exclusively for your project, offering greater control and predictability. Costs are typically calculated on a monthly basis and encompass several key components:

• Personnel costs: this encompasses salaries, benefits, taxes and insurance for each dedicated team member. It's essential to consider variations based on skill level, experience and geographic location.
• Infrastructure costs: incorporate the provider's expenditures related to office space, equipment, software licenses and IT infrastructure.
• Management fees: these encompass the outsourcing provider's project management, quality assurance and administrative overheads.
• Communication and travel: factor in potential costs associated with travel, communication tools and collaborative platforms.

Independent or single hire

Engaging individual freelancers or contractors offers a flexible and potentially cost-effective solution for specialized tasks or short-term projects. Costs are usually based on hourly rates or project milestones, and may include:

• Hourly rates: freelancers and independent contractors generally command hourly rates that fluctuate based on expertise, experience and market demand.
• Project fees: for well-defined projects, a fixed project fee can be established upfront through negotiation.
• Platform fees: when utilizing freelance platforms, incorporate any platform fees or commissions into your calculations.

Full company outsourcing

Entrusting entire business functions to a specialized provider can yield significant cost savings and operational efficiencies. Pricing models for this approach may include:

• Fixed monthly fees: a prevalent model for outsourcing entire business functions, with fees determined by service level agreements and projected volume.
• Transaction-based fees: costs are directly linked to specific transactions or units of work, such as customer support tickets processed or orders fulfilled.
• Gain-sharing models: in certain instances, costs may be correlated with performance metrics and shared gains, fostering alignment of incentives between the client and provider.

Project-based outsourcing

This model is ideal for well-defined projects with specific deliverables and timelines. Clear cost estimations are facilitated by a detailed scope of work, and common pricing structures include:

• Comprehensive scope definition: clearly delineating project scope, deliverables and timelines is paramount for accurate cost estimation.
• Fixed price contracts: a fixed price for the entire project offers cost certainty, but necessitates meticulous planning and comprehensive risk assessment.
• Time and materials contracts: this model bills for actual time expended and materials utilized, offering flexibility but requiring diligent monitoring.

Managed services outsourcing

This model involves delegating the responsibility for managing and delivering specific IT, HR, administrative or operational services to a third-party provider. This approach offers a balance of expertise and control and often involves:

• Strategic partnership: the provider acts as an extension of your team, aligning with your business objectives and strategy.
• Defined responsibilities: clear delineation of responsibilities between your internal team and the managed service provider ensures seamless collaboration and accountability.
• Proactive monitoring and management: the provider proactively monitors your operations, anticipates potential issues and takes preventative measures to ensure optimal performance and stability.
• Performance reporting and optimization: regular performance reports provide insights into operations, enabling data-driven decision-making and continuous improvement.
• Scalability and flexibility: the managed service provider can scale resources and services up or down as needed, providing flexibility to adapt to changing business requirements.

Beyond these models, it's imperative to consider:

• Transition costs: initial setup, knowledge transfer and integration efforts can incur costs.
• Currency fluctuations: for offshore outsourcing, factor in potential currency exchange rate volatility.

By evaluating these cost components and selecting the most suitable outsourcing model, you can optimize your investment and attain your desired business outcomes.

Hidden costs of outsourcing

Put simply, outsourcing can save your business up to 70% on employment costs. This includes savings on recruitment, infrastructure, labor management and onboarding but is also completely dependent on the outsourcing provider you partner with.

What we want to focus on here are the costs you need to keep in mind, the ‘hidden costs’, that if identified early on, can ensure an effective return on investment from your outsourcing venture.

Training and development

Depending on the outsourcing model your outsourcing provider uses, they will often take care of onboarding and infrastructure setup for your onshore or offshore team. However, your outsourcing partner isn’t you. You will still need to invest time and resources into getting your outsourced employees up to speed on how you want them to work and orientate them around your organizational ethos.

The outsourced hiring process will ensure you have an outsourced team that has the necessary skills for the job, but they also need to be trained to understand the policies and procedures to get the job done properly. How long can this take? Sometimes weeks, sometimes longer depending the complexity of what they are doing, but is an important startup cost to take into consideration to ensure that the return on investment down the track is worth it.

Contingency plans

What happens if there is a natural disaster that affects your outsourced team? What happens when the internet cuts out or an electricity shortage? These unforeseen events that can come up, like a recession, are important factors to consider when choosing your outsourcing partner. Do they have contingency plans in place to ensure your outsourced operations remain operational? Make sure to delve deep into understanding how they handle unexpected events to avoid any potential loss of investment.

Outsourcing transparency

Like with any business transaction, there comes a risk that you will be oversold and undelivered. Choosing to partner with any organization will always pose this risk, especially when outsourcing. To avoid having this affect you, do your research, ask for recommendations, set clear KPIs and ensure your outsourcing partner is being as transparent as possible. This is your business’s reputation and who you partner with can affect your brand. Choose wisely and emphasise transparency throughout the partnership.

Complacency leads to failure

Outsourcing is not a set-and-forget business venture. Just like any other investment, the economy changes and your business strategies have to adapt. Markets evolve and you should regularly review your outsourcing agreement to ensure you continue to receive the best return on investment you can find. You want to maximise your outsourcing potential and get the most out of the investment.

Upgrade technology

Outsourcing, as it is a service that utilizes confidential information from within your company and sends it externally to your trusted outsourced teams, relies heavily on cloud-related technology. Without the ability to transfer and communicate information, your outsourced venture is doomed to fail. Double-check your data security protocols and systems to ensure that when it comes time to hire your outsourced team and start sending them information, everything is secure. You may even need to review your hardware and software processes to ensure they align with your new outsourced business model.

How to determine if outsourcing is cost-effective

Evaluating the cost-effectiveness of outsourcing requires a comparison of in-house versus outsourcing expenditures. While the fundamental equation appears straightforward (in-house costs - outsourcing costs = cost savings), the complexity lies in the nuances.

To arrive at an informed decision, adhere to these steps:

• Define the scope: clearly outline the specific functions or processes under consideration for outsourcing. This precision is fundamental for accurate cost estimation.
• Calculate in-house costs: calculate all costs associated with performing these functions in-house. This encompasses:
  • Direct costs: salaries, benefits, office space, equipment, software licenses and IT infrastructure.
  • Indirect costs: management overhead, recruitment and training expenses and potential productivity losses due to employee attrition or skill deficiencies.
• Estimate outsourcing costs: obtain comprehensive quotes from prospective outsourcing providers. Ensure these quotes encompass all pertinent cost components, including:
  • Service fees: monthly fees, transaction fees or project-based fees.
  • Transition costs: setup, knowledge transfer and integration expenses.
  • Ongoing management costs: communication, travel and vendor management overheads.
• Compare and analyse: juxtapose the total in-house costs with the estimated outsourcing costs. Consider both quantitative and qualitative factors, such as:
  • Cost savings: calculate the potential cost savings by subtracting outsourcing costs from in-house costs.
  • Quality and expertise: assess the provider's capabilities and demonstrable track record in delivering high-quality services.
  • Risk mitigation: evaluate the provider's risk management protocols and contingency plans.
  • Scalability and flexibility: consider the provider's capacity to scale resources and adapt to evolving business needs.
• Factor in contingencies: incorporate potential unforeseen costs associated with outsourcing, such as:
  • Communication challenges: language barriers or cultural disparities can contribute to miscommunications and delays.
  • Quality control considerations: monitoring quality and performance remotely can present challenges.
  • Security risks: data security and confidentiality concerns warrant meticulous attention.

By adhering to these steps and utilizing appropriate tools you can make data-driven decisions regarding the cost-effectiveness of outsourcing and optimize your investment for maximum return.

Outsourcing: onshore and offshore

If these costs haven’t phased your desire to start an outsourced team for your business, it’s time to consider who to partner with. You will want a partner who is market-leading and industry-recognised to provide you with the best people locally and offshore to deliver results. When a business partners with Probe CX, they can rest easy knowing they have teamed with an outsourcing provider that boasts the experience, knowledge and technology to help them rise above the pack.