Companies today turn to outsourcing primarily for cost reduction, driven by the desire to lessen or eliminate the expenses associated with hiring and retaining in-house staff. Around 5% of American jobs are outsourced annually, reflecting the growing trend of outsourcing in the US and other parts of the world.
Ever wonder how much companies save by outsourcing and what allows them to spend less compared to hiring a full-time employee? Well, this article will surely explore the topic.
Can You Save Money by Outsourcing
Yes, you can save money through outsourcing across a wide range of tasks, whether digital or physical. For instance, LinkedIn reported that IBM was able to save up to $2 million just by outsourcing some of its business processes.
When it comes to outsourcing, you have two choices: you can enlist the services of an agency or a specialized outsourcing company, or you can directly hire an individual freelancer for their specific skill set.
While the quality of work and turnaround times might be different when hiring an agency or an individual, the fact that it is still more cost-efficient than hiring an in-house staff remains unchanged.
How Does Outsourcing Save Money
Outsourcing allows businesses to save money in multiple ways, including reductions in expenses associated with hiring, software, office space, and other overhead costs. The extent to which outsourcing decreases your business expenses hinges on the specific nature of the work or tasks being outsourced.
Here are the five ways on how does outsourcing save money:
No Recruitment, Onboarding, and Training
One of the obvious things about how outsourcing can be much more cost-efficient than hiring an employee is that it saves the company from the expenses related to recruitment, onboarding, and training.
Imagine the amount of time and money your team has to allocate to filter thousands of applicants, interview hundreds of them, and hire only one or two candidates for the position.
And oh – don’t forget that selecting the best candidates isn’t the end of the nitty-gritty task! You also have to invest in their onboarding and training. If not, how can they start providing value to your company, right?
Now, picture how much companies save by outsourcing instead of navigating through this intricate process! I must say – it’s a lot, especially if they’re outsourcing a huge volume of work.
No Office Space Needed
If you’re outsourcing to the Philippines or another country aside from where you or your company is based, it will be much more beneficial for you (at least, cost-wise) to outsource than hire an additional in-house staff. The reason? It’s simply because this way, you won’t have to worry about finding extra space for your new in-house team member to work.
Outsourcing remotely allows you to hire an additional workforce without needing additional real estate expenses. Definitely a cost-saver, isn’t it?
24/7 Support Without Additional Cost
When outsourcing your tasks to agencies, they usually assign some team members to provide support to you or your team 24/7.
Now, the good news is that this typically doesn’t come with an extra cost. It’s already packaged together with the task you outsourced to them. This means you get this for free, which is obviously a lot better than having to hire three (3) full-time employees just to have support at any time of the day.
Output Quality
When figuring out how outsourcing saves you money, don’t focus too much on the difference between the salaries and benefits of an outsourced individual and an employee. The efficiency and quality of work also affect how much companies save by outsourcing.
Just think about how the price of your final product or service will skyrocket if you keep doing, reviewing, and redoing a specific part of the process. Every mistake or error comes with a cost.
And this is why opting to outsource tasks that require the help of a seasoned freelancer is much better than hiring a newbie that will take months or even years before they can provide a result that is as good as their freelancer counterparts.
Work Efficiency
If you want to guarantee fast turnaround times, then hiring an agency to do the tasks for you is a great idea. Business Process Outsourcing agencies have the capability to increase or decrease the number of people working on your business process at any point.
In terms of efficiency, nothing beats the power of a dedicated agency team. Well, unless you plan to hire hundreds of workers only for a specific task and lay them off afterward? If you’re planning that, you better think twice. The hassle of dealing with labor legalities isn’t something you’d want to struggle with.
How Much Do Companies Save by Outsourcing?
Companies save around 70% of operational expenses by outsourcing external workforce, according to Forbes. If you’re outsourcing IT services, outsourcing statistics show you can save around 40% of your usual costs. If you’re outsourcing bookkeeping services, recruitment, and other admin tasks, you can save about 20 to 30%.
It’s challenging to define a fixed amount of savings when you outsource. The amount of savings still depends on several factors, including the tasks you outsource, the types of tasks you retain in-house, and the number of external workforces you have.
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Calculating Saved Costs on Outsourcing
Although there’s no definitive amount of savings companies can save by outsourcing, you can still calculate it. You can ask your finance department for help to give you the exact data on your company’s expenses. Once you have the data, you can start calculating how much your company can save if you outsource some of your services.
Follow these steps to find out whether or not you can save money from outsourcing:
- Step 1. Identify the services & functions to outsource.
Determine the number of tasks you will outsource and how long you plan to outsource them.
- Step 2. Calculate how much you can save when you outsource.
Compute the amount your company spends when services or functions are outsourced instead of doing them internally. This would cover hiring fees, salaries, software, tools, supplies, and benefits. Sunk costs should not be considered in this cost analysis.
- Step 3. Compute the total cost of outsourcing the services.
In this step, you must also factor in the administration fees, transition fees, and the actual bid price.
- Step 4. Subtract the outsourcing costs from internal costs.
In this final step, all you have to do is deduct the outsourcing costs from in-house costs. Once you get the total, that’s the savings your company will get by outsourcing.
Once you finish the final step, compare the expenses you determined for outsourcing to the costs associated with performing tasks internally. If the outsourcing costs are less than the in-house costs, you can save money by outsourcing.
It’s important to put actual costs instead of estimated costs to determine how much your company can save accurately. Outsourcing also has hidden fees, as you must pay for project initiation, employee transition, etc. You should know first-hand what these hidden costs are to have a more accurate calculation of potential savings.
Companies That Saved Costs by Outsourcing
Here are some of the companies that saved costs by outsourcing tasks to an external workforce:
- Google
Due to massive workloads, Google outsourced global talents and partners. They were able to save on operations and employment costs. Due to this, Google’s revenue is consistently skyrocketing. In just the second quarter of 2023, their revenue amounted to 74.3 billion U.S. dollars. - WhatsApp
They outsourced tech talents for developments to keep their costs low. The company only started with a capital of $250,000 and is now one of the most popular messaging apps worldwide. In 2023, WhatsApp is anticipated to be worth 98.56 billion. - Born to Sell
This online investment tool saved its owner over half a million dollars in just one year by outsourcing programmers from various locations. This proves that even small companies can save by outsourcing when done the right way.
Who Benefits More from Outsourcing?
Businesses and employees can benefit from outsourcing. Companies save money; they only need to pay outsourced workforce hourly or output-based instead of a fixed salary. Outsourcing also reduces employee workload, thus preventing burnout.
Here is a list of groups that benefit from outsourcing:
- Personnel.
Since outsourcing allows people to work from home, they benefit from this setup as they won’t have to commute anymore. This helps them save time and avoid the hassle of traffic jams. - Clients.
When companies outsource services with lower labor costs, consumers and producers benefit from lower product prices. - Global Communities.
Outsourced services can be provided from anywhere in the world, helping global communities earn money despite not being physically located in the company’s location.
On the other hand, some sectors that benefit from outsourcing include healthcare, retail, financial services, IT, and more.
Other Ways to Reduce Costs in Your Company
Aside from outsourcing, there are other ways to reduce costs in your company. Knowing these methods is essential to save the most out of your company and increase your profit.
These are some of the ways to reduce company costs:
- Invest in Technology.
You’re ahead of the game if you invest in good software or innovative technology. If your company needs more efficient machines, you can always invest in these. Acquiring software that makes your day-to-day processes easier will also help you save time and costs in the long run. - Market Your Business Online.
Since most consumers are active online, you can try marketing your products via social media, blogging, and vlogging. These are cheaper compared to traditional marketing styles. - Stick to Your Budget.
You need to compute your budget appropriately and stick to it. Don’t be afraid to haggle occasionally to help you save costs. - Stop Automatic Renewal of Premiums.
Services and premiums are usually automatically renewed unless you cancel them. Negotiate with the provider to develop a more agreeable set of terms before you continue your subscription. You’ll never know unless you try.
Learn about When You Should Cut Expenses in Your Company.
Outsourcing Helps You Save Money and Time
Outsourcing doesn’t only help companies reduce costs; it also allows them to save time. Employees benefit from this as they can avoid pressure to accomplish much work. They can also strike a balance between their job and personal life.
If you’re not yet outsourcing some services in your company, it’s about time to try it out. You can even save half of your usual expenses depending on the type of service you’ll avail.
