How Much Can You Really Save From Outsourcing?

September 24, 2020|

By Iris Lee

To run a successful company, you have to keep your eyes open for opportunities whether it be improving your bottom line or making the best out of your finite resources. If an outsourcing strategy can save you a significant amount of money, all that extra cash can be earmarked for your expansion plans, product development, and even fending off the competition.

But how much can you really save from outsourcing?

I wish there was a single, straight answer. The extent of how much really depends on where you do it, what role you farm out, and who you outsource to. But first and foremost, you have to be aware of what you’re truly spending on an employee. This is quite a strenuous exercise so I’ll provide a sample calculation to make it easy breezy.

Calculate the True Cost of an Employee

Hiring someone goes far beyond covering their hourly rates or salaries. There’s what we famously call the “true cost” of having an employee. That includes office space, equipment, internet, utilities, taxes, insurance, and even those cool company perks we all love. Think of free catered meals, unlimited paid time off, or even something as crazy as spending $4,000 bucks a month just on Kombucha. You’d be surprised how those quickly add up.

Say you want to hire Customer Support and your company has a fairly modest office in a major city. According to Glassdoor, the average yearly wage for someone in customer support is $33,359 so we’ll use this. When it comes to office space, it’ll be a ballpark figure of $2,500 to $5,000 per employee each year. Another indirect expense we have to think about is organizational support. Things like recruitment, onboarding, and administration should also be taken into account. In the same vein, a Talent Acquisition Factbook from Bersin by Deloitte indicates that the national average cost-per-hire in the US hovers around $4,000.

You should know, however, that all these are estimates and they’re designed to help you figure out your own internal costs.

Now that we have the variables to calculate the true cost of an employee each year, let’s take a look at the table below:

calculation for true cost of employee
Sources: Salary data from Glassdoor. Payroll taxes from Gusto Employer Tax Calculator. Health insurance estimates from Kaiser Family Foundation. Office rent estimates from SquareFoot.

I decided not to throw in any perks and bonuses since not all companies have the luxury to give that. In case you do, then the annual amount of $53,107 will naturally climb up.

Calculate the Estimated Cost of Outsourcing

On the other hand, let’s see what you can expect to spend using an outsourcing service.

Take note that providers don’t have the same pricing structure all the time. However, I’d say it’s common to find one charging at a fixed hourly price. Usually, that already foots the bill for overhead expenses of a full-time staff — see this is where you really start to save with outsourcing. The pricing quotes you’ll get will vary simply because it’s depends on where you outsource, the nature of work, skills, and experience you need.

For the sake of this sample calculation, we’ll again use the position of Customer Support. There are so many tasks you can outsource but customer service is by far one of the most popular. For the location, we can use Philippines as a model.

Now when it comes to service pricing, you might get disparities in the rates even though the country and position you require are the same. That can definitely leave you scratching your head and wondering, “Why am I getting a bunch of different prices?”

The logic behind this is that oftentimes, the gaps in the rates have something to do with talent quality. We all know good people don’t come cheap. The rates of outsourcing companies tend to reflect that (though not always the case).

Another cause of price variation is location. An outsourcing firm may choose to have its operations in a Metropolitan area. This allows them to attract better, wider talent and gain access to the latest infrastructure — especially if they’re in a developing country. Would you think a company like that will charge the exact same way as another operating in a province far away from the city? Most likely not. More importantly, the amount of partnership support they’ll provide you can also greatly influence the price.

So for instance, let’s assume you get an outsourcing company in the Philippines that’s located in a business district with good talent. You can expect to pay between $10 to $14 per hour for really good customer support. Now we’ll use $12 per hour for the calculation since it’s the median.

Using the standard 2,080 hours per year multiplied by the outsourcing hourly rate, a sample cost would look like this:

sample cost for outsourcing

Find Out Your Potential Cost-Savings

Finally, it’s time to compute just how much you can really save from outsourcing some tasks. With the formula below, we simply took the true cost of an employee and subtracted the cost of outsourcing.

To put all of this into perspective, you can save roughly $28,147 or 53% each year for a customer support role. Should you need an outsourcing team with several people, the amount of savings you get quickly magnifies. And it’s not rare to hear companies saying that they’ve saved even as much as 65% — due to their internal expenses being much higher than our example.

estimate cost savings of outsourcing

Final Thoughts

A word to the wise. If something is priced lower, doesn’t always mean it’s good for you. Even if one of your reasons for outsourcing is to cut down on costs, don’t go out looking for the cheapest outsourcing company you can find.

Why is that?

Because you’ll always end up paying a much higher price than what you saved with shoddy work.

Take the time to choose the best outsourcing company for you and set a reasonable budget. At the end of the day, it’s all about balancing affordability and quality.


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