How Much Can You Actually Save With Outsourcing?

February 27, 2024| read

By Iris Lee

Running a business isn’t just about keeping the lights on. It’s about spotting opportunities to boost your bottom line and leveraging every resource at your disposal. If adopting an outsourcing strategy can slash your costs, all that extra funds can be redirected towards growth, innovation, or even outmaneuvering your competition.

But let’s talk about numbers . How much can you actually save with outsourcing?

I wish there was a single, straight answer. The savings in outsourcing hinge on several factors — where you do it, what role you farm out, and who you outsource to. Before diving in, it’s crucial to peel back the layers and first understand the true cost of an in-house employee. We’re about to get into the nitty-gritty but I’ll provide you with sample calculations to simplify this complex task.

Unpacking 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 USD 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. Let’s break down eight of the most common expenses that companies spend on every employee.

1. Base Salary

Research the average annual salary of the position. For example, ZipRecruiter shows that a Customer Support role earns an average of USD 43,555.20 annual salary or USD 20.94 per hour.

2. Federal Payroll Taxes

Federal payroll taxes consist of Social Security, Medicare, and FUTA (Federal Unemployment Tax Act). As an employer, you’ll cover the tax rates of 6.2% for Social Security, 1.45% for Medicare, and 6% for FUTA that is only paid on the first USD 7,000 of wages. Check out this Payroll Tax Rates (2024 Guide) released by Forbes for more information.

Apart from federal taxes, you also may be responsible for state payroll and local taxes depending on where your business is based.

This employer tax calculator created by Gusto really comes in handy.

Using our example of a Customer Support role with an annual salary of USD 43,555.20, our federal payroll taxes tally up to USD 3,374.

3. Health Insurance

A peek at Kaiser Family Foundation’s 2023 Health Employer Benefits Survey reveals that the average health insurance for single coverage reaches around USD 8,435.

4. Workers’ Compensation

For workers’ compensation, you can expect to spend about USD 542 annually. This is the median cost as per Insureon’s findings.

5. PTO & Holidays

Consider the number of federal holidays (approximately 11) and the average PTO days companies offer (around 11). These were based on articles released by Forbes and Wikipedia. Combine the total number of days off, multiply by the average working hours per day, and then multiply again by the employee’s hourly rate. This will give you your average expense for every employee for their PTO and holidays per year.

Your formula would look like this:

11 (no. of federal holidays) + 11 (no. of average PTO) = 22 days x 8 (average working hours per day) x USD 20.94 (customer support hourly rate)

6. Office Space & Equipment

When it comes to office space, the amount of square feet required per employee can widely vary. It’s dependent on several factors like your industry, specific job roles, collaboration requirements, and company preferences.

A general rule of thumb is to aim for a minimum of 100 square foot per person. You can go way above that based on your density needs. This allows a mix of workstations, private offices, meeting rooms, common areas, and support spaces. I suggest you use this office space calculator by SquareFoot. To compute your office space cost, multiply your average square foot per employee by the yearly office rent per square foot.

Your formula would look like this:

100 (average square foot per employee) x USD 37.35 (average yearly office rent per square foot)

Office equipment like computers and laptops have various price points and expected lifespans. As shared by, you can expect to pay between USD 400 for a basic model with limited storage space to USD 3,500 for a top of the line desktop with a large hard drive. Laptops on the other hand, ranges its price from USD 300 for the most basic models to USD 3,000 for high-speed models with large storage capacity. Now the average desktop computer will last between three to eight years and three to five for a laptop. To compute the office equipment cost per employee for a year, get the average price of the item and divide it by its expected lifespan in years.

Your formula would look like this:

USD 1,950 (average price of desktop computer) / 5.5 (expected lifespan in years)

7. Utilities & Internet

Utility costs such as electricity, water, and gas can dramatically be different depending on your location and climate. For a rough estimate, a blog by Integrity Energy shows the average utility cost for commercial properties as USD 2.10 annually per square foot. Simply multiply that USD 2.10 per square foot by the average square foot per employee.

Your formula would look like this:

2.10 (average annual utilities per square foot) x 100 (average square foot per employee)

The Business Internet Buyers Guide done by mentions that AT&T’s business fiber service ranges from USD 160 per month for 1 Gbps to USD 250 per month for 5 Gbps. Get your monthly internet expense and multiply it by 12 months, then divide it by your total number of employees.

Your formula would look like this:

205 (monthly internet expense) x 12 (total months in a year) / 80 (total no. of company employees)

8. Organizational Support

Another indirect expense we have to consider is organizational support. Things like recruitment, onboarding, administration, and other ongoing support that every employee needs will naturally take up resources and should also be factored in. To determine what this costs per employee, add up the total expenses of your support teams — HR, Recruitment, IT, etc. Then, divide this total by the number of employees they support.

Your formula would look like this:

USD 70,000 (average annual salary of each support employee) x 5 (no. of support employees) / 80 (total no. of company employees)

In the same vein, there’s a recent survey done by the Society of Human Resource Management (SHRM). It found that the average cost per hire hovers around USD 4,700. But many employers estimate the total cost to hire a new employee can be three to four times of the position’s salary, comprising of recruitment hours, job advertisements, background checks, etc. So if you’re in market to fill a position with a USD 60,000 salary, the actual cost to secure that talent could soar up to USD 180,000 or beyond. Though this part is a one-time expense and I decided to no longer include it in our calculation of an employee’s true cost, it’s still a good thing to keep in mind.

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

I chose to leave out any perks and bonuses since not all companies have the luxury to give those. In case you do, then the annual expense of USD 68,297 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 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 top-tier talent. You can expect to pay between USD 12 – 14 per hour for really good customer support. Now we’ll use USD 13 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 actually save with outsourcing some tasks. Using 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 USD 41,257 or 60% 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 70% — due to their internal expenses being much higher than our example.

estimated 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.

Editor’s Note: This post was originally published in September 24, 2020. It has been updated to contain the most accurate and latest information.

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