Inflation poses significant business challenges, leading to increased operational costs, reduced profitability, and declining demand. This white paper proposes offshoring as a viable solution for maintaining sustainability and mitigating the effects of inflation. By leveraging cost-effective and high-quality services from offshore providers, businesses can achieve significant cost savings, improve cash flow, and maintain a competitive edge.
The Problem: Adverse Effects of Inflation on Businesses
Inflation has several adverse effects on businesses, including increased operational costs, reduced profitability, and declining demand. These effects can significantly impact a company’s bottom line and overall competitiveness.
Increased Operational Costs
In the United States, the Consumer Price Index (CPI) rose by 8.6% in May 2022 compared to the same period in the previous year. This increase in inflation led to higher costs for businesses, particularly those in the manufacturing sector. For instance, the cost of raw materials such as steel and aluminum increased by 15% and 12% during the same period.
Inflation leads to higher costs for raw materials, labor, and other inputs, reducing profit margins and making it difficult for businesses to maintain profitability.
For example, suppose a company that manufactures electronics experiences an increase in the cost of raw materials such as copper and silicon. In that case, it may need to raise its prices to maintain profit margins. This can lead to reduced demand and ultimately affect the company’s profitability.
Reduced Profitability
In 2021, the global semiconductor industry experienced a decline in profitability due to inflation. The industry’s profit margins decreased by 10% due to higher costs for raw materials and labor, leading to reduced investments in research and development.
Higher costs and declining demand can reduce profitability, making it challenging for businesses to maintain their market position.
For instance, if a company that sells clothing experiences a decrease in demand due to inflation. It may need to reduce its prices to attract customers, which can contribute to lower profit margins.
Declining Demand
In 2020, the COVID-19 pandemic led to a reduction in consumer spending due to inflation. In the United States, consumer spending decreased by 3.4% in March 2020 compared to the same period in the previous year. This lessening in spending was attributed to high prices and reduced purchasing power.
Inflation can lower consumer spending, as high prices and reduced purchasing power reduce demand for goods and services.
For example, if a company that sells appliances experiences an increase in prices due to inflation, consumers may delay their purchases or opt for cheaper alternatives. This leads to a decline in demand and ultimately affect the company’s profitability.
Impact on White-Collar Jobs
Reduced Hiring: Inflation can cause reduced hiring in certain industries, as companies may be less likely to hire new employees due to increased costs and reduced demand.
Increased Turnover: Inflation can also lead to increased employee turnover, as employees may seek better-paying jobs or adjust their spending habits in response to reduced purchasing power.
Changes in Workforce Composition: Inflation can induce changes in the composition of the workforce, as companies may prioritize hiring employees with skills that are less affected by inflation, such as those in the healthcare or education sectors.
Examples
Cyclical Unemployment: A study by the National Bureau of Economic Research indicated that cyclical fluctuations in inflation are related to cyclical movements in real activity and unemployment.
Consulting: A survey by the Management Consultancies Association (MCA) indicated that profitability across the consulting landscape declined compared to the previous year, prompting firms to monitor profit margins.
Retail: Most consumers—90%—have observed price increases. For instance, they’ve reported big price spikes in fuel and food, which many people purchase weekly. If the trend continues, discretionary spending might persist, leading to reduced profit margins and reduced hiring.
The Solution: Offshoring for Sustainability
Offshoring can be a valuable strategy for businesses to mitigate the adverse effects of inflation.
Offshoring is relocating a business process or work function, like manufacturing or customer service, from one country to another. Companies do this to take advantage of lower labor costs or gain access to skilled labor in the destination country.
Offshoring offers several benefits, including:
Cost Savings: Offshoring can save up to 70% on wages, allowing businesses to maintain profitability and invest in growth initiatives.
Improved Cash Flow: Offshoring can improve cash flow by reducing operational costs, enabling businesses to manage their finances more effectively.
Flexible and Scalable Solutions: Offshoring provides flexible and scalable solutions, allowing businesses to adapt quickly to changes in demand and market conditions.
iSupport Worldwide, a leading offshoring solutions provider, has successfully implemented offshoring strategies for various clients across industries such as trade, healthcare, hospitality, and renewable energy. Some examples include:
Accounting and Finance: A hotel chain turned to iSupport Worldwide to help with the lack of qualified candidates in its finance and accounting division.
The hospitality company achieved significant cost reductions of between 30% and 50% due to iSupport’s effective recruiting of highly skilled accountants and finance managers in response to the employment gap.
Customer Service: With a TrustPilot score of 1.6, the customer satisfaction response of a renewable energy company was at an all-time low in its early days.
iSupport transformed their client’s customer service, which led to a 93% increase in productivity and a 3.8 TrustPilot score.
This was achieved through a rigorous selection process and high standards of offshore providers, ensuring the quality of services despite the geographical distance.
Full-Scale Service: A wholesale company experienced rapid business growth post-COVID, but the U.S. talent market provided few candidates. iSupport provided talented, quick learners within 30 days, and iSupport’s pricing structure provided the wholesale company cost savings of 78% up to 138%.
Consider Offshoring to Mitigate Inflation
Inflation poses significant challenges for businesses, but offshoring can be a valuable strategy for maintaining sustainability. Businesses may realize substantial cost savings, enhance cash flow, and maintain a competitive advantage through leveraging affordable and superior services from offshore partners.
The success stories of iSupport Worldwide’s clients, who have seen significant improvements in their operations and profitability through offshoring, serve as a testament to the effectiveness and potential of this strategy.
Register now for a no-obligation free assessment of your offshoring potential