Cost Reduction: Will Outsourcing and Offshoring Really Help?
By: Paolo Arguelles
Reducing costs is a guaranteed way to increase your chances of business success. However, of course, running a business comes with expenses. The question then lies in how smart you can be with balancing your business spending.
For all the financial resources invested in your company, profit is always the end goal. So business owners will not bat an eye on the business expenses if sales keep coming in. However, if calculated profit margins are not at par with your expected revenue growth trajectory, that’s a different story.
In an increasingly competitive world, businesses have to pursue more projects and upgrades to keep up with established giants in their respective industries. However, if not done strategically nor efficiently, these will just end up costing you more money.
Cutting costs where you can is the strategic solution to move forward — and outsourcing and offshoring can help you achieve it.
However, it is not good business to jump headfirst without proper planning and research. First, you need to find the best outsourcing and offshoring company that will be your partner in crafting the most beneficial setup for your business. Your operational, technical, and cost-reduction strategies should be aligned. How well will they fit your business culture? How will they set your team up for process and cost-efficiency? These are essential questions to answer so you can experience the full benefits of outsourcing and offshoring services.
Why and How Businesses Reduce Costs
We’ve established that smart spending is critical for a business to run smoothly and produce top-quality products or services for its customers. From acquiring top talent to procuring office space and work equipment, everything you do will incur expenses as you establish your business. Consider these investments to your success because once customers line up for your offering, your company will receive profit.
Once you know your business expenses and revenue, you can compute your profit margin, which your business keeps as actual earnings. The profit margin has many implications for business growth and scalability, the most significant of which is the revenue growth rate, which dictates the company’s competitive advantage.
Ideally, a healthy revenue growth rate should be at least 15% annually. As long as your company’s revenue is growing consistently, its trajectory to success remains stable. If you can maintain an annual 15% revenue growth rate, your company should expand to at least double its size within the next five years. However, a lot of things can happen between now and then.
Maintaining a competitive advantage relies on your relentless pursuit of adjustments and upgrades to finetune spending and processes. And in a rapidly advancing digital age, simply relying on increased revenue is not an effective plan. What you do now matters, so when you don’t have the funds to pursue those necessary advancements, reducing costs will be your saving grace.
Fortunately, you can approach cost reduction strategies for your business in multiple ways. Streamlining processes, tightening procedures, putting a budget cap on your departments, and utilizing automation tools are some of the internal changes you can pursue to limit spending. These tactics allow you to dedicate more funds to core business matters, resulting in more impactful revenue growth. Companies incorporate cost-cutting strategies into the business framework to grow their bottom line. Here are some of the techniques businesses use to save money:
Cost-Cutting Strategies According to Priority
- Staff Layoff
- Cost Reduction in Operations
- Aggressive Working Capital Management
- Lower Contracts with Suppliers
- Discretionary Spending Reduction
- Price Adjustments
- Product Portfolio Optimization
- Management Layer Reduction
- Business and Asset Acquisitions
- Product Development Investment
- Employee Compensation Adjustments
- Sales Incentives Adjustments
- Marketing Effort Increase
The data above mostly shows internal adjustments businesses apply to reduce costs. However, there is one outlier on the list that involves seeking assistance outside of the company: offshoring or outsourcing.
So how can getting an offshoring or outsourcing partner benefit your business?
The Cost Benefits of Outsourcing and Offshoring
Moving your business processes or hiring workers overseas provides many benefits. Most outsourcing and offshoring companies position themselves as effective cost-saving options. It’s not surprising since businesses looking to grow sustainably will always try to look for ways to do so while managing or cutting down on expenses. Offshoring and outsourcing can reduce costs significantly, but don’t just take our word for it; let’s look at the numbers:
Offshoring’s Cost-Saving Statistics
- 27% of organizations outsource to reduce costs.
- 78% of businesses have healthy and profitable partnerships with offshoring and outsourcing companies.
- 70% of companies consider cost-reduction as the driving factor for seeking outsourcing solutions.
- 24% of small businesses utilize outsourcing solutions to improve efficiency despite limited funding.
- 66% of organizations with 50 or more employees outsource.
Outsourcing and offshoring are proven to lower down business operation costs. So the only problem in your way involves which business processes and tasks you are most comfortable with offloading. Business planning and research will direct you to areas where you can save money the most. For reference, here is a list of the most outsourced business functions:
Top Outsourced Business Functions
The global market for IT services outsourcing reached a massive USD 520.74 billion in 2019, with an expected annual growth rate of 7% for the next eight years.
Since most IT roles and responsibilities can be accomplished remotely and there’s a high demand for IT professionals locally, businesses look overseas for skilled and accessible.
IT positions benefiting from outsourcing sources include those that take place online like Software developers, Mobile App developers, IT development specialists, and Website designers.
Accounting & Finance
Accounting services such as tax, payroll, and finance are also typically outsourced business functions; 37% of US-based businesses offshore their Accounting and Finance functions to other countries. Aside from helping them keep overhead and staffing costs in control, they also offload their in-house teams of tedious and time-consuming tasks.
Some of the most popular accounting positions include Accounting Managers, Treasury Managers, Treasury Analysts, Tax Accountants, Bookkeepers, and Payroll Specialists.
While cost-savings remain the top priority when outsourcing, companies choose to offload human resources-related business functions for another reason. 29% of businesses find that outsourcing HR functions eliminates the many tasks involved in the division. The same report shows that only 21% pursue the strategy for cost-savings.
It is not surprising since HR functions range from recruitment, employee retention and employee engagement to processing hiring, compliance, payroll, and many other white-collar tasks. Some of the most popular HR tasks being outsourced include the following:
- High-volume recruitment (both local and foreign)
- Temporary staffing
- Benefits administration
- Compensation implementation
- Employee experience
- Talent development
- Compliance maintenance
- Candidate background checks
Those tasks do not even remotely come close to how many responsibilities the HR department has for the company, so hiring people for it can be costly. Outsourcing not only saves recruitment expenses for HR talent, it eliminates the HR business functions from the direct operations completely.
Supplies, materials, equipment, tools, and manpower. Name everything a business needs by bulk, procurement will handle the execution. Sourcing and negotiating with third party suppliers will be the primary role of procurement specialists for a company. With such a significant task for the company, you’d wonder why businesses outsource the business function.
However, the digital age makes hiring in-house procurement specialists unnecessary and costly. You can find experts around the world with the same quality of talent, but for a significantly lesser price. 39% of US companies already seeked outsourcing solutions for procurement, with positions like Procurement officers, managers, and specialists leading the way.
Businesses can outsource or offshore practically every business function if they want. It comes down to which business functions or departments you need to grow significantly while keeping costs under control.
A Forbes article reiterates the need to cut costs strategically amid the pandemic. There are ways to manage your expenses to save in the short run without compromising the quality of your output. Fortunately, outsourcing and offshoring provide businesses with a long-term solution. The only question that remains unanswered is this: Who should you pick as your offshore partner?
iSupport Worldwide can provide you with world-class Philippine teams to grow your business. With top talent, 24/7 support, fully-branded suites, and a guarantee that you keep full control over your business, we are ready and able to provide you with the best offshore services you deserve.
Our end-to-end offshoring package comes up to 70% less than what it will cost you to hire locally.
Need more information on how our outsourcing and offshoring solutions can save you money? Book a 30-minute call with us, and we’ll be happy to walk you through the process!