How Outsourcing Reduces Labor Cost for Companies

Cost control is always on one side of the scale when business operations are being weighed against each other. Operations like scaling horizontally or vertically, competing in your niche, and increasing profits with the current resources require a considerable rise in your fixed and variable costs. It’s a dilemma you normally face when you can’t easily explore other options in the market. Fortunately, the need for controlling costs and other operations gave rise to the outsourcing industry, which has successfully established its credibility, expertise, and integrity over the years. At the same time, realizing the valid concern and importance of confidentiality, it’s reassuring to see that outsourcing companies have designed and implemented stringent policies, procedures, and techniques to protect the privacy of their client’s information, sensitive data, and assets.  

Most importantly, Venture Capital (VC) or Private Equity (PE)-backed growing tech companies, especially those that have successfully progressed through the SEED funding round to the Series A or B funding stage, find it challenging to expand according to their further growing needs. They need a foolproof, winning growth plan and rigorous implementation, which is only possible with an extra pool of excellent talent with specialized skills and market insights. At this stage, outsourcing becomes quite an inevitable option to achieve the desired goals as it can easily provide what it takes to fulfill the funding sources’ requirements and the expertise needed to lead the company through the avenues of expansion. Primarily, outsourcing reduces labor costs. As a result, especially for growing businesses, it significantly improves their operational productivity and advances their brand. 

Here are some simple questions you could ask yourself to decide which operations you can confidently outsource to achieve cost reduction with peace of mind.

• Is my current payroll cost higher compared to outsourcing the same operations?
• Do my employees lack the required expertise and standards?
• Are my company’s resources being used to their maximum capacity utilization?
• Am I spending extra money on recruitment and training? 
• Can I optimize the current processes in any way to deliver work of higher quality and efficiency?
• Am I having difficulty in achieving operational excellence?
• Do I need an additional team or department to grow my company without increasing any fixed costs?

Outsourcing gives tech companies a strategic advantage by providing solutions to these questions. Here are some significant ways outsourcing can reduce costs.

How Outsourcing Reduces Labor Cost

Hiring permanent employees means increasing your fixed costs, especially when you’re located in a developed country where labor is considerably more expensive. Outsourcing companies typically charge you almost one-third of the salaries you would pay your permanent employees. For every position that is filled, a company goes through the time and cost-consuming process of recruitment. Furthermore, they go through acquisition and training, which requires the company to spend even more money and resources. A common occurrence that renders all this effort meaningless is when the newly hired employee resigns not long after.

Outsourcing presents a relatively foolproof solution to both of these major issues. Recruitment costs, training costs, employee benefits, and other expenses are eliminated. 

Savings in Incorporating an Expert Team or Department

The first thing that comes to mind when considering hiring experts or setting up an extra department to expand your services is the associated fixed cost. Highly professional operations, such as Customer Experience, Back Office, Sales, Data Science, and Engineering, need competitive skills and expertise to succeed. Those skill sets are expensive if the company goes the traditional route of finding and hiring people with those skills. Hence, outsourcing reduces labor costs drastically while incorporating access to the excellent talent you need. 

1. Cost Reduction in Outsourcing During Downtime

Companies can outsource seasonal work and only pay workers when there’s work to do. Besides, there are also slow times and downtimes when businesses are slow due to various factors. This is another critical area where you enjoy cost reduction in outsourcing. 

2. Outsourcing Saves the Cost of Infrastructure

As your company grows, the scariest part of the increasing fixed or variable costs is the enormous cost of purchasing or renting a bigger space for your additional team. Then comes the cost of additional furniture, equipment, utilities, insurance, and other overheads, as well as the extra administrative costs to manage all that. Outsourcing frees you up from all these hassles and allows you to consistently apply your existing resources to focus on improving your growth and brand image.

3. Savings in Taxation Costs and Professional Fees 

Another issue that adds costs is the taxation of permanent employees and the professional fee that your accountant will charge to prepare your payroll. There is the Federal Insurance Contributions Act (FICA) tax that includes Social Security and Medicare. These employees’ taxes are split between the employees and the employer. Then there is the Federal Unemployment Tax (FUTA) and State Unemployment Tax (SUTA), which are paid entirely by the employer on behalf of their employees. By outsourcing your operations and expansions, you bypass all these additional costs and hassles. 

Information technology is the leading industry for outsourcing, with approximately 37% of IT tasks being outsourced and 13.6% of the average IT department budget allocated to outsourced tasks. Furthermore, 59% of companies claim that cost is the primary factor for wanting to outsource. Hence, an outsourcer can access a much more cost-effective and flexible workforce while enjoying more efficient technology. All of this is reflected in the company’s improved performance overall.

Infinit-O is the trusted customer-centric and sustainable leader in Business Process Optimization to Small and Medium businesses in the Financial Services, Healthcare and Technology sectors by delivering continuous improvement through technology, data and people.