How Outsourcing Can Cut Labor Costs by Up to 70%

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Outsourcing some of your business’s processes is a smart choice regardless if your company is a small startup that’s well on its track to become a multinational enterprise, or if you’re already there and you’re looking to expand your operations. By contracting work to other companies, your business not only stands to do away with tedious and time-consuming tasks that are not central to satisfying your clients; it can also cut at least 70% of your labor costs.

Choosing to tap outsourced talents, however, has its pros and cons, and saving a good amount of money shouldn’t be your only basis for making a business decision. You can always choose to grow your company by hiring people who have what it takes to keep your business running smoothly and foster tremendous growth at the same time. Let’s take a good look at some of the factors you should consider before deciding between using outsourced work and directly hiring new people into your small to mid-sized company.

Dealing with More People and Larger Teams within the Company

The dynamics of running a small business and growing and sustaining a large pool of individual talents is vastly different. If you choose to directly hire people and expand your team, you should be prepared to identify and tackle the following challenges head on:

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Higher wage cost

Let’s start off with the most obvious and, from a purely business perspective, most onerous challenge that comes with hiring new people: increased labor cost. Yes, the additional personnel can go a long way in improving your productivity and processes. Still, the fact stands that directly hiring more people will have a significant effect on your profit margin. Hiring, onboarding, and training a new hire is a serious investment for a small business, and the company will feel the weight of the additional wage to be paid for quite a while. The cost alone can also prevent your company from finding and hiring someone with the right skillset full time.

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Social loafing or Ringelmann Effect

In 1913, a French agricultural professor named Maximilien Ringelmann performed a simple experiment. He asked a group of volunteers to perform a single task: pull on a rope. He found that as the number of people involved in pulling the rope increased, the amount of work being done or the effort being expended by each individual decreased. This concept was coined the Ringelmann Effect, but it’s more commonly known as social loafing.

While this may seem to fly in the face of the entire point of hiring more employees — that being, increased efficiency in the performance of a task or business process — it make sense when we look at it at the point of view of individual employee output.

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An employee in a huge team will naturally start working less because they assume that their fellow teammates will pick up the slack, and that the team’s size makes it difficult for the employer to tell the exact contribution of each individual employee in that team. The end result therefore is you paying out a lot more in wages for less work done, even if the task itself is completed quickly.

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Too many cooks in the kitchen

There is also the fact that having too many employees dedicated to one single task, especially a task that can be ably done by just a handful of people, can actually start to bog things down. For example, let’s say you have a specific team in your company that works on the creation and publication of marketing copy.

A typical setup here would involve a writer to create the copy, as well as an editor to check the copy and get it ready for publishing. If you have too many writers creating copy, then yes, it makes sense to hire more editors to manage the load. However, if you only have one or two writers creating copy and you have a team of editors to check each piece of copy being put out, you have a recipe for disaster.

Each editor will have their own comments and corrections to make on the document, and once the document itself is sent back to the writer for revisions, that writer will then have to try and accommodate all of those editors — a herculean task, especially if there is no actual unifying consensus within the editorial team (and there usually isn’t). What happens here is that you’re paying more money out in wages to make your business process even more inefficient.

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Red tape bloat

Another con to hiring more employees, especially in the case of startups, is how you’ll start to get bogged down with the responsibilities that usually come up with a higher employee headcount. These responsibilities may include the formation of an HR department, a policies department, and other bureaucratic matters.

Obviously, this can easily distract you from business-critical operations that are necessary for your company to grow, such as dealing with customers, ensuring an adequate supply of your product or service to meet current demand, refining your main offerings, and so on. Naturally, having to deal with these responsibilities will also cause a further shrinking of your bottom line, due to all the extra administrative staff you need to hire on top of your expanded workforce.

Considering the Other Option: Outsourcing Work to the Philippines

Keeping a watchful eye out for these issues can help you nip them right at the bud. A good management team, which should also grow alongside the main workforce, should help you face the challenges of hiring and training more people. But if your company doesn’t have the resources needed to hire a dedicated HR personnel who will ensure that your staff is at maximum productivity, then it would be a smarter choice to outsource work instead of directly hiring more people.

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A company that chooses to outsource work to the Philippines stands to gain a lot of advantages in terms of savings and quality of work. One of the top destinations for outsourced work, the country offers business owners the following benefits:

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Save 70% up to 90% in wage payouts

Let’s start off with the biggest benefit: the savings. Compared to other countries, the Philippines has a much lower cost of living and wage range. Companies that outsource work to the country can cut their labor costs by 70%, even up to 90%, all while providing their outsourced labor force with decent, livable wage.

This is because the Philippines is still a developing nation in the Southeast Asia region, despite the massive economical breakthroughs it’s been making through the years. It also has the distinction of being one of the countries with a very low cost of living, even when compared to its neighbors. The minimum daily wage in the country is currently set at USD 9, which is significantly lower compared to the minimum hourly wage in the US, for example.

Just to compare, the average annual salary of a software developer in the Philippines amounts to USD 7,174. On the other hand, their counterparts in the US take home USD 69,589; in the UK, an equivalent of USD 41,551; and for those who are based in Australia, around USD 50,272 every year. This means that a software developer in the Philippines can be paid 80% less for doing the exact same job.

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Compatibility with Western culture

When outsourcing your business process to a foreign country, especially to one in a vastly different region from your own, you will inevitably have to contend with cultural differences that may or may not have a detrimental effect on the performance of the business process itself. These cultural differences can manifest in different ways, from excessive religious holidays to language barriers. There may also be an aversion to working overtime or going beyond what is required.

When you outsource to the Philippines, you can rest assured that the impact of any cultural differences between you and your Filipino work force will be minimized. English is considered a primary language in the country, and all students are required to have an excellent grasp of the language — both in writing and in speech — in order to graduate. No matter the industry involved, your outsourced business process is guaranteed to be handled by professionals with a decent to excellent command of the English language.

The Filipino workforce has also proven itself to be a fiercely-loyal and hardworking one. Not only is the concept of overtime or ‘crunch time’ familiar to Filipino employees, it’s something that’s widely accepted and even anticipated. They fully understand that working overtime not only adds value to their work, but it also gives them a chance to actively contribute to the company’s overall performance. This easily balances out the fact that the Philippines is one of the countries in the world with the highest number of non-working holidays.

Lastly, Filipinos are also very amenable to shifting their schedule around to fit yours, so you don’t have to worry about time differences impacting your work processes. Rotating shifts are very common and expected in the Philippines, especially in aspects that require personal round-the-clock attention like customer and technical support.

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Philippine BPO companies take care of their employees

The BPO industry has become one of the biggest and most profitable industries in the Philippines, and as such many huge BPO firms — fully-fledged companies in their own right — have risen up to compete with each other in attracting the best talent available.

What does this mean to a business owner who is looking to outsource work? First, should you choose to outsource to the country, you’ll not only hire a team of people; you’ll get the benefit of working with a company with a full workforce, one with its own HR department, its own medical and security staff, a legal team, and so on. The employees will also usually have their own health insurance, provided by their BPO company. You are therefore insulated from having to burden the cost of providing these essential employee privileges and rights.

In addition, all administrative tasks are handled by the BPO company that you’ve outsourced your business process to. By taking the extra work out of your company’s hands, you can focus your resources on the more important things like product R&D, making your operations more efficient, and establishing customer relations, among others. By not having to worry about the contrivances of a large workforce, you’re free to do what is necessary to grow your company.

Final Thoughts

In today’s hypercompetitive world of business, it’s essential for companies — especially startups — to find ways to catch up with their bigger and more moneyed competitors. Outsourcing is one of those ways, one that has the potential of not only reducing cost in wages paid but also allowing a startup to focus on the activities critical to growing their brand and reach.

When it comes to which country to outsource to, the Philippines is a top contender, with its fiercely-loyal and hardworking labor force. Any western company or startup looking to grow should definitely consider outsourcing their business processes to the Philippines, as the country not only took advantage of the BPO boom but also completely embraced it.

Originally published at

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Founder of Outsource Accelerator, Derek is passionate about living and loving life; mastering the art of business; and outsourcing

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Derek Gallimore

Derek Gallimore

Founder of Outsource Accelerator, Derek is passionate about living and loving life; mastering the art of business; and outsourcing

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