Savings from offshoring

So you’re thinking about trying to save money through offshore labour. The first thing you need to decide is how you want to incur these savings in the best way possible.

Essentially there are two different ways in which you can tap into low-cost offshore labour. One is through outsourcing and the other is through offshoring – although both concepts are also known also by a variety of other names.

So what are the differences?

Outsourcing is essentially where you contract with a third party service provider for them to deliver a range of services to your business. There is usually a service-level agreement that specifies the things that they are to do and the standards and timeframes within which they are to be done. You do not normally have any visibility over who does the work, nor have direct managerial control. This can work quite well for larger businesses who are clear about the things they want done and where that will not change greatly. Conversely, it doesn’t work as well with small to medium sized businesses who typically want more flexibility and direct control over the staff doing the work.

Offshoring, on the other hand, is where you engage an intermediary to assist you to find, host and manage offshore staff. The staff, whilst legally employed by the intermediary, are seconded exclusively to your business and work as part of your team, with you having direct managerial control. The big benefit of offshoring over outsourcing is that you have direct control and decide what the staff do from time to time. This also means that you can train and develop the staff, change what they do and generally integrate them as an extension of your local workforce operating in very much the same way as local staff working from home (albeit with a much greater level of supervision and transparency).

If you decide that offshoring is the right fit for you, then what are the savings likely to be?

In the Philippines, salaries are typically around 20% to 25% of what they are in Australia. As to other costs, internet and electricity are more expensive in the Philippines but otherwise all other costs are either similar or cheaper, with office rentals being about a third of what they are locally. This means that the total cost in the Philippines (including the cost of your service provider) is likely to be 40% to 50% of the salary cost in Australia.

This of course isn’t the appropriate comparison. The appropriate comparison is to compare the total cost in the Philippines against the total cost in Australia, which includes things such as rent, electricity, internet connection, salary, superannuation, payroll tax, workers’ compensation, HR and IT support etc. Such a comparison shows that on average, the total cost in the Philippines is 75 – 80% less than the total cost in Australia.

For businesses to truly take advantage of the benefits of offshoring, they need to plan their expansion with this in mind so that they minimise their local growth and instead grow overseas. This is where truly significant savings can be achieved through offshoring.

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