The Truth About Outsourcing Overseas & Cost-Saving

Shaunvir Mahil May 23, 2018

When you think of outsourcing abroad, what comes to mind immediately? The answer is – cost-saving. But, despite the synonymous link between the two, there are some common mistakes that clients make when they calculate ‘how much will I save if I outsource to a country like India.’

Here are three ways in which clients frequently grossly underestimate just how much they can save when they outsource:

1Comparing Local Employee Salary vs. Total Offshore Cost

When hiring remote staff in India, clients will often compare the salary of a local employee to the total cost of hiring an employee offshore (that is, salary plus overheads, infrastructure, management, etc). But the fact is that there are many hidden costs to hiring staff locally. From payroll and taxes to infrastructure and overheads, to name just a few.

A Forbes article estimated that companies spend $3300 on recruitment alone when hiring locally! And another recent Forbes article, estimated that for a company with 20-49 staff strength, the average employee cost (that is, expenses separate to that of the employee’s salary) are a staggering £35,500/$56,770 a year per employee!

If you want to fairly deduce just how much you can save by hiring Virtual Employees in, say, India, add $56,000 to the salary cost of hiring an employee locally and then compare it to any quote you receive from an Indian company. As a side note, it is worth also keeping in mind that for companies with fewer than 20 staff, the overall cost of hiring locally is even greater than $56,000, i.e. smaller the company, greater the cost saving from outsourcing.

2Comparing Junior Resources to Senior Resources

This is perhaps the most surprising of all the miscalculations. We find clients often comparing the cost of hiring senior resources in India with, say, 5 or 7 years of experience to the cost of hiring a fresher or graduate locally. This is, for obvious reasons, highly illogical, particularly in highly skilled professions. For instance, a software developer with 5 years of (relevant) experience is simply in another league to that of a fresher.

When clients fail to appreciate when they bemoan that, for the cost of hiring a 5-year experienced resource in India, they can hire a fresher locally, is that were they to hire a fresher in India, the cost would be significantly lower than hiring a graduate locally. If you want to accurately calculate how much you save when you outsource to India, make like for like comparisons.

3Ignoring the Number of Hours

We once had a client tell us that he decided to outsource to a local digital marketing company over taking our services because our fees of £1200/month were the same as those of a local agency. This particular case truly dumfounded us because the client then proceeded to tell us that a) the local agency was charging him £40/hour and, b) that the local agency had told him ‘he only needed 30 hours of service per month’.

For £1200/month with us he would have received 176 hours of service, close to 6 times as many hours. But despite this, the client still found the local agency’s services more attractive. You might retort, “Perhaps their services were of a higher capability”. I know the local agency the client opted for (because he told us) and just from looking at their website, I highly doubt their capability is superior to ours (if you have a lot of marketing/digital marketing expertise, more often than not, you can judge a digital marketing company’s capability by just looking at their website. When you see a site with poor copywriting, a lack of value proposition, poor design, a handful of pages, an agency offering PPC services but no CRO services, you get a fair idea that the firm’s marketing prowess is not so strong).

If the cost of outsourcing to a local agency is the same as outsourcing to an offshore agency, but if the latter is giving you 5x as many hours of service, you are still getting a massive cost saving. If you are thinking of outsourcing to India, it is imprudent and inaccurate to focus solely on cost and not factor into the equation the number of hours of service you will receive in return.

In summary, to accurately deduce your cost saving when outsourcing, all parameters should be equal. You can have a lower cost and same skill set or a higher skill set and the same cost. To expect both simultaneously (lower cost and higher skill set) is, however, a grossly unfair expectation.

What I have stated in this article is obvious; that goes without saying. But because so many clients make these basic miscalculations, I felt compelled to provide some clarification.

But this does prompt me to ask ‘why’? When the logic is so clear and straightforward, why do so many clients repeatedly get the cost saving calculation wrong? Secondly, what are the repercussions of making such erroneous calculations on your business? Can there be a serious negative impact in getting the calculation wrong?

Perceived Value vs. Actual Value

I think part of the reason clients get the ‘cost saving calculation’ wrong is because of the way clients frame the question in their mind. If you frame the question as one of ‘employee vs. employees,’ then outsourcing becomes attractive only if the cost of hiring offshore is significantly lower than the cost of hiring any employee locally. For instance, you can hire employee A in the USA for $1800/month or employee B in India for $1800 per month. Which would you choose? Employee A, right? Obviously! But what if I framed the question as follows: Employee A is a graduate software developer whereas Employee B has 6 years of experience of working for Microsoft. Which employee would you choose now? Now, of course, hiring offshore becomes attractive, even at the same cost of hiring locally. The problem, however, is that some clients simply are not framing the comparison in their minds as such. To frame the comparison accurately, you must go deeper, something a lot of clients are unprepared to do because they simply want a quote, rather than assessing what they are getting in return for that quote .

It is the same mistake that clients make when evaluating whether to outsource a project to local firm or to an offshore firm. If you frame the comparison as one of ‘Company A in the USA is charging $1,500 and Company B in India is charging $1,500’, then of course, outsourcing is not going to appear appealing. It is only until you factor in to the calculation that you are getting five times as many hours with the company in India does the service then become appealing.

Even when clients are aware that they are getting more when they offshore, some still find a local solution more attractive. Why? What is clear is that the rule of thumb going through the minds of some clients is, ‘if the cost of a local solution and an offshore solution are the same, local is better, irrespective of any other considerations.’

To such clients, it does not matter if those ‘other considerations’ include better experience, more hours of service or higher quality technical expertise. This is clearly illogical. So once again, we must ask ‘why’? Why does an offshore solution that provides an employee at the same cost as that of a local employee but with better skills and more experience, not appeal to some clients?

I believe this is firstly due to perception. The perceived value of outsourcing is one of a ‘numbers game.’ In the minds of most, the value of outsourcing overseas is simply, ‘give me a number much lower than I can get locally,’ and that’s it. In other words, most people think the only way outsourcing can be of any benefit to them is if the quotes or rates are much lower than they can get locally. If they are not very low, then of course, there is no benefit in outsourcing.

It never occurs to some that outsourcing can also provide value in terms of greater capability and better result. That simply is unthinkable. A local solution, even if the employee has less experience, is deemed valuable in terms of capability and result, but an offshore solution is deemed valuable only in terms of cost-saving. In other words, if you take cost out of the equation, working with a graduate locally, in the minds of some clients, is going to provide a better result than working with an offshore resource with five years of experience. I know it sounds rather unbelievable, but the actions of many prospective clients demonstrate this, that is, for many if it costs $1,500 to hire a graduate software developer locally, or a software developer with four years of experience offshore, I assure you many will opt for the former.

Let me give you an example to put this into better perspective. Consider the following hypothetical scenario: if you needed to hire a content writer for your website, would you be willing to hire a content writer in India for $2,000 per month? I can safely assume that your answer will probably be something along the lines of, “Are you crazy? I can hire a content writer locally for $2,000 per month, why on earth would I outsource content writing for $2,000 per month? Thanks, but NO THANKS!”

If that is your reaction, it is precisely my point. Yes, it is true that you can hire a content writer locally for $2,000 per month, but what capability will such an individual have? They will likely be graduates. But what if the content writer you can hire in India for $2,000 per month has 10 years of journalism experience and five years of online content-writing experience? What if the content writer in India had created two blogs in those five years, both of which went on to become highly successful sites, which now bring in thousands of organic visitors every day, which have resulted in tens of thousands of dollars in revenue? What if the content writer in India was able to do all this, because he or she is able to independently think up highly creative and intelligent blog posts? What if the audience of these blogs cannot find equally valuable content elsewhere? What if this content writer is also a content marketer?

With this additional information, who would you hire now? If you would still opt for the local content writer, then consider this. How much would it cost to hire a content writer in the US with 10 years of journalism experience and five years of digital marketing experience? Well, I would speculate that even if you were prepared to offer $70,000 per year for such a content writer, you would struggle to find such a person locally (keep in mind that a journalist with 10 years of experience in the US is paid handsomely) because someone with such experience and expertise would probably: a) still want to work as a journalist or b) would be running his or her own content/copywriting agency or hold a senior position at an equivalent firm (senior content writers in the US generally want to work for content writing agencies).

This is a classic example of the divide between perceived value and actual value. As touched upon earlier, some clients mistakenly assume that outsourcing is beneficial only if the cost is lower than any cost of getting the work done locally. The above example demonstrates how the cost of hiring offshore can be the same as the cost of hiring locally, but still provide immense cost-saving (provided you made like-for-like comparisons). Remember there is a difference between costs and cost-saving, two services can cost the same, but one service may significantly reduce your cost over that of another service.

It is not rocket science that a content writer in India with 15 years of experience and a journalism background will be far more capable then a graduate content writer in the US. And yet, despite this being glaringly obvious, I would still take a safe bet, that when I asked you above, if you would be willing to hire a content writer in India for $2,000 per month, your initial reaction would have been ‘No!’

This begs another ‘why’ question: Why is the obvious value of outsourcing so often obscure?’

I believe there are two reasons. Firstly, I speculate that in the minds of some clients, getting work done locally is ‘the holy grail’. For some of us, our ‘auto-pilot’ tells us that getting work done locally will trump the result we can achieve offshore. A local solution is for some, quite simply, ‘sacrosanct’. So if you can get the work done locally for the same cost as offshore, opt for local.

In other words, for some clients, even if the offshore solution is providing a greater experience, expertise and number of hours of service, they still subconsciously believe that a local solution will provide superior results, simply for the reason that it is a local solution. Ask any expert on branding and they will tell you that our unconscious anchors our perception of value. And how we unconsciously emotionally feel about an offshore vs. a local solution differs drastically, hence why clients will often choose a local solution even when objectively speaking it is clearly inferior. For some, I believe there is a perception, that an offshore solution on a ‘results’ front is quite simply inferior, no matter what. The only way in which an offshore solution can provide a superior result is by way of numbers, that is, offshoring is better only if the numbers are much lower.

This is why, I believe the client I mentioned above opted to work with a local digital marketing agency, despite the fact that the local firm was offering only 30 hours of service and we offered 172 hours of service. Despite the fact that they were a 2-man team with experience in a handful of digital marketing areas and we are a team of 50+ professionals skilled in many more verticals. To him, the additional number of hours did not matter, 30 hours with a local firm is better than 172 hours with an offshore firm. This is also why he trusted the local company when they said, “30 hours of work a month is sufficient,” over our opinion that it was inadequate (perhaps the local agency said 30 hours was adequate also because their service would be affordable for him. The 30 hours did seem highly convenient to me. If they had offered him something more like 100 hours of service a month, which was closer to what we believed is what he needed, they would have had to charge him £4,000 per month, which would have been beyond the client’s budget, that is, they would have lost his business altogether).

Again, this clearly is not logical, but it is the thought process for many clients. Perhaps some clients also feel that a local solution offers a superior result to offshore, because of the psychological comfort it gives. If you have an employee working physically alongside you vs. one remotely, does the former somehow feel more intrinsically valuable? Does a remote employee just feel like ‘less’ of an employee because you never see them? I am only speculating, but this could possibly be the case, and is something I looked at in my previous blog post , (regarding why small businesses do not outsource) when sharing the following quote from the book, Unconscious Branding:

“No amount of reasoning will change how you feel, because feelings weigh in before and irrespective of logic and conscious choice.”

I remember years ago asking a friend why he continued to buy CDs rather than just download music from iTunes (as it was more convenient). He told me he liked ‘having the cases’. A CD and digital music both give the same result, but holding a physical CD perhaps just intrinsically feels more valuable than digital music (at least it used to, before the increased popularity of MP3 players). If an employee offshore with five years of experience costs the same as a graduate locally, is it that we simply feel like we are not getting a cost-saving, even though logically, we clearly are?

This would explain why so many clients are so fixated on beating the cost of hiring locally, as opposed to beating the capability or result of hiring locally. You simply can’t beat the ‘quality of work’ or ‘results’ of hiring locally because perhaps a resource sitting alongside you simply feels like a more valuable addition to your company than someone thousands of miles away (irrespective of whether the overseas resource is significantly more capable).

Hence, for there to be sufficient motivation to outsource, the value of outsourcing can only be ‘experienced’, ‘tangible’ or ‘felt’ if the numbers are clearly much lower than the cost of having someone sitting next to me. This is a plausible explanation. If clients do think like this, it is also understandable. It is not, however, necessarily in our best interests.

Our perception of value causes us to make poor decisions. When an offshore solution can assist our business more than a local solution, we often simply cannot see it. As in the example above, hiring a content writer locally for $2,000 a month might seem like a better deal, but without a shadow of doubt, in my opinion, hiring a content writer with 15 years of experience in India would bring greater ROI for my business.

We are so entrenched in our view that outsourcing is purely a numbers game that as soon as we see a number that does not meet our expectations or it is similar to any local quote, we end the conversation. We don’t go further. We don’t bother to investigate and find out whether the content writer in India for $2,000 would cost maybe $70,000 in the US and thus give us access to a level of expertise we could never imagine of adding to our team locally. When we see a quote of $2,000 for a content writer, we automatically say, “hiring locally is cheaper,” rather than seeing the reality for what it actually is; that for the level of capability and skill that you will get for $2,000 per month, you are actually saving $50,000 a year.

Not being able to see the value outsourcing can truly provide to our businesses is, of course, to our own detriment. Content marketing is an exceptionally competitive space. You can hire a junior writer locally, and you can hire a junior writer offshore. You can hire a writer with 15 years of experience, offshore, but as mentioned above, even if you are willing to pay local rates, a small business is unlikely to be able to lure such a senior writer locally. And that is precisely the point. Your best bet for growing your company would be with a senior writer, especially if you are a small business competing against the big guys. Even if you can hire a content writer locally for $2,000 per month, what good is it if you do not achieve your objectives?

It is important to keep in mind that outsourcing is not simply about cost, numbers or cost-saving. Outsourcing is also about bringing on board a pedigree of talent your business simply could never have access to if you did not outsource. It is access to such niche talent that will grow your company in highly competitive markets.

To conclude, this is why I repeatedly advocate that to outsource successfully and to ensure that you make prudent decisions when outsourcing, you must invest time into the process. By doing this, you will cross the line from what you think the benefits of outsourcing are to what the actual benefits of outsourcing are .

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