In a world where new competitions pop up all the time, businesses are constantly searching for ways to make their operations better and reduce costs. One common strategy they use is outsourcing.
According to Forbes, businesses can cut their operational costs by as much as 70% by outsourcing their IT services.
There are many parts of a business that can be outsourced, like human resources (HR), accounting, marketing, and information technology (IT).
But how does outsourcing actually save money? In this article, we’ll look at the different ways outsourcing can help businesses save money.
Proven Cost-Saving Benefits of Outsourcing IT Services
Many organizations, both large and small, have saved money by outsourcing software development or IT services to other countries. And we have data to back this up!
- A recent IBM research report shows that about 27% of organizations outsource to cut costs.
- In a survey of 7,500 public organizations in Australia, outsourcing led to savings of about 46% compared to doing things in-house.
- A review of 210 studies from the last 20 years found that 85 of them showed outsourcing is a smart way to save money.
- According to a 2003 study by the McKinsey Global Institute, outsourcing IT services can lower costs by 60% in the U.S.
- As companies spent $96.14 million on IT outsourcing, they saw a drop of $121.14 million in non-IT operating costs.
- A Deloitte study showed that 64% of companies view cost savings as the main reason for outsourcing.
How Does Outsourcing Save Money?
Outsourcing software development to an ideal partner can really make a difference for your business, and the biggest benefit is that it can significantly lower your costs. Don’t take our word for it—here are several ways outsourcing can help cut your company’s expenses:
Reducing Hiring Costs
When a company decides to develop software in-house, one of the first big expenses is hiring new employees. Companies often need to buy an applicant tracking system, have a human resources team, go through stacks of resumes, or even hire recruitment agencies to find the right developer.
Outsourcing can help avoid these costs by skipping long screening processes and multiple interviews.
Cost Reduction Through Labor Arbitrage
One of the main ways that outsourcing helps companies save money is through labor arbitrage. This term means taking advantage of the differences in pay between different countries or areas, where the cost of labor is much lower in some places than in others.
For example, when companies hire IT services from countries like Bangladesh, India or the China, they can save a lot of money because the wages there are lower compared to the United States or Western Europe.
Economies of Scale
Outsourcing companies usually work with many clients at the same time. This helps them take advantage of economies of scale. In simple terms, this means that the fixed costs for things like infrastructure, technology, and other expenses are shared among several clients. As a result, each client pays less overall.
Better In-House Operations and More Sales
When businesses start outsourcing certain operations, they often see a positive impact on their returns, sales, and overall revenue. By giving complex tasks to outside service providers, in-house teams can focus on their main duties and work on improving customer satisfaction.
No Training Costs for Employees
Technology is always changing, with new tools and updates coming out all the time. Training in-house teams to keep them up-to-date can be very expensive. This cost can be avoided by working with remote tech teams who already have the necessary skills.
Access to the Latest Technology at Lower Prices
The cost of finding the latest technology varies by country. In the U.S., hiring a developer can cost between $250 and $850 per hour. However, outsourcing software development to countries like Bangladesh or China can reduce that cost to around $25 to $50 per hour.
Access to Specialized Skills
In today’s complicated business world, some tasks need special knowledge and skills that a company might not have on its own. Outsourcing allows businesses to find experts from around the world who have the right skills to do these tasks well.
This can include things like software development, digital marketing, or financial analysis. Outsourcing companies usually have teams of highly skilled professionals with the specific knowledge and experience needed for these jobs.
By outsourcing these specialized tasks, businesses can save money that they would have spent on hiring, training, and keeping experts in-house.
Pay Only for What You Need
When you hire a developer to work in-house, you’re often locked into a long-term commitment. You might have to keep paying them even if they’re not fully utilized. With outsourcing, there are no such commitments. You only pay for the services you need, and once a project is finished, you can end the contract.
Risk Mitigation
Outsourcing can help manage risks by spreading out operational challenges among different vendors and locations. When companies share tasks and responsibilities with multiple outsourcing partners, they can lessen their reliance on just one provider.
This way, if something goes wrong—like a natural disaster, political issues, or problems with a supplier—the impact on the business is reduced.
Best Practices To Cut Costs With Outsourcing
To cut costs through outsourcing and reduce the risk of outsourcing failure, businesses should adopt several key strategies.
Outsource a Managed Project
One of the best ways to save money when outsourcing is to use managed projects. With this approach, you’ll get a project manager, developers, and all the technology you need. All you have to do is explain the project details, and they will complete it by the deadline.
Instead of finding developers or teams and paying them by the hour, a managed service model can save you both time and money.
Create Clear Outsourcing Contracts
To make outsourcing work well, it’s important to create clear contracts that explain the details of the project, what needs to be delivered, deadlines, and costs. Being clear about these things helps everyone understand what to expect, reduces confusion, and helps you avoid extra costs that can come from changes in the project or delays.
Link Service Lines Together
Talk to your outsourcing company about their other skills and see if you can connect different services. This can help you save a lot of money instead of hiring different companies for different tasks.
Check Out New Delivery Methods
By using new pay-per-use models like cloud computing, Software as a Service (SaaS), and virtualization, you can save money on IT services. Look into these options and see if they could benefit you. If they can, go for it—you could save a lot!
Integrate Out-Tasking with Outsourcing
Out-tasking means hiring developers from other countries to work as part of your team on specific tasks. Your company can handle the main functions, but you can outsource some parts that you might not have the skills for. Instead of giving away the entire project, you can focus on specific tasks.
Make Use of the Hybrid Model
The hybrid model lets you enjoy the benefits of both onsite and offshore work. You’ll have a business manager on-site for face-to-face communication, while the actual development work is done in another location. Using this hybrid approach can help you save a lot of money when outsourcing.
Clear Communication Channels
It’s important to create open and honest ways to communicate with outsourcing partners. This helps everyone work together better and solve problems more easily.
Setting Key Performance Indicators (KPIs)
Creating specific performance goals and standards allows businesses to see how well their outsourced work is doing. This makes it easier to find areas that need improvement.
Continuous Monitoring and Evaluation
Keeping an eye on and regularly checking the results of outsourced work ensures that they meet the company’s goals and quality expectations.
Wrap Up
Outsourcing is a smart choice if you want to cut costs. However, it’s important to remember that it offers more benefits than just saving money. While saving money is great, outsourcing can also help you save time, give you access to the latest technology, and allow your managers to focus on their main tasks, among other advantages.
If you’re looking to outsource your software development while keeping costs low and quality high, you can trust Laraforest.
You can hire skilled developers from around the world in just 24 hours.
