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Why Do Companies Outsource?

by Svitla Team

August 22, 2012

Undoubtedly, the recent popularity of outsourcing has fundamentally altered the international business landscape. Outsourcing is the process of strategically hiring employees from offshore or near-shore countries to perform tasks that are traditionally given to internal staff. Numerous companies with high economic standing have found outsourcing to be a beneficial technique. Here is our most recent article describing most crucial benefits from engaging additional talent to your team.

Meanwhile, here are some of the reasons companies outsource.

Lower Wages

The most powerful incentive to outsourcing is financial. To put it simply, it is much cheaper to pay for the wages of employees from offshore countries than it is to pay for the services of an American employee. According to Industry Week, the average factory worker in China only earns around half a US dollar an hour. The average factory worker in Mexico only earns about $2.50 per hour. Meanwhile, the minimum wage per hour in the U.S. is $7.25 (as of 2009). The ability to employ workers at a fraction of the cost of labor in America is a very compelling motivation.

More Resources for Core Business Processes

Most people assume that the savings companies make from outsourcing go straight into the pockets of its CEOs and shareholders. But this isn’t necessarily the truth. In fact, one of the biggest benefits of outsourcing is that it frees up a significant portion of a company’s funds – money that can be put to better use instead of being spent on payroll. For example, instead of paying employees with higher wages, a company can spend its money on a new advertising campaign, new equipment, research into new products, and on refurbishing its facilities.

Lower Regulatory Costs

Apart from their significantly higher wages, workers in the United States are also more expensive because of their high regulatory costs. In the United States, the government imposes fees such as those for Medicare, Social Security, unemployment insurance, OSHA regulation, and FICA tax. Meanwhile, overseas workers require no or lower regulatory costs.

Improved Performance

Because a lot of people have experienced trying to fix a computer glitch with overseas tech support to no avail, the assumption is that lower wage costs is the payoff for lower quality service. However, experts and the companies themselves point out that improved IT performance is actually one of the primary reasons for hiring software outsourcing company. Additionally, better performance results in more revenues, which is yet another incentive for a company to outsource.

Risk Management

Launching a new product is a gamble – it could be a hit or a flop. If a company hires salaried or contracted American employees, they have to be paid regardless if the product sells or not. This means that company has to spend on their wages and regulatory costs whether or not it profits from their services. With overseas employees, this risk is eliminated because their employment can be dropped if the product fails to sell.

Ability to Downsize Easily

Because employees in the U.S. have become increasingly aware of employment laws in regards to downsizing, companies have been scampering to avoid lawsuits. They have found the solution to this in overseas outsourcing. Instead of running the risk of being sued for laying off an employee in the U.S., a company can employ one from a developing country where they can upsize or downsize at will. Outsourced employees are generally not as educated about employment law and thus are less of a risk, lawsuit-wise.

These are only a few of the reasons why companies outsource. Other incentives include: tax benefits, faster turnaround time, faster time to market, uncertainty over the political or business climate, and contractual certainty.

by Svitla Team
August 22, 2012

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