The practice of outsourcing labor has gained popularity among businesses as a result of the rapidly changing global economy. With a long-standing history that dates back to the Industrial Revolution in the 1700s, outsourcing jobs has effectively evolved from a cost-cutting solution to a fast-growing industry of its own, now valued at over $300 billion.
Developed nations, in particular, frequently outsource jobs to countries with lower labor costs, favorable tax policies, and more relaxed regulations. Over the years, as more and more top global and American companies outsource their key functions, offshoring as a solution became more of a strategic move towards hiring specialized talent and improving operational efficiency on a more global level. Outsourcing now spans more industries, too. Businesses from countries with developed economies now outsource several business aspects from customer support to IT to admin & HR functions.
But, alongside this growth is still a very important question: what benefits do these developed economies actually receive from outsourcing to less developed countries? How does outsourcing impact individual business development, as well as the country’s economic growth as a whole? This article will explore the positive and negative aspects of outsourcing for developed economies.
6 reasons why developed economies outsource jobs to other countries
Does outsourcing benefit developing countries? Well, outsourcing to third-world countries is a common practice among developed economies. This practice is driven by various reasons, such as cost savings, access to global talent, increased efficiency, focus on core competencies, flexibility, and improved competitiveness.
In this section, we will explore these reasons in more detail.
1. Cost savings
Outsourcing jobs to countries with lower labor costs can significantly lower the operating costs for companies. For instance, if a company outsources its manufacturing operations to a country where labor is cheaper, it can produce the same products at a lower cost, which can help it to remain competitive in the market and increase profits. In the same way, outsourcing jobs across other functions like customer service, information technology, and human resources among others allow companies to hire experienced professionals who have significantly lower salaries as opposed to local hires.
2. Access to talent
Outsourcing can give companies access to a larger pool of talented workers in countries where there is a strong technical or educational infrastructure. For example, outsourcing IT services to countries such as India or the Philippines, which have a large pool of skilled IT professionals, can help companies access high-quality technical expertise at a lower cost. For developing countries with a strong BPO industry, meeting the staffing needs of American companies (or businesses from other developing countries) is faster and easier. In essence, outsourcing gives developing countries the opportunity to tap into a larger, and equally qualified, job market.
3. Increased efficiency
Companies may outsource certain processes to specialized companies in low-cost countries that have more experience and expertise in those areas. This can lead to improved efficiency, as these companies have the resources, processes, and technology to perform the tasks more efficiently. In turn, this can help companies produce higher-quality products or services in less time and at a lower cost. For example, outsourcing software development to countries with strong tech infrastructures and backgrounds is a great way to leverage this solution.
4. Focus on core competencies
By outsourcing non-core activities, companies can concentrate their resources and efforts on their core competencies and allocate resources more efficiently. This can help companies to stay competitive by allowing them to focus on what they do best and avoid distractions from non-core activities. The formula is simple: once you’ve delegated the right job to the right outsourced employee, you now have more time to focus on the things that matter the most.
5. Flexibility
Outsourcing allows companies to adjust their workforce size and skill mix quickly in response to changing market conditions or business needs. This can be especially valuable for companies that operate in fast-paced industries where rapid adaptation to change is essential.
6. Competitive advantage
Outsourcing can help companies to stay competitive in global markets by reducing costs, improving efficiency, and allowing them to focus on their core competencies. By outsourcing non-core activities, companies can remain nimble and responsive to changes in the market, which ca,n be critical in maintaining a competitive edge.
How does outsourcing affect the economy of developed countries?
Outsourcing can have serious effects on the economy of developed countries. One of the major effects of outsourcing is job loss. When companies decide to outsource jobs to countries with lower labor costs, it can result in job losses for workers in the developed country.
- Job loss and decreased wages
For example, if a company that is based in the United States outsources jobs to India or other countries where labor costs are lower, it can result in job losses for workers (and job seekers) in the US. Another impact of outsourcing is decreased wages. The competition for jobs between workers in the developed country and those in countries with lower labor costs can result in decreased wages for workers in the developed country. This is because companies can pay lower wages to workers in countries with lower labor costs, which can put downward pressure on wages for workers in the developed country.
- Shifts in industry competition
Outsourcing can also result in a shift in competitiveness. As companies outsource certain jobs, the developed country may lose its competitive advantage in specific industries, leading to a decline in economic competitiveness. For instance, if a company that specializes in manufacturing products outsources jobs to a country with lower labor costs, it can result in the developed country losing its competitive advantage in that industry.
- Increased trade deficit
Another impact of outsourcing is an increased trade deficit. As the developed country imports goods and services from countries with lower labor costs, it can result in an increased trade deficit, which can further impact the job market and the economy as a whole. This is because the developed country is importing more goods and services than it is exporting, which can result in a decrease in economic growth.
Despite these negative impacts, however, the exponential growth of the BPO industry tells us that businesses have seemed to collectively decide that the pros of outsourcing jobs outweigh its cons for the job markets and economies of developed countries.
Which brings us back to the initial question raised earlier: what’s in it for developed economies?
Why is outsourcing an attractive option for developed economies?
The answer is quite simple, actually. It’s not about complex labor statistics or any other complicated reason. Outsourcing is a popular option for developed countries because it allows them to save money and improve efficiency in their businesses. Companies in developed countries can hire workers from other countries to do certain tasks for less money, which can reduce their overall costs and increase profits.
In addition, outsourcing can also provide access to specialized skills and knowledge that may not be available locally. By outsourcing, companies can focus on their core competencies and leave non-essential tasks to outside experts, allowing them to be more productive and successful.
Also, outsourcing has been a cost-cutting strategy for developed countries to prepare them for the looming threat of global recession. Many industries are affected during a recession, and companies are under pressure to cut costs and increase efficiency to stay afloat. Outsourcing jobs to countries where labor is cheaper is one way for companies to reduce their expenses and remain competitive.
It’s pretty straightforward: developed countries have staffing needs, developing countries have job seekers — experienced professionals just waiting for job opportunities — who can fill these roles at significantly lower costs, without compromising on quality.
Yes, the costs. Let’s now talk about how much businesses save by outsourcing jobs.
How much do developed countries save on outsourcing business processes?
Outsourcing business processes to developing countries like the Philippines can result in significant cost savings for companies in developed countries. By outsourcing certain tasks to a country with a lower cost of living, companies can take advantage of lower labor costs and save on expenses such as salaries, benefits, and overhead costs. In the case of outsourcing to the Philippines, it is estimated that companies can save up to 85% compared to hiring in-house staff in developed nations. For a clearer view, the global average for cost reduction through outsourcing was recently recorded at around $87,012 annually.
However, it’s important to note that the actual amount of cost savings will depend on various factors such as the type of business process being outsourced, the size of the company, the cost of living in the target country, and the specific terms of the outsourcing agreement. For example, outsourcing complex processes or larger projects may result in higher costs, whereas outsourcing simpler or smaller tasks may result in lower costs. Additionally, the cost of living in the target country can also impact cost savings, as some countries may have higher or lower costs compared to others.
List of Top Outsourcing Destinations for Developed Countries
The globalization of the business world has opened up a variety of options for outsourcing work to different countries. The following is a list of top outsourcing destinations for developed countries based on factors such as cost, quality, and cultural compatibility:
Philippines
The Philippines is a top outsourcing destination for its highly educated and English-speaking workforce, low labor costs, and cultural similarities with Western countries. The country is a leading provider of customer support services and earned the title of “the call center capital of the world.” Beyond call center services, however, the Philippine BPO industry is now known for other offshore outsourcing services such as IT, HR, financial services, real estate, and more.
India
India is among the leading outsourcing destinations for its large pool of English-speaking, skilled labor, and favorable government policies. The country has a strong IT industry, and a large number of software development, customer support, and data entry services are outsourced to India.
China
China has a large pool of highly skilled workers, making it a popular outsourcing destination for manufacturing and production-related services. The country is among the top outsourcing destinations in Asia, and a preferred outsourcing destination for businesses seeking to lower production costs.
Mexico
Mexico has been gaining enough attention in the global BPO market for its proximity to the United States, favorable trade policies, and lower labor costs. The country is a leading provider of manufacturing, IT, and business services.
Eastern Europe
Eastern European countries such as Poland, Czech Republic, Hungary, and others, are popular outsourcing destinations for their highly skilled and well-educated workforce, favorable business environment, and relatively lower labor costs. These countries are popular for IT and software development, financial and business services, and customer support services.
Vietnam
Vietnam is a fast-growing outsourcing destination for its favorable business environment, lower labor costs, and large pool of skilled workers. The country is a leading provider of manufacturing, IT, and customer support services.
Brazil
Brazil has a large and highly educated workforce, making it a popular outsourcing destination for IT and business services. The country is also a major provider of customer support services and has a rapidly growing IT industry.
South Africa
South Africa has a well-developed infrastructure, a favorable business environment, and a large pool of English-speaking, skilled workers. The country is a popular outsourcing destination for IT and business services, as well as call center and customer support services.
Indonesia
Indonesia is a growing outsourcing destination for its lower labor costs and large pool of skilled workers. The country is a leading provider of manufacturing, IT, and customer support services.
Thailand
Thailand is an emerging outsourcing destination for its lower labor costs and well-developed infrastructure. The country is a leading provider of manufacturing, IT, and automotive services, and has a rapidly growing IT industry.
With so many attractive outsourcing destinations across the globe, businesses in developed economies must weigh their options carefully. After all, this is a business investment that should empower your business today and long into the future.
How to Choose an Outsourcing Destination
Of course, not all countries are equally suited for every industry or function, so considering the right factors can help ensure a successful outsourcing strategy.
Here are the 5 most important things to evaluate when choosing a country to outsource jobs to:
- Check for cost-effectiveness. Labor savings remain the biggest driver, of course, but companies should balance affordability with quality of output. See which companies (and from which countries) will give you the best ROI for outsourcing.
- Choose according to talent pool and expertise. The availability of skilled professionals in industries like IT, customer service, financial services, or creative functions is critical.
- Review the country’s infrastructure and technology. Do they have the systems in place to support your business? Reliable internet, modern facilities, and strong digital adoption are essential for seamless operations.
- Cultural and language alignment matters, too. Countries with strong cultural compatibility and high English proficiency are often easier to integrate with global teams, both in terms of technical expertise and culture.
- The 5th one is a bonus benefit of offshoring: learn about the time zone advantage. Overlapping working hours or round-the-clock support from time zone differences can speed up turnaround times.
By weighing these considerations, developed economies can make informed decisions about where to build long-term outsourcing partnerships.
Build the Best Offshore Team in the Philippines
Building an offshore team in the Philippines can be a game-changer for your business, as you increase your operational efficiency at a fraction of the cost. The Philippines is a top destination for outsourcing and good reason. With its strong English proficiency, highly educated workforce, and culturally aligned work ethic, the Philippines is the perfect place to build your offshore team.
At KDCI, we have years of experience helping businesses like yours build the best offshore teams in the Philippines. We provide a broad range of outsourcing services from creative design to marketing, ecommerce, customer support, and finance. Our proven approach to sourcing, selecting, and managing top talent ensures that your team will be made up of the best people for the job. With our 100% quality assurance and effective oversight management, you'll have peace of mind knowing that your offshore team is working effectively, efficiently, and aligned with your business goals.
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