For those reading this post, outsourcing is probably something of interest. We get that. Businesses all over the world lean towards outsourcing for a variety of different reasons. That can be cutting costs and reaching a broader market, implementing new strategies, or even something entirely different. Outsourcing can be beneficial due to legal, economic, or social differences between countries, regions, or even continents.
Nevertheless, not everyone makes it work. But why? Maybe it is because the complete knowledge of successful outsourcing cannot be put into one sentence. Success is not easy in this market. It is a broad topic that requires a deeper dive into it. Let us do that and share some knowledge to you about the most significant challenges of successful outsourcing, and share a few pointers to get you going in the right direction.
It isn’t without its challenges
If you were to jump headfirst into an outsourcing venture, chances are, your expenses would increase, but you would not gain any monetary or actual benefit nor decrease expenditures. We hear about businesses amassing multi-figure losses due to unprofessional and hot-headed decisions to immerse themselves into outsourcing. Even though it has significant upside, merely making it work out without preparation or backing is hardly possible.
Main obstacle – finding the right location
The primary challenge, most of the time, hovers around the location. Sometimes businesses choose to outsource locally, like finding a cheaper office across town. However, the truly efficient and economical solutions are almost 100% international, sometimes even intercontinental. If a particular market offers cut-rate labor, without having to compromise too much or at all in terms of service or product quality, then it is a green light to go. Despite these facts, some business owners are slow even to believe that cheaper, outsourced labor is any good.
Well, we are here to change those beliefs. Executing an outsourcing employment plan by merely knowing the least expensive country is not yet worth it. Besides the lower cost of employing people, tax-free exemptions, there are more factors to consider before choosing the location to outsource.
Baltic Assist narrows it down to these factors to determine the best location for outsourcing:
- Lenient or flexible legal and political conditions for employment and business
- Low taxes for the employer
- Lower cost of labor
- Cultural or business practice similarities
Anything else of varying significance will likely fall under one of these categories. Let us dive a bit deeper and give examples.
Political stability + little legal barriers
Geopolitics is important. Investing in international markets that have no political stability always boasts a high risk. It is why a smaller EU country like Belgium, with 11.4 million people, attracts a lot more outside investment than 46 million Ukraine. Business loves political stability. Also, local labor law is also of major significance. It plays a significant role in the final decision. For example, hiring someone in Russia for a foreign entity is much more complicated than doing so in the EU. That is just the way things are. Thus much more US-based or Europe-based business subsidiaries spawn across the EU rather than moving to a large market like Russia. So, sensible decision-makers should consider an alternative to Russia.
So, let’s say you narrowed it down to two locations: Lithuania and the previously mentioned Ukraine. Let’s also presume that on paper, both countries have equally competent candidates. According to WorldData, Ukraine has a much lower average yearly wage so the scale should likely weigh in its favor, right? However, you will probably opt for Lithuania, because of:
- The more stable geopolitical situation,
- EU-regulated and overlooked legal system
Seeking out the perfect location with small corporate taxes
Next up – figuring out how much tax you have to pay. The scouting of corporate taxes goes hand-in-hand with the previous step. A large chunk of businesses seeks lower taxes. The tax-burden in some domestic markets is a real problem for employers. Which is no surprise when you consider that corporate tax is a significant piece in determining the next best spot for outsourcing. By knowing the taxation system, you can select one out of two approaches:
- The first option, open your subsidiary in the respective country. You will operate as an organization in the country and pay all taxes. Below we compare corporate taxes which were applied to businesses in the listed countries by the end of 2018. Used was KPMG’s Corporate tax table.
The chart above displays the percentage of the corporate tax (counted from annual income) around the world. According to this info, you would be best off establishing a subsidiary in Hungary or Lithuania, where the corporate tax rates are 9 and 15% respectively. The United Arab Emirates and its 55% corporate tax would be the least cost-efficient solution. The global average of 23.79 % used for scale.
- The second option, find freelancing individuals and embrace contract-based employment or use the services of virtual agencies. While hiring a freelancer can bring mixed results, virtual agencies are a definite home run. Little or none legal issues, proven specialists, real-time problem-solving. This option is worth looking at.
Out of this data and facts, we can assume that outsourcing to a place with higher corporate tax (like from Denmark to the UAE) to cut costs is inefficient. It would be best if you found a place with lower corporate tax rates than your current domestic market. A country like Lithuania or Hungary for such an endeavor is usually much better.
Determining where to find more affordable employees
When we talk about business expenditures, nothing is more costly than employees. People are the most valuable and most demanding resource. Without proper and skilled specialists, even the best brands and organizations would grind into a halt. Everyone values talent and businesses spare no expense to hire the best and brightest.
It is widely speculated that a ‘good’ and skilled employee is more expensive to employ than one of lower competence, which is not true at all. Even though in a domestic and enclosed market, this fact might have some truth, on a global scale, with regards to outsourcing, such speculations crumble to dust.
An example: the average monthly salary in Israel, at the end of 2017 was around 2,575 Euros per month. In Denmark, it stood at 5,485 Euros (both figures are before taxes), so more than 2x higher. Thus, the numbers implicate that Danish workers are more skilled than Israelis, subsequently costing more for businesses to employ, right? Wrong. Such conclusions, according to the World Atlas, are opposite from the truth. Israel has the world’s fourth most competent labor force while Denmark does not even crack top 10.
Nevertheless, looking at things from an objective standpoint, employing the best person for the job is a bit more complicated than just saying expensive=better or cheaper=better. For example, stats say that Finns have the world’s most successful school system; thus, teachers are likely to be valued higher and be more competent than specialists from a country with weaker school systems.
However, this does not mean that for example, a laser technologist from Finland would also be better than one from Lithuania. On the contrary, even though Lithuanians are no match for Finns in school education, they are much more qualified in the field of laser technology. Businesses tend to select the destination for outsourcing based primarily on the cost.
To make the most out of it, you have to align the final cost of employment with the skills of the specialist and his or her qualifications. Only then a proper decision can be made.
Businesses tend to select the destination for outsourcing based primarily on the cost. Since most outsourced jobs are of general qualification, narrowing down the best possible destinations is not tricky. For example, in Europe, these locations are primarily the Baltic States, Poland, and Eastern Europe (Romania, Bulgaria). Are you interested in numbers? Here is a chart for the average monthly salary (in Euros) around the EU.
The chart gives businesses looking for outsourcing opportunities a clear picture of where to outsource to cut costs the most. For example, the average salary in Bulgaria is almost eight times lower than that of Denmark.
Go global or stay regional?
If you are, for example, from Scandinavia and seek to cut employment costs, you might wonder ‘Why not outsource in Far East Asia, like Indonesia, Vietnam or Thailand?’. It is a possibility which lots of American, Canadian, Scandinavian and European businesses contemplate. Average wages there are even smaller than the lowest average in the EU. So, if you think about saving, why not go all the way, right?
Well yes and no. We do not think that outsourcing is all about just cutting costs. There has to be a silver lining. Outsourcing carelessly could result in losing the flow of information within the organization or creation of a bottleneck. Even though saving more money sounds tempting, for the Scandinavian business, the best long-term solution for your business is not outsourcing so far away.
Ways to make outsourcing work + how to make the most out of your outsourced employees
Finding a virtual agency
If you are looking for access to innovation, accelerated task completion, or finding affordable specialists with core competencies and skills – a virtual agency is your best and safest bet. Local players have a better grip on the local market. They also have a broader network of specialists, possibly in your field of need, too.
When choosing the services of an agency, you can save weeks or even months. An agency can connect businesses with talent quickly. Besides, you can be hands-on with the selection process, make sure that the candidate has the required competencies and can bring value to your organization.
Testing the water first
In business, the saying “It’s better to be careful rather than sorry” applies perfectly. Outsourcing could be beneficial for you, or it could not. Maybe you miscalculated or chose the wrong person for the task? If your error is in small scale, you have breathing room to fix and repair the issue with little loss. However, if you decided to max out the entire outsourcing capacities on a single venture, your errors could create a considerable resonance.
We recommend trying out with a handful or single outsourced employees at first. That is if you do not have an exact business plan for outsourced virtual assistant services yet.
Select a niche for outsourcing
Outsourcing is not for every profession. Apart from physical manufacturing, the most prominent jobs in the outsourcing area are related to virtual or computer/digital services. It is why remote employees are becoming synonymous with virtual assistants. Out of the many services offered, some are a lot more popular than others.
The pie chart shows the six most popular positions for virtual assistants.
- Leading with 27 out of 100 is customer support. Due to fast-paced globalization and English language becoming the primary method of international communication, employing English-speaking people in less labor-costly countries has become an employer favorite
- Next up – accounting with 20 out of 100. Being a good accountant requires experience, meticulousness, attention to detail, and analytical capabilities. These requirements are similar and equally valued for accountants all over the world. Thus hiring from country A or country B makes only a small difference in quality.
- In the third position, we find Web Design. Along with Graphic design, they take up 14 and 11 out of 100 respectively. These are very trendy positions. Outsourcing opportunities are plentiful due to their relative high-cost and a shortage of these specialists. There is a constant lack of graphic and web designers because the supply cannot keep up with demand. Besides, skilled and experienced graphic and web designers earn a lot more than the average salary, so an organization saves if it decides to outsource.
- Programming, with 8 out of 100 also falls into the same position of outsourcing for cheaper, equally qualified labor
- Data entry is very similar all over the globe; thus, one in every ten outsourced virtual jobs is in this category.
Nearshoring and avoiding too many cultural differences
The first obstacle of far-away offshoring presents itself in the shape of time-zone differences. Most businesses solve problems, carry out tasks, and deal with clients during the working hours of the day. You create a significant inconvenience for your organization and your clients if a part of the office works only during the night. If you choose to employ virtual assistants during your day and their night – costs are going to skyrocket, so it is better to nearshore, even at slightly lower cost reduction.
If you progress forward with the idea, consider the linguistic, cultural, and customs barriers. You have very business-first oriented people in most of the Western World, with national and traditional holidays being standard in most countries. However, there are very different countries and people. For example, in Muslim-majority countries, people have to follow their customs and pray at certain times, disregarding their current activity because religion is a very high priority. Plus, it can be challenging to employ female workers.
Some Spanish-speaking South and Central American nations do still take mid-day breaks, known as the Siesta. Other countries turn a blind eye to being late; others tune out anything about dress-code or tidiness in the working space. The world is very diverse and different, but not all locations might suit your company culture well.
Try to find a market with as much similarity to your home market. The EU has little difference with the United States, EEE member states (Switzerland, Norway, Iceland, and others), Canada. Due to these similarities, business practices are in the majority, the same. Besides, almost everyone speaks English, so communication is always efficient and coherent.
Diving more in-depth into nearshoring, you will find that nearby abroad markets could best suit your specific needs. For example, Swedish businesses have more chances to find Swedish speaking UX designers in close-proximity, like Estonia, Lithuania or Latvia rather than in Romania, Bulgaria, or Far East nations, like Vietnam.
We want to point out, that before choosing to outsource, priorities have to be set. It is very important to understand and know what are you trying to get from outsourced services. Your preferences can range from reducing costs, building a foundation for an outsourced office of the future to plans of expansion.
If you have your priorities covered, finding the right employee is not going to be difficult. You will be able to not only find the right personnel but also create more added value to your business.
We in Baltic Assist has experience realizing the visions and goals of many clients. We know what it takes to succeed and reach maximum efficiency from outsourcing. We also, advice, whether your business model would work or not for outsourcing.
Contact us and we will discuss your outsourcing opportunities.