Outsourcing fee structures - what you need to know

When considering your options for offshoring, you may have noticed many providers boast a “low, all-inclusive price”. It’s an hourly rate per employee that packages staff wages with operational costs such as IT, recruitment and office expenses.

At first glance, an all-inclusive price may seem like an easy way to budget for your offshore team costs and lock in resourcing cost-saving. But before you choose a provider, it’s important to understand how different offshoring vendors price and package their services, so you can compare them side by side. To do so, you need to understand what types of offshore models exist. Because with offshoring - like with any other business investment, you get what you pay for.

In this blog, we will take you through the different types of offshore models, how fee structures work, what you can expect to pay and what you can expect to save by investing in offshore solutions.

What is offshoring?

Offshoring is a type of outsourcing where you create an extension of your business or team in another country. Outsourcing is when organizations engage a third-party provider to manage services and tasks traditionally performed in-house by the organization's employees.

Both terms can be used interchangeably only when you are engaging a provider overseas. An outsourcing provider could be just done the road from you, while an offshoring provider will hire employees for you in another country such as the Philippines.

With offshoring, different capabilities and characteristics make up the various offshoring models. Determining which model suits your business is key in understanding what offshoring provider you may decide to partner with.

There are a multitude of different offshore models to choose from, but in this blog, we will address four of the more popular options. While all four models involve setting up a division or sending tasks outside of your company to a third-party entity, the differences between each one are quite distinct. Understanding these characteristics will help you in choosing the right one for your business or making the informed decision not to offshore at all.

Types of outsourcing models

Project-based outsourcing

Project-based outsourcing is where you pay an offshore freelancer to complete a project for your business. The key characteristic of this model is that your freelancer is often not full-time and won’t be 100% dedicated to your business. While they complete your projects according to your deadline, they may also do work for other businesses at the same time.

Examples of this type of model in action include hiring a designer on contracting platforms such as Upwork or Fiverr, engaging a web designer in, say Russia to create a new microsite or paying a copywriter in India to write 10 blog posts for SEO purposes.

The pros of project-based outsourcing include:

• It is often very cheap - great for startups
• It’s an ‘on-demand’ relationship that you can turn on or off
• It’s often quick and easy to find and hire people.

The cons of project-based outsourcing include:

• You can’t control when, where and how the work gets done
• Your offshore freelancer usually won’t have local knowledge, and there may be some cultural or language barriers
• You’ll often need to source different freelancers for the same type of work because your previous contact is unavailable
• If you want to change anything or work beyond the project's initial scope, it’ll take longer and cost more.

This model is best suited for:

• One-off projects that require specialist knowledge or skills
• Startups and micro-businesses with very limited budgets
• Businesses that are willing to accept more risk or project delays to save money
• Businesses that don’t want or need full-time dedicated team members.

Traditional outsourcing

Traditional outsourcing, also known as Business Process Outsourcing (BPO), is where you pay an overseas company to handle absolutely everything related to your offshore operation. The key characteristics of this model is that they recruit and manage your employees, handle all facilities and infrastructure, and manage business processes, productivity and quality of work. You’re essentially handing over the keys and asking your BPO to drive the whole thing.

Examples of this type of model include asking a BPO to provide an end-to-end call center service, including staff, facilities and all business processes.

The pros of traditional outsourcing include:

• You don’t spend any time recruiting or managing staff
• It’s usually faster to get up and running than other offshoring models
• No local knowledge is required.

The cons of traditional outsourcing include:

• You have no control over your business processes
• Quality often suffers, as you have almost no input into how your offshore staff does their job
• It can be more expensive than other offshoring options
• It’s not really cost-effective unless you have quite a few staff
• There is little operational integration with your onshore team which can lead to an ‘us and them’ culture.

This model is best suited for:

• Businesses that need a very fast turnaround
• Businesses that are more interested in minimizing their own workload than maximizing quality
• Short- to medium-term offshoring engagements
• Highly transactional tasks with little to no direct contact with your customers.

Offshore company incorporation

Offshore company incorporation is where you set up an overseas division of your company, and you handle everything yourself, including facilities, IT, labor laws, recruitment, HR and payroll, as well as day-to-day quality and productivity.

The characteristic of this model is that you're responsible for every element of running your offshore business. Just as you are with your onshore team. You create your own incorporated company in another country which involves paying tax in that country, finding an office, setting up infrastructure, researching and abiding by local labor laws and recruiting qualified staff for each position.

An example of this model might include opening an office in India and hiring team members to handle your customer service.

The pros of offshore company incorporation include:

• You’re 100% in control of your hires, the exact office location and resources
• You’re in charge of the entire process from the beginning
• On paper, it can appear cheaper than managed services offshoring.

The cons of offshore company incorporation include:

• It takes longer to set up than other offshore models
• It requires more upfront investment in infrastructure
• It is a lot more hands-on, which is distracting and takes the focus off the core business
• There are more hidden costs
• It can be hard to scale.

This model is best suited for:

• Businesses that have a genuine understanding of the culture or country they are offshoring in and are committed to long-term operations offshore so they can recoup their investment
• Larger businesses with a lot of time, money and resources to invest in setting up their offshore team.

Managed services offshoring

Managed services offshoring is when you form a partnership with an offshore provider in the offshore location to set up an overseas division of your company and get them to handle facilities, IT recruitment and HR, while you handle quality and productivity. This is the offshore model that MicroSourcing uses.

The key characteristic of this model is that you retain full control of your business processes and fully integrate your offshore team into your business. You get an experienced partner on the ground to handle basically everything your offshore team needs and all you supply is the systems and processes to ensure high-quality work and productivity. It's up to you how you manage your offshore team.

Examples of this model include engaging a third party partner to employ a dedicated, full-time customer service team in the Philippines or having all tech support calls and queries sent through to an offshore help desk or service desk of specialists who are solely responsible for helping your clients or onshore team. Another example could be employing loan processors and broker support officers to help financial industry professionals benefit from a more effective use of both their capital and their time. Or perhaps engaging an offshore provider to source digital marketing specialists to optimize online marketing and advertising campaigns.

The pros of managed services offshoring include:

• Costs are transparent
• You don’t need to be on the ground yourself to set up or manage your offshore team, it can all happen remotely
• Your partner will have the on-the-ground knowledge, connections and experience
• You get a dedicated team who works exclusively for your business
• You’re in control of your team’s tasks and processes
• It’s easy to scale up and down, and test the waters.

The cons of managed services offshoring include:

• It can take around six weeks from hiring to having a team ready to go, so it’s not instant
• Your team members usually won’t have knowledge of your home country, and there may be some cultural or language barriers but you’ll have the operations provider’s support in managing this.

This model is best suited for:

• Businesses that want a dedicated offshore team without spending months or even years setting up the infrastructure themselves
• Businesses that are proficient in creating efficient systems and processes to help save time and money
• Businesses that are keen to scale and grow, fast
• Businesses that want full-time positions filled and ongoing help with specific roles.

What is the total cost of outsourcing?

Depending on the type of offshore model you decide to invest in will determine the fees associated with offshoring. Say for example, you decide to pursue traditional outsourcing, the investment fee itself will be significantly larger than if you were to engage in project-based outsourcing.

The main point to note when considering fees associated with offshoring is fee transparency. Regardless of the type of offshoring you engage in, if you are partnering with a third party, a good offshoring provider will give you a proposal with a full breakdown of service fees and employee wages, so you know exactly what to expect.

Let’s consider a popular fee structure or one you may happen across in your offshore journey: all-inclusive pricing. The issue with paying an all-inclusive price, despite it sounding attractive as it’s a fixed fee, is that you don't want your offshoring partner to be incentivized to find the cheapest staff available in the market. What can happen is that the hiring manager appoints poorly skilled people, simply because they fit into a certain price bracket. This can lead to poor job performance for your team and frustration for you over the offshoring process.

Not surprisingly, a fixed price becomes even more challenging when employees warrant an annual wage increase as a result of high-performance and so on. With an all-inclusive price, there’s no room for it in the fee. This can demotivate your offshore employees and lead to quality issues down the line such as poor productivity or output. Consequently, these employees could be tempted to look elsewhere and you’ve suddenly lost all the time you’ve invested in training a member of your team, starting from scratch again.

It’s important to note that the best candidate for the job might cost more than the others because they have a higher level of expertise. Think about hiring an onshore employee; the same would apply and in most cases, that small additional cost works out to be excellent value for your organization in the long run. So it’s important you ask for, and get, a transparent breakdown of salary costs, separate from service fees. This makes it easy to assess the business case for hiring each candidate, alongside their different salary expectations.

An example offshore fee structure that illustrates transparency is the one MicroSourcing adheres to. A managed operations model like the one that’s used at MicroSourcing has fees that include everything you need to make your offshore investment a huge success: desk space, furniture, computer, IT infrastructure, management, recruitment and HR. Employee prices are transparent so you know you’re getting the best value for your offshore investment.

How to calculate outsourcing cost?

This is completely dependent on whether you are hiring one offshore team member or a team of offshore employees. The next layer is what skill level you require and whether their field of expertise is easy to hire or requires additional investment to attract and sustain quality talent.

Let’s give you an example of a cost breakdown. Say you want to hire an offshore customer service representative for your call center team in the Philippines. A cost breakdown could look like the below, noting these are just examples and a general indication of costs:

• Recruitment fee and annual seat fee: highly dependent on outsourcing provider
• Salary:
  • Junior customer service representative: ₱301,522 or U.S. $5,771 p.a
  • Senior customer service representative: ₱344,792 or U.S.$7,677 p.a

These costs are very baseline and also represent the base salaries of hiring a customer service representative in the Philippines. It’s important to discuss costs and ensure your offshore provider is fully transparent to understand any additional costs that may not be directly related to the recruitment and management of your offshore team.

To begin with, you want to be sure that your employees are getting paid a fair local wage for their work. Then you might be advised by your offshore partner to increase the basic wage to attract the best talent the offshore market has to offer. If a candidate is considering two job offers at the same time, offering a generous base salary can help attract the candidate to your business. This will be worth it in the long term paying a generous wage that makes your team feel valued and rewarded, which makes them enjoy working for you.

In some countries, like the Philippines, bonuses are a key motivator for employees. Productivity bonuses are a popular incentive for staff to work efficiently and achieve their KPIs. Another common bonus incentive is based on company performance. When the company achieves its overall targets, all staff in the offshore team share in the performance bonus. Moreover, shared bonuses foster teamwork, which makes your offshore team stronger.

You might consider offering a loyalty bonus as an incentive for your team to stay long-term. In fact, some companies choose to pay their staff a bonus of one month’s salary each year, after the staff member has been with the same company for three years. This is known as the “14th-month” bonus.

As it turns out, a one-month bonus is cheap if it keeps employees with the company for another year, because then you don’t have to pay, again, for the entire recruitment process, including advertising, interviewing and training a new staff member. The point is, having control over how your team gets paid opens up all these options to get the best value from your offshore investment.

How does outsourcing reduce costs?

In the two decades from 2000, the value of the global outsourcing market has more than doubled to an incredible $92.5 billion and that growth is continuing as more and more organizations realize the benefits of partnering with quality offshore providers. That is especially so for organizations looking to reduce expenses, with outsourcing delivering cost savings in multiple ways.

In this blog, “How much can your business really save by offshoring?”, we touch on the five ways outsourcing saves money, where those savings can be directed and the five benefits of offshoring.