Why Businesses Double Down On Outsourcing to Protect Margins In a Tight Economy

In a time when growth alone isn’t enough for many investors, more and more businesses are looking for tactics to reduce costs and protect their margins. A variety of factors have resulted in a tighter economy across industries, with tariff-related inflation in particular looming large for many business owners.

Efforts to manage costs and maintain profitability are an important factor as would-be investors consider the underlying value fundamentals of a company. Businesses that are proactively engaging in strategies to counteract inflationary concerns will be better poised to deliver lasting returns.

Outsourcing is chief among the strategies being used to protect margins. While the practice may not have always had positive connotations in the past, the modern landscape of outsourcing presents a vastly different picture.

Outsourcing Reduces Overhead and Other Key Expenses

One of the most immediately apparent ways that outsourcing protects margins is in its capacity to reduce overhead immensely. During the 2008 recession, IBM was one of many companies that leveraged outsourcing for a variety of activities, such as data center management and technical support. Outsourcing to areas with lower labor costs proved critical for the company to maintain its margins during that time.

Indeed, a study by ISG found that business process outsourcing typically delivers an average 15% savings over keeping similar operations in-house, though savings can be significantly higher in certain areas.

Outsourcing doesn’t just reduce expenses when it relies on workers from areas with lower labor costs. Businesses can save by outsourcing activities to firms that charge set monthly rates or by working with contractors, who don’t receive healthcare or other benefits. For most businesses, the monthly service rate of an outsourcing partner will be far less than hiring a comparable number of employees in-house.

In addition to savings on salary and benefits, companies can also reduce overhead expenses on office space and technology, and even reduce their recruitment costs.

Outsourcing Delivers Flexibility and Scalability

In addition to the direct financial savings of outsourcing, many businesses double down on this strategy because it gives them added flexibility for navigating periods of uncertainty.

As Han Butler, president and co-founder of ROI CX Solutions explains, “When you outsource a particular activity, many outsourcing partners have the ability to adjust the level of service you receive based on your needs at that time. This allows businesses to turn something like contact center operations into a variable cost that can be adjusted for seasonal demand, economic downturns, and so on. This doesn’t just apply to times when they need to cut back — it also makes it easier to scale when demand ramps up. The process is much simpler and more efficient than hiring and laying off employees.”

That flexibility gives businesses a high level of agility so they can respond in a timely manner to market changes, taking quick advantage of opportunities for growth and scaling back when margins are tight.

Outsourcing Helps Reduce Risk

As an analysis of data from the U.S. Bureau of Labor Statistics reveals, 65.3% of businesses fail within their first ten years. Narrow profit margins are certainly a factor in the high level of risk, with cash flow problems being cited as the top reason why businesses fail. Outsourcing helps mitigate financial risks to a business, but it can also address other risk factors that could disrupt a business’s operations in a way that hampers profitability and potential returns to investors.

One of the most common reasons organizations rely on outsourcing is to entrust regulatory and legal-related activities to experts. Businesses in industries related to healthcare and finances, in particular, can face significant penalties, sanctions, and audits if they run afoul of associated regulations. These regulations can be wide-reaching, even affecting areas like customer service.

By outsourcing to partners with compliance expertise, businesses can drastically reduce their own risk and potential liability. For many of these businesses, outsourcing represents a source of stability and reassurance against regulatory issues that could damage profit margins.

Outsourcing Can Improve Internal Efficiency

Finally, when outsourcing is done right, it allows businesses to improve their operational efficiency. The businesses that are most successful at outsourcing don’t simply go for the cheapest possible option. While cost savings are certainly a factor, the most successful organizations use outsourcing to gain access to expertise that isn’t available inside their company.

This ensures that these non-core tasks can be performed at a higher level of efficiency than what the internal team would be able to achieve on its own. At the same time, it also frees the organization from the administrative burdens associated with these activities.

Instead, leaders can focus on higher-level strategic initiatives and core activities that will drive profits and growth. This also reduces the risk of burnout among internal teams, which could otherwise limit productivity and potential investment returns.

There are many different pieces to fit together when structuring an investment fund, but investors should always consider the underlying fundamentals of the businesses they plan to invest in. By examining steps that companies are taking to protect their margins, such as outsourcing, investors can have greater confidence in the long-term viability of the businesses in their portfolio.