So, you’re thinking about offshoring your talent or outsourcing work.
You’ve read all the books and articles about how it can save your business money. You’re know you can get a great deal on overseas customer service reps, virtual assistants or developers. After all, labor costs in certain countries are mind-bogglingly low. It seems like a no-brainer.
But before you do, you should know the truth:
Offshoring isn’t as cheap as you might think.
The problem is, when people look at labor costs, they only look at the per-hour rate they’re paying. They don’t take into consideration all of the other expenses surrounding an overseas hire. This is a mistake we see time and again in our consulting business, and it can be solved by knowing just one simple number:
Total Cost of Ownership.
TCO is an estimate you put together that includes all of the direct and indirect costs associated with a product or system. Your TCO is a vital component of any business decision, yet most people don’t know how to come up with this number.
That’s okay! We’ll show you how to determine if the TCO of offshore labor is really going to save you money, or if it’s actually going to cost you more in the long run.
First, let’s use an example. Say you’re going to buy a used car. As you’re weighing the pros and cons of a $6,000 used car versus a $15,000 used car, the cheapskate in you rears its ugly head.
“$6,000 is the deal of a lifetime!” your inner cheapskate says. “The other car is more than twice that. You don’t want to put down all that money. Go for the cheap one and save yourself a buck!”
The problem is that your inner cheapskate only weighs the initial amount of cash you have to lay out for the transaction. Your inner cheapskate doesn’t think about the future. Or the fact that there will be a lot of costs associated with the $6,000 car over time. Things like:
- Old tires that will have to be replaced within six months
- The transmission that’s about to start leaking and will have to be replaced within the next year
- Bad gas mileage that will require extra trips to the gas station for the life of the car
- The fact that the car doesn’t have much more than 5-6 years left in it, tops, and you’ll have to buy another car before you know it
It’s things like these that make up the Total Cost of Ownership. And it’s things like these that make something more expensive over the long run than you might think at the outset.
So, let’s figure out the TCO for offshoring your labor.
Let’s say you’re hiring a virtual assistant in the Philippines. How much do you pay them? Let’s say it’s $3/hour. So, if they work full-time for a week, that’s $120. Over a month, it’s about $500.
Compare that to a virtual assistant you might hire in the US, where you offer to pay $11/hour. A week of work is $440. A month is almost $2,000.
$2,000 vs. $500. If you go offshore, you’re cutting your labor costs by 75%. You’re saving a huge pile of money, right?
Because these calculations don’t tell the full story.
What you don’t realize is that your offshore VA is going to need a lot more upkeep than you expect. With the amount you’re paying, they’re only there to do exactly what you tell them. You can’t expect any initiative or personal investment with rates that low.
And that means YOU will have to spend extra time managing and hand-holding.
That might not seem like a big deal, but it increases your TCO dramatically. Let’s say you value your time at $100/hour. And let’s say you have to spend an extra hour per week supervising your VA. That’s an additional $100/week – or $400/month – that you’re spending.
Now, the TCO for your offshore VA has increased from about $500/month to $900/month. Over a year, you’ll spend $4,800 of your own time IN ADDITION to the approximately $6,000 you’re giving your VA.
That brings your TCO up to $10,800 for the year.
That is, if your VA even lasts the entire year. Offshore talent has a high turnover rate, and if you’re paying bottom-of-the-barrel rates, who can blame them? They may move on to something else, something that’s better paying or that they find more interesting. There’s not a strong sense of loyalty or commitment.
Which means you might find yourself spending additional time searching for, hiring and training a brand new VA. Let’s say you have to onboard a new VA once a year, and it takes 12 hours of your time. That’s another $1,200 to add to your TCO, bringing it up to $12,000.
At this point, the TCO for your overseas VA is about $12,000 a year, versus a US-based VA for around $24,000 a year.
The savings, while significant, don’t seem so big anymore, do they?
Pat Flynn of Smart Passive Income used to have two fantastic assistants in the Philippines, but when their projects came to an end, he decided to find new team members closer to home. Here’s what happened:
“My Filipino VAs were amazing, please don’t get me wrong, but they only did what I asked them to do and nothing more. It was my job to come up with the ideas and give direction, and it was theirs to get their assignments and do them well. The cool thing is that their tasks were usually done by the time I woke up in the morning due to the time zone differences. They made a big difference in my overall output.
Not once, however, did either of them make suggestions for improvement of the brand or business in whole. Even within their specific tasks, they hardly ever commented on whether something could have been done differently or better. They just did what they were asked to do very well. It’s not in their culture to give suggestions back to those who are giving the orders, especially when the ones giving the orders are the ones who pay their salary.
With my current team, new suggestions and improvements are talked about daily. They often make improvements on their own and make things better without me having to ask, and I love that. They each feel like they have a part in the brand and can have an effect on the future of the business, and that to me is something worth paying for if you have the resources to invest in that.”
(You can scroll about halfway down this page to read the rest.)
Taking Pat’s story into consideration, imagine this scenario:
Imagine you paid your VA a whopping $20/hour. Why? Because you want someone proactive, someone skilled, someone motivated. Someone who can do their job in half the time, and spend the rest of their day looking for ways to save you even more time and money.
It’s the exact opposite of how most people approach hiring, but it works. It pays for itself and saves you money in the long run. It’s a double whammy, actually. You’ll save time on managing your talent, and they’ll save you time by being efficient and coming up with better ways of doing business.
As an entrepreneur, time is the most precious and non-scalable commodity you’ve got. Why not hire someone who can find you more time?
This isn’t to say you shouldn’t offshore if that’s the right decision for you. But it takes a special kind of person to do it cost-effectively. Only a small percentage of people have those specific skills – people like Chris Ducker. If you’re still considering an overseas team, check out his book and podcasts and learn from the master!
At the end of the day, we want to make sure you’re investing in your success. Don’t make your hiring decisions based on what seems cheap. Look at the big picture. Look at the Total Cost of Ownership. Tell yourself every day – my time is my most precious commodity. Is my team costing me time, or saving me time?
This is just another example of what we talk about all the time here on the SegMetrics blog: using every tool in your toolbox to help you be efficient and make more money. That’s why we tell our consulting clients (and our blog readers!) to tier your pricing. Create premium products. Do a VIP Mastermind launch. Do whatever it takes to help your operation run as smoothly as possible.
Now we can add to that list: Hire the BEST talent you can, to give you the AMAZING results you deserve.