The Economics of Outsourcing: Save More with Strategic Customer Service Outsourcing  

June 20, 2023
ai in contact centers



In today’s fast-paced business landscape, companies are constantly seeking ways to optimize their operations and drive cost savings. One approach that has gained significant importance is outsourcing customer service. In 2022, the value of the global BPO market size is $329.9 billion, which is predicted to grow rapidly at a CAGR (compound annual growth rate) of 2.8% between 2023 and 2026.

By entrusting their customer support functions to external service providers, businesses can focus on their core competencies while reaping the benefits of cost savings. In this blog, we will delve into the economics of outsourced customer service cost and explore how it translates to significant cost savings for organizations.

Outsourcing in Customer Service – A Brief

Outsourcing customer service refers to the practice of delegating specific customer support tasks or the entire customer service function to external service providers. These providers, often located in different regions or countries, specialize in handling customer inquiries, resolving issues, and providing support on behalf of the client company. This allows the client company to offload the operational aspects of customer service, enabling them to focus on strategic initiatives and core business functions. In addition, outsourcing customer service also reduces costs.

Outsourcing Customer Service and Cost Savings – The Common Connect

Cost savings play a pivotal role in the success and sustainability of any business. By reducing expenses and increasing profitability, companies can reinvest capital into growth opportunities, innovation, and enhancing the overall customer experience. The significance of outsourced customer service cost savings in business operations cannot be overstated, as it directly impacts on the bottom line and long-term financial health of an organization.

According to recent studies and statistics, the potential cost savings achieved through outsourcing customer service are substantial:

  • Labor cost differentials: Outsourcing customer service to countries with lower labor costs can lead to significant savings. For instance, a report by Deloitte found that companies can achieve cost savings ranging from 40% to 60% by outsourcing customer service to countries like India or the Philippines, where labor costs are comparatively lower.
  • Scalability and flexibility: Maintaining an in-house customer service team always can be costly, especially during periods of low demand. However, outsourcing provides the flexibility to scale up or down based on business needs. Research by the Everest Group indicates that outsourcing customer service operations allows companies to achieve 15% to 20% cost savings due to the ability to flexibly adjust the team size.
  • Access to specialized expertise: Outsourcing customer service to specialized service providers can result in cost savings through improved efficiency and quicker issue resolution. According to a study by McKinsey, companies that outsourced customer service achieved a 10% to 30% reduction in handling time and a 20% to 40% increase in first-call resolution rates, resulting in significant cost savings.
  • Technology and infrastructure advantages: Outsourced service providers often possess advanced technology platforms and infrastructure. By leveraging these resources, companies can avoid hefty investments in expensive customer service technologies and infrastructure. According to another survey, 59% of businesses outsource customer service to reduce costs.

Common Reasons to Outsource Customer Service Operations

    customer service cost savings
    • Cost reduction: Cost savings remain one of the primary motivations for companies to outsource customer service operations. By outsourcing to regions or countries with lower labor costs, companies can significantly reduce expenses associated with salaries, benefits, training, and infrastructure.
    • Focus on core competencies: Outsourcing customer service allows companies to concentrate on their core competencies and strategic initiatives. By delegating customer support functions to specialized service providers, organizations can redirect their internal resources and expertise towards activities that directly contribute to their competitive advantage and business growth.
    • Scalability and flexibility: The ability to scale operations up or down based on fluctuating demand is another advantage of outsourcing customer service. External service providers can quickly adjust their staffing levels to accommodate peak periods or seasonal fluctuations, ensuring optimal customer support without the need for companies to maintain a large in-house team throughout the year.
    • Access to specialized skills and expertise: Customer service outsourcing firms often possess industry-specific knowledge, advanced technology platforms, and trained personnel. This expertise can be beneficial for companies seeking to enhance their customer support capabilities without investing significant time and resources in recruiting, training, and retaining specialized talent.
    • Global reach and 24/7 support: Outsourcing customer service to providers located in different time zones enables companies to offer round-the-clock support to their customers. This extended availability can enhance customer satisfaction and loyalty, especially for businesses serving a global customer base.
    • Improved service quality and performance metrics: Outsourced customer service providers typically adhere to strict service level agreements (SLAs) and performance metrics. They invest in training, quality assurance, and continuous improvement initiatives to ensure high standards of customer support. This focus on quality can result in improved customer satisfaction scores, reduced customer churn, and increased brand reputation.

    The Cost Factors in Customer Service

    Unveiling the key cost drivers in customer service

    When analyzing the cost factors in customer service, several key drivers come into play. These factors influence the overall expenses associated with providing effective customer support.

    Here are some of the significant drivers that determine the average cost of customer service:

    • Labor costs: The largest cost component in customer service is often the workforce. Salaries, benefits, training, and other employee-related expenses contribute to labor costs. Skilled and experienced customer service representatives typically command higher salaries, which can impact on the overall budget. Whereas, with outsourced customer service, costs can be reduced while you get skilled professionals.
    • Infrastructure and technology: Outsourced customer service operations require robust infrastructure and technological resources. This includes hardware, software, telecommunications systems, customer relationship management (CRM) software, call center equipment, and other tools necessary for efficient service delivery. Investing in and maintaining such infrastructure can be expensive, especially as technology rapidly evolves. When you outsource customer service, costs reduce as the offshore team handles these aspects.
    • Training and development: Well-trained and knowledgeable customer service representatives are crucial for delivering high-quality support. Organizations must allocate funds for initial training programs and ongoing professional development to ensure that customer service teams are equipped with the necessary skills and product knowledge.
    • Management and supervision: Supervisors, managers, and team leaders play a vital role in overseeing and optimizing customer service operations. These roles incur costs associated with salaries, benefits, training, and performance management.
    • Quality assurance and monitoring: Monitoring and assessing customer interactions, conducting quality assurance checks, and implementing feedback mechanisms require dedicated resources. These activities help maintain service standards, identify areas for improvement, and ensure consistent customer satisfaction. The costs associated with quality assurance efforts should be considered in the overall customer service budget.

    Challenges of Managing In-House Costs

    So, how much does it cost to outsource customer service ? Managing the costs of customer service in-house presents several challenges for organizations:

    outsource customer service cost
    • High fixed costs: Maintaining an in-house customer service team requires significant fixed costs, including salaries, benefits, infrastructure, and technology investments. These costs are often inflexible and can be burdensome, especially during periods of low customer demand or economic downturns. With outsourced customer service, costs like these do not affect your business.
    • Scalability limitations: In-house customer service teams have limitations when it comes to scaling operations based on fluctuating demand. Hiring, training, and onboarding new employees can be time-consuming and expensive. As a result, organizations may struggle to quickly adjust their team size to handle peak periods or unexpected spikes in customer inquiries.
    • Skill and expertise gaps: Developing and maintaining a highly skilled customer support team requires continuous investment in training and development programs. Organizations must keep up with evolving customer expectations, industry trends, and product knowledge to ensure that their representatives can effectively address customer needs. However, bridging skill and expertise gaps can be challenging and costly, particularly for niche industries or complex products and services. When you outsource customer service, the costs of skilled agents are a part of the package. You get what you ask for.
    • Technological advancements: The rapid evolution of customer service technologies can strain in-house resources and budgets. Implementing and maintaining cutting-edge tools and software can be costly, especially for organizations that lack dedicated IT departments or expertise. Staying up to date with emerging technologies and integrating them seamlessly into existing systems can pose significant financial and operational challenges.
    • Opportunity cost: When companies allocate substantial resources to managing customer service in-house, it can divert attention and resources away from their core competencies and strategic initiatives. This opportunity cost may hinder growth and innovation in other areas of the business, ultimately impacting long-term competitiveness.

    To address these challenges, many organizations turn to outsourcing customer service as a cost-effective alternative. By partnering with external service providers, businesses can leverage specialized expertise, scalable operations, advanced technologies, and access to trained talent, all while reducing the burden of managing these costs in-house.


    How Outsourcing Can Drive Cost Savings

    A. Cost reduction through labor arbitrage

    One of the primary ways outsourcing customer service operations can drive cost savings is through labor arbitrage. Labor arbitrage refers to the practice of leveraging lower labor costs in outsourcing destinations compared to domestic labor costs. By outsourcing to countries or regions with lower wage rates, companies can significantly reduce their overall labor expenses.

    Exploring the benefits of leveraging lower labor costs in outsourcing destinations

    Outsourcing customer service to countries with lower labor costs offers several advantages:

    • Reduced wage expenses: Lower labor costs in outsourcing destinations allow companies to access a pool of skilled and competent professionals at a fraction of the cost compared to hiring locally. For instance, countries like India, the Philippines, and Mexico are popular destinations for customer service outsourcing due to their competitive wage rates.
    • Operational cost savings: Lower labor costs directly impact operational expenses. By outsourcing to countries with lower wage rates, companies can achieve significant savings in salaries, benefits, and training costs. This reduction in operational expenses contributes to overall cost savings.
    • Currency exchange rates: Currency exchange rates can further amplify the cost savings achieved through labor arbitrage. When the client company’s currency is stronger than that of the outsourcing destination, the savings in labor costs can be even more significant. This exchange rate advantage adds to the overall cost reduction obtained through outsourcing.

    B. Scalability and Flexibility

    Outsourcing customer service operations provides companies with the flexibility to scale their operations based on fluctuating customer demand. This scalability is crucial in ensuring that customer inquiries are handled efficiently during peak periods while avoiding unnecessary expenses during slower periods.

    Here’s how outsourcing enables scalable customer service operations:

    • On-demand staffing: Outsourcing partners can quickly adjust their staffing levels to match the fluctuating volume of customer inquiries. During peak periods, such as holiday seasons or product launches, the outsourcing provider can rapidly ramp up their team by hiring and training additional customer service representatives. This ensures that the company can handle increased call volumes or online inquiries without compromising on response times or service quality.
    • Flexible resource allocation: With outsourcing, companies can allocate their resources strategically based on their current needs. Instead of maintaining a large in-house team throughout the year, which can be costly, businesses can rely on outsourced providers to provide additional support when necessary. This flexibility allows companies to scale their customer service operations up or down as per demand, optimizing resource utilization and reducing unnecessary expenses.
    • 24/7 support: Outsourcing customer service to providers located in different time zones enables companies to offer round-the-clock support to their customers. This extended availability ensures that customer inquiries are promptly addressed regardless of the time of day. By providing 24/7 support, businesses can enhance customer satisfaction and loyalty, particularly when serving a global customer base across different time zones.

    C. Access to specialized expertise

    Outsourcing customer service to specialized providers offers significant cost savings by tapping into their expertise and industry-specific knowledge. Here’s how accessing specialized expertise can result in cost savings:

    • Reduced training costs: When outsourcing to providers with specialized knowledge, companies can benefit from the expertise of trained professionals who are already well-versed in customer service practices specific to the industry. This eliminates the need for extensive training programs and reduces associated training costs. The outsourced customer support team can quickly adapt to the company’s products, services, and customer support requirements, leading to faster onboarding and cost savings.
    • Enhanced service quality: Specialized customer service providers have in-depth knowledge of industry-specific practices, customer pain points, and best customer service practices for issue resolution. By leveraging their expertise, companies can deliver superior customer service, resulting in higher customer satisfaction, increased customer loyalty, and reduced costs associated with customer churn and acquisition.
    • Advanced technology and tools: Outsourcing partners often have access to state-of-the-art technologies, software, and customer support tools. Leveraging these advanced tools can improve efficiency, streamline processes, and optimize service delivery. By outsourcing to providers with specialized technology solutions, companies can avoid the capital expenditure of investing in their own technology infrastructure and ongoing maintenance costs.

    D. Technology and infrastructure advantages

    Customer support outsourcing can bring significant cost savings through the utilization of the outsourced provider’s infrastructure and technology resources. By leveraging the provider’s existing setup, companies can benefit in the following ways:

    • Reduced infrastructure costs: Outsourcing eliminates the need for capital expenditure on infrastructure like office space, computers etc. The outsourcing service provider already has the necessary infrastructure in place. This significantly reduces upfront infrastructure costs and ongoing maintenance expenses for the client company.
    • Access to advanced technology: Outsourcing providers often have access to cutting-edge technologies and specialized customer service software that may be costly for companies to acquire and maintain on their own. By leveraging the provider’s technology resources, businesses can take advantage of sophisticated customer relationship management (CRM) systems, call center software, ticketing systems, and analytics tools without the need for heavy investments.
    • Scalable technology solutions: Customer service demand can fluctuate, requiring businesses to quickly scale their technology infrastructure to handle increased call volumes or online inquiries. By outsourcing, companies can rely on the provider’s scalable technology solutions, ensuring that the infrastructure can adapt to changing needs.

    Ready to Partner with the Preferred Customer Service Outsourcing Company and Save Costs?

    When you opt for outsourced customer service, cost is not the only benefit in the long run. By reducing the overall costs and having focused business goals, you can maximize profit margin too. However, before achieving those countless benefits, you need a preferred customer service outsourcing partner. At ContactPoint 360, we take a personalized approach to deliver customized solutions to different industrial verticals and help them achieve their CX goals.

    As one of the best-outsourced customer support companies globally, we aim to deliver cost-effective solutions to our partners. Our solid experience and expertise in this industry combined with the use of advanced technology like AI, makes us a trusted name.

    Frequently Asked Questions

    How much does outsourcing customer service cost?

    Customer service outsourcing costs are determined by various factors. However, there is no such fixed amount. ISO (International Organization for Standardization) reveals that outsourcing helps businesses reduce their average costs by up to 15%. 

    How does customer service outsourcing reduce costs?

    By outsourcing services, businesses can reduce the costs of hiring expert employees for specific tasks, labor expenses, infrastructure costs, and maintenance expenses. 

    What is the key advantage of outsourcing?

    Outsourcing reduces labor costs drastically. It also reduces equipment costs as the outsourcing partner takes charge of all the processes. 

    Does outsourcing also increase efficiency?

    Many companies depend on outsourcing because it boosts productivity while reducing costs. Strategic outsourcing increases efficiency by hiring teams possessing the expertise to handle tasks.  

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