Outsourcing is Dead.
In the business world, as in dynasties, the fall of one leads to the rise of another. Antiquated outsourcing models no longer serve modern businesses, and the days of race-to-the-bottom labor arbitrage — and sacrificing service quality for cost savings — are over.
But what is taking its place?
What does Outsourcing 2.0 look like?
What Is Labor Arbitrage?
To understand where outsourcing is going, it’s crucial to understand where it’s been. For decades, outsourcing has been associated with labor arbitrage — searching different global markets to find cheaper labor, often at the expense of service quality, customer satisfaction, and employee experience.
Labor arbitrage results in a “race to the bottom” in which organizations select providers with the lowest possible labor costs, even when that means quality suffers.
When you say “outsourcing,” this is often what people think of: language barriers, quality control challenges, data privacy risks, high employee turnover, a lack of specialized skills, and maybe even exploitative labor practices, all in the name of cost savings.
But thanks to a few paradigm shifts, Outsourcing 2.0 will rise above those negative connotations, redefining the outsourcing industry. Let’s dive into why — and how — these shifts are taking place.
Cheap Labor
Won’t Cut it Anymore
While outsourcing has historically been associated with cost-cutting measures and declines in service quality, the industry is currently undergoing a transformation.
Today, organizations are still using outsourcing as a way to drive cost savings, but now service quality is also a high priority — and in some cases, a higher priority.
We recently partnered with CMSWire to conduct a comprehensive survey of nearly 500 business leaders whose organizations leverage outsourcing in some capacity. We found that 86% of respondents rated quality service as “critically important” when selecting a provider, compared to just 58% for cost savings (respondents could select more than one answer).
Fig. A
“Critically Important” Factors When Selecting an Outsourcing Provider”
Costs Savings
Service Quality
Cost savings and “butts in seats” alone are no longer enough. Organizations need to know that their outsourced processes — from customer success and content moderation to data processing and beyond — are handled with the care and attention they deserve.
The Evolution of Outsourcing
The best outsourcing providers understand that antiquated outsourcing models no longer serve modern business needs, and they’re adjusting their offerings accordingly. But what does this strategic outsourcing revolution look like in practice?
We believe that transformational outsourcing is evident through three primary mindsets:
Mindset
#1
“The RFP Process is Broken”
Beware of a race to the bottom — the lowest RFP price is not always a good thing.
Our State of Outsourcing survey found that 40% of organizations faced higher outsourcing costs than expected in the past year. Some organizations can likely attribute these higher costs to simply utilizing outsourced services more than expected, but for others, the root of the issue is discrepancies between costs cited in the RFP — or initial contract — and actual costs.
In some cases, vendors get clients in the door based on low prices, then claw back revenue with add-on services, hidden fees, and change orders, resulting in higher costs than expected. This means the lowest RFP price can actually result in more financial strain in the long run.
According to strategic business relationship expert Kate Vitasek, another counterproductive result of the RFP process is that it “often creates an inherent perverse incentive where the buyer gets what they asked for in the bid — not necessarily what they needed.”
While innovation benefits both buyer and service provider, in a transaction-based bidding process, neither is willing or able to invest. Rather than working collaboratively with their prospective buyers to find the best solution, vendors must operate within strict bid requirements that don’t benefit either party.
The traditional race-to-the-bottom RFP process also forces providers to cut costs wherever possible. No matter what stopgap measures they implement to do so — hiring lesser talent, paying lower wages, offering lighter benefits, skipping employee engagement activities, reducing training, etc. — they’re bound to result in higher turnover, lower service quality, and less engagement.
Fig. A
“The Race to the Bottom”
Providers must cut costs to offer low prices that attract customers and meet SLAsProviders must cut costs to offer low prices that attract customers and meet SLAs
Cost-cutting strategies negatively impact service quality.
Industry standards for service quality get lower over time.
For many organizations looking to outsource, the focus is now on strategic alignment. They don’t just want the lowest price — they want to collaborate with their providers to identify and pursue common goals, promoting innovation and mutual benefit. This approach eliminates the need for providers to cut corners in order to offer the lowest possible price, and results in stronger, more sustainable long-term partnerships.
Mindset
#2
“Tech Enablement is Critical”
Technology enablement is critical for business transformation, whether internally or outsourced. A value-centric outsourcing partner will empower their teams with industry-leading tools — and today, that includes AI.
According to our survey, 78% of respondents say their current outsourcing vendors have at least some AI capabilities. Additionally, 84% of respondents in the tech industry — and 71% of respondents in other industries — say it’s either moderately or very important for their outsourcing vendors to have AI capabilities.
Fig. C
AI Capabilities Categorized as Either “Moderately Important” or “Very Important”
Tech Industry
Other Industries
However, while AI's potential for speed and efficiency can surpass human capabilities, it does have its drawbacks, especially in the realm of outsourced CX.
For example, AI is limited in its ability to mirror human empathy and personalization — both critical elements in CX, where it’s vital to build genuine connections and cater to individual customer needs.
Accuracy is another concern. AI-powered chatbots can make mistakes or even go rogue, manufacturing erroneous information and damaging your brand reputation, especially when they’re pulling from open datasets. They also struggle to understand more complex inquiries, which can lead to customer frustration and high escalation rates.
This is where it’s vital to balance human and AI support. By leveraging a human-in-the-loop (HITL) strategy, businesses can utilize the human workforce to help the AI learn over time, enhancing its efficiency and accuracy — which in turn frees up human agents to handle more complex tasks.
Mindset
#3
“Outsourcing Must Drive Value”
The primary advantage of outsourcing is having a strategic partner by your side to support your big-picture goals, not just cutting operational costs and meeting basic service expectations.
With an outsourcing partner that truly drives value, you’ll get access to knowledgeable SMEs without having to hire many in-house FTEs or consultants. For example, you may outsource a CX team, but you should also be able to rely on your vendor for CX consultation and best practices — not just to provide a certain number of FTEs to “do the work.”
Your outsourced team should understand your unique business processes and suggest long-term strategies tailored to your objectives, resulting in a true partnership that’s greater than the sum of its parts.
At SupportNinja, we call this value-centric outsourcing — an approach that seeks to drive value wherever possible, beyond expectations.
Fig. F
A Value-centric Outsourcing Provider…
Fuels growth by offering agile, highly customizable solutions that transform challenges into opportunities.
Leverages a strategic mix of human talent and state-of-the-art technology to deliver the best results.
Gives you access to skilled, scalable, high-performing teams with relevant subject matter expertise.
Collaborates with you to create strategies that help your business achieve key outcomes and scale according to your needs.
Continuously works with you to set goals, measure success, adjust strategies, and uncover new efficiencies.
Offers multiple outsourced services, enabling simplified management, consistent quality, better integration, and enhanced communication.
Embracing the Future of Outsourcing
Outdated outsourcing models no longer cut it — “savings at any cost” is out, and delivering sustainable value is in.
Modern businesses require more than just reduced overhead. They need outsourcing providers who can deliver high-quality service, leverage advanced technologies like AI, and offer true value in the form of knowledgeable experts, a partnership mindset, and strategic alignment with their goals.
Moving forward, Outsourcing 2.0 will continue to evolve, driven by the demand for quality service, technology enablement, and value-centric partnerships. By understanding these key shifts and adapting to the evolving landscape, your organization can leverage outsourcing as a strategic tool for growth and long-term success — not just a cost-cutting measure.
