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By Elaine Pofeldt, CNBC
U.S. companies and small businesses have long outsourced work to freelancers in developing economies to save on labor costs. Now there’s a new spin on the trend: Businesses based in developing countries are turning to freelancers in countries with higher labor costs, such as the United States and Canada.
Reverse outsourcing is feverishly taking place now as companies from developing economies seek to gain a greater foothold in developed markets. The reason: Hiring workers with knowledge of a local culture can help gain a competitive advantage and quickly achieve attractive profit margins.
Freelancer.com, a large global freelance platform based in Sydney, has found that in some emerging economies, there is a substantial flow of work to developed economies, including the United States, the U.K., Australia, Canada and Germany.
[post_ads]Among the emerging economies with the greatest flow of work assignments to labor located in developed economies are Argentina (17.49 percent), Thailand (12.32 percent), Mexico (10.76 percent), Egypt (10.68 percent), China (10.3 percent), Pakistan (8.05 percent), India (7.45 percent), Turkey (7.35 percent), Saudi Arabia (7.12 percent) and Nigeria (7.12 percent).
Sarah Tang, head of global operations at Freelancer.com, said the platform is seeing some demand from enterprise clients in countries such as India that offer professional services and want to hire freelancers who live in the markets they serve. They have told her team that as they work with clients in the United States and U.K., they have to hire freelancers who are based in those countries.
Higher-paid freelancers lead to higher profits
For Estuardo Oriolls, who runs a 10-person graphic design shop in Guatemala City that hit half a million dollars in revenue last year, hiring in developed markets is more profitable than trying to make do with local professionals who lack the deep experience he needs.
His firm, Perinola, started hiring freelancers in countries such as Canada because he could not find people in Guatemala with some of the specialized technology skills he needed to go after bigger projects. He tried training college-educated generalists from the local area, whom he put on payroll, but he found they were not as speedy, even when trained, as overseas freelancers he found on the freelancing platform Upwork, and eventually downsized his operation from 25 people to 10. The freelancers he found in countries such as Canada and Sweden were highly specialized and did the same work repeatedly, allowing them to operate very efficiently, he says.
One such freelancer was a front-end developer in Canada who helped on a rush project to develop a Wordpress site. Although it cost far more than what he’d pay locally to hire her, “she helped us put it through in record time,” Oriolls said. “We got a really good review.”
When Oriolls did a reality check by calculating the profit margins on 10 recent projects, he found the average profit margin with the local employees was 37.56 percent, compared to 64.43 percent for the projects completed by freelancers. Oriolls also found through his calculations that hiring higher-paid, specialized freelancers, regardless of where they are based, has been more profitable than hiring those who are less specialized and lower paid.
Oriolls is currently talking with a new freelancer from the United States whom he is interested in bringing on board. The challenge is that freelancers in the economies where he must go to find talent are sometimes skeptical that he will be able to meet compensation needs. The availability of the firm’s track record on Upwork, where it has done more than $20,000 worth of work and has racked up high ratings, helps. “They investigate us — and after that, they reach out,” he said.
Tamma Ford, a freelancer in Santa Clarita Valley, California, has also picked up work from nonprofits based in the developing world. She helps clients write business plans, tapping her past background running a management training firm in Europe, and also ghostwrites nonfiction and business books. Not long ago, an NGO in Africa hired her to write a series of nonfiction books on its socioeconomic message to distribute to influencers in Europe, among them prime ministers. Ford believes her experience working in Europe was one factor that helped make her an attractive candidate for the project.
Because Ford liked what the group stood for — “I got some passion going,” she recalls — and had already done research on the topics the NGO focused on, she was able to charge the NGO a lower rate than she asks on other projects. Ford, who retired in 2011, has some latitude to be flexible on her pricing, but, she says, “Nothing was pro bono by any means.” And it helped that writing the books was not her only project paying the bills at the time. “I had other freelance projects that kept me going,” she said.
The US is the No. 3 market in the world for freelancing
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In most international freelancing relationships, the work is done in markets with lower labor costs. The No. 1 location for freelancing is India, followed by Bangladesh, according to the University of Oxford Internet Institute Online Labor Index worker supplement, which draws on data from the freelance platforms Fiverr, Freelancer, Guru and PeoplePerHour.
However, the United States is No. 3, and in some cases the work its freelancers are doing is coming from developing economies. Alex Wood, a researcher at the Oxford Internet Institute, has for instance, interviewed American freelancers in Los Angeles who were doing business development for a software company in India that needed help navigating the U.S. market. Wood has found that companies made up of highly skilled workers in developing economies such as India may face cultural barriers when they want to break into markets such as the United States. “In many cases the benefits of adding a U.S. freelancer to help you with the U.S. side of the business is going to be a bigger market there,” Wood said.
Wood, however, doesn’t envision the trend happening on a large scale but rather when it’s a necessity for business expansion. “It’s going to be those situations where bringing in the U.S. freelancer is going to add a lot of value.”
Steve King, partner at Emergent Research, which studies the freelance economy, has also observed software development shops in Eastern Europe and South America hiring Americans for business development, to create a presence in the U.S. and interact in the same time zones as their clients. “These companies are realizing there are advantages to having a local presence,” King said. “It should grow over time. Once you’ve established trade relationships with a country, trade tends to go both ways. That’s the normal way trade evolves.”
A key factor that is making it possible for businesses in developing countries to hire freelancers in countries such as the United States is the accessibility of giant freelancing platforms such as Upwork. “Without them, it wouldn’t be possible for businesses in other countries to be able to find and arrange engagements with people,” said Andrew Karpie, research director, services and labor procurement, at Azul Partners. “Clearly, they play a critical role.”
[post_ads]Some firms in developing economies are also supplementing the skills on their team in areas such as software development and web design. To build their business, they ended up hiring Americans, either on a full-time or contract basis. Often, this means the company owners must stretch their freelancing and salary budgets well beyond what they usually pay, and the compensation gap is closing.
“If someone is being hired in a U.S. capacity for one of these firms, they are likely to be taking less than they probably would from a U.S. firm or a European firm,” King said. However, he added, “I would think they would be paid close to their normal U.S. salaries or otherwise they would go somewhere else.”
Sometimes, Ford helps her clients on very tight budgets find ways to cover the costs of a project, tapping her business strategy skills. One client in the Caribbean, for instance, wanted to establish a multi-nation tour of Africa for a well-known musician. “They came on the job board and said, ‘This is what we want to do. Can anyone pull this off?’"
Ford had worked on a similar project years ago and realized they did not have the cash flow to achieve their goal at the time. She helped them create a plan to secure in-kind contributions from donors and corporate sponsorships, drafting a template for letters they could send to contacts.
They got off to a strong start but, needing more lead time, decided to postpone their work on the event to this spring. “That’s under way as we speak,” she said.
