3 Ways to Leverage Labor Arbitrage to Maximize Earnings

With many companies facing budget constraints, hiring employees might not look feasible right now. However, finance and procurement leaders don’t necessarily have to implement a hiring freeze or cut back as much on other spending if you can leverage labor arbitrage.

For those unfamiliar with labor arbitrage, it helps to first consider the root of the term. As the Corporate Finance Institute explains, “Arbitrage is the strategy of taking advantage of price differences in different markets for the same asset.”

So with labor arbitrage, businesses can theoretically take advantage of price differences in two different markets for labor of the same quality. For example, you might be able to find the same quality of worker in Manhattan, New York as you could in Manhattan, Kansas. Yet the cost of hiring the worker in Kansas would likely be less due to cost-of-living and labor market competition differences between the two areas.

In some cases, however, labor arbitrage has become synonymous with outsourcing to a low-cost area, without necessarily weighing whether the quality is the same. Moving a call center offshore, for instance, might be considered labor arbitrage if that reduces labor costs. Yet this move could be more expensive in the long run if it does not take service quality into account.

That said, there are ways to engage in labor arbitrage where you can maintain quality while maximizing earnings. These include:

Finding Remote Workers: In the past, labor arbitrage might have been limited to the areas where your company has offices or where a service provider might be located. And companies might have only tried to arbitrage a few entry-level positions. Other roles, particularly those at a senior level, might have been considered to only be effective when those employees worked at corporate headquarters.

With the rise of remote work during the pandemic, however, many companies realized they’re just as productive with this model as they were when everyone came into the same office. That could mean more opportunities to find all types of workers in lower-cost areas than your headquarters, without necessarily affecting quality.

Even if your company does not adjust salaries based on cost of living, you could still save money when hiring remote workers, such as if that enables you to limit office space rent. Opening up your employee search to more areas can also expand your talent pool and help you find more diverse candidates. While the costs of hiring these workers might be the same, diversity can help improve your earnings, as it can boost innovation, enhance brand reputation and more.

Utilizing Contractors: Similar to leveraging remote employees, you can also utilize contractors as a form of labor arbitrage. For example, you might need help in areas such as marketing or web design but not be at the point yet where your capacity requires a full-time employee.

Instead of choosing between paying someone to work a job with tons of downtime or stretching your current employees too thin, consider utilizing contractors on an on-demand basis. 

Even if the contractor has a higher hourly rate or project fee than you’d normally pay an employee, they often can fit a lot of work into limited hours. Plus, you generally don’t need to pay for training, can limit meetings, don’t have to pay for benefits, etc. You just pay for the specific projects you need help with. Doing so can often save you money while getting the same quality of work that a full-time employee might provide.

Working With an Outsourcing Partner: Partnering with an outsourcing provider can also be an effective form of labor arbitrage, provided that you trust their quality. Instead of simply outsourcing to a service provider in a low-cost country, consider outsourcing partners based on factors like their expertise and scale that you might not want to build internally.

It might not be cost-effective, for example, for your procurement team to build contacts with hundreds of suppliers, as that might require a large procurement department. Yet an outsourcing provider could have the scale and resources already in place to provide you with the value of a large supplier network.

GoProcure’s Buyer’s Desk, for instance, can help quickly assist with purchasing needs as they come up, rather than requiring you to have a large staff on-hand at all times. Our expertise helps you find the high-quality, low-cost suppliers you need to save money without sacrificing quality.

These areas of labor arbitrage can help you reduce labor costs while still finding the talent you need to help your company grow. Trying to control budgets can be difficult, but labor arbitrage can be a great way to get a handle on one of the largest portions of your overall spend.

Want to learn more about how you can leverage labor arbitrage with GoProcure? Request a free consultation with our team of experts today.