UK BPOs and contact centres look offshore as payroll costs rise
Changes to the National Living Wage (NLW) and National Insurance Contributions (NIC) in the UK will come into effect on April 6, with far-reaching implications for businesses in every sector, particularly contact centre operators and business process outsourcing (BPO) providers.
The increase in the NLW aims to ensure low-wage workers benefit from economic growth, reduce reliance on the country's welfare system, and protect workers' living standards.
Similarly, the UK government increased NICs primarily to raise revenue for public spending, particularly to fund healthcare, social care, and pensions, particularly in the wake of depleted public finances due to the furlough schemes, business support grants, and healthcare costs incurred in response to the COVID pandemic.
While critical to address the fiscal challenges in the UK, these legislated changes will have significant financial implications for UK businesses, raising the minimum wage for workers aged 21 and over from £11.44 to £12.21 per hour, alongside an increase in the NIC of close to 9% from 13.8% to 15%.
Calculated on a full-time salary at 37.5 hours of work per week, the revised NLW and NIC will cost employers £27,380 a year as the legal minimum, up 7.9% from £25,386. In addition, the UK government plans to reduce the threshold at which employers start paying NICs from £9,100 to £5,000.
Once factoring additional mandatory costs, like pension fund contributions, the true cost of a person employed in the UK will be considerably higher from April 6.
This will be a significant change that UK businesses will need to factor into their FY25/26 budgets and comes before any attributional or indirect costs, such as IT costs and rent are factored in, which are already some of the highest globally.
The resultant increase in hiring and payroll costs across every industry in the UK will have a significant impact, particularly on sectors that rely on minimum wage or entry-level workers, and companies with large workforces.
The implications for the UK contact centre and BPO sector are significant, with British customer service agents set to become some of the highest-paid globally.
This will likely accelerate the shift towards offshoring and greater automation, reducing the reliance on in-house customer support teams in the UK, especially in sectors like customer service, financial services, and tech support.
The rise in payroll costs comes at a challenging time for UK BPO providers, which already faced higher salary costs than other major outsourcing destinations.
Businesses are also grappling with rising input and operational costs, forcing many companies to consider restructuring their workforce, reducing staff numbers, limiting working hours, or turning to zero-hour contracts, which impact service delivery and quality.
UK business to look abroad to offset financial pressure
Compared to offshore destinations in emerging markets like South Africa, the UK will struggle even more to remain competitive on cost. According to data from Business Process Enabling South Africa (BPESA), salary costs are more than 45% lower in South Africa when compared to those in key source markets like the UK.
This is a concern for the UK's BPO sector, which is a prolific job creator, with more than 600,000 people employed in the UK as of 2023, according to IBISWorld data.
The sector is also a critical component of the economy, providing both onshore and offshore outsourcing operations that support industries such as financial services, telecommunications, retail, healthcare, and government.
In response to the rising costs, companies that operate in-house contact centres or outsource services within or into the UK will need to consider alternative solutions to address the cost increases without compromising on their quality of service.
Faced with these challenges, outsourcing job roles and services to regions that offer labour arbitrage opportunities, supported by English language proficiency, a highly skilled and motivated workforce, and a cultural affinity to the UK home market offers an extremely compelling value proposition.
Regions that can offer additional benefits, such as time zone favourability, make this an extremely attractive alternative for UK firms looking to maintain seamless customer experiences.
As the escalations to the NLW and NIC come into effect, UK firms seeking cost-efficient, high-quality BPO services can look to countries like South Africa for workable solutions that deliver cost benefits without sacrificing quality of service.
