A Strategic Way Out of Nigeria’s 2024 New Minimum Wage

In 2024, Nigeria faces yet another adjustment to the national minimum wage, following earlier hikes in 2019. This change reflects the government’s attempt to balance the economic realities of inflation, rising cost of living, and social pressures from labour unions.

However, the new minimum wage brings fresh challenges to employers, particularly in a country where many businesses already grapple with high operational costs, power supply issues, and fluctuating exchange rates.

To cope with the financial strain, many organizations are turning to outsourcing as a strategic way out of the new wage pressures.

This article examines how outsourcing is emerging as a solution for Nigerian businesses in the context of the 2024 minimum wage adjustment, exploring its potential benefits, challenges, and the strategic approaches businesses can adopt.

The 2024 Minimum Wage Adjustment: Economic Context

Nigeria’s economic landscape in 2024 remains turbulent, marked by fluctuating oil prices, inflation, and currency devaluation. As the federal government moves to increase the minimum wage in response to public demands and inflationary pressures, businesses are faced with the need to adjust their payrolls, which has a significant impact on profit margins, especially in labour-intensive industries such as manufacturing, retail, and agriculture.

While workers benefit from higher wages, companies may face financial strain, especially small and medium enterprises (SMEs), which make up 96% of businesses in Nigeria. This scenario often leads companies to explore ways to maintain profitability while adhering to wage laws. Outsourcing non-core business functions to external vendors has become one of the most strategic and cost-effective approaches to cope with this pressure.

Read… Beyond Cost Savings: Measuring the True ROI of Manpower Outsourcing

Outsourcing as a Strategic Response

Outsourcing involves transferring certain business functions, such as customer service, IT support, payroll, and logistics, to external providers. This approach allows businesses to focus on their core competencies while leveraging the expertise and lower operational costs of outsourcing partners.

Here’s how outsourcing can help Nigerian businesses navigate the new minimum wage reality:

1. Cost Reduction: One of the primary benefits of outsourcing is the ability to reduce costs. With the 2024 minimum wage increase, businesses will face higher payroll expenses. Outsourcing allows companies to shift some of these expenses to third-party vendors who may operate in regions or countries with lower labor costs. By outsourcing non-core functions, companies can avoid the need to hire and pay full-time employees at the new wage rate.
2. Access to Specialized Expertise: Outsourcing provides companies with access to specialized skills and expertise without having to invest in training or upskilling internal teams. In areas such as information technology, HR, and customer service, outsourcing partners often have highly skilled professionals who can deliver services more efficiently and at a lower cost.
3. Focus on Core Business Functions: By outsourcing non-essential tasks, businesses can focus on their core functions, such as product development, customer relations, and strategic growth. This focus can lead to improved performance and competitiveness in the market.
4. Flexibility and Scalability: Outsourcing offers greater flexibility, allowing businesses to scale operations up or down as needed without the burden of hiring and firing permanent staff. This is particularly beneficial for companies facing seasonal demand fluctuations or uncertain market conditions. With outsourcing, businesses can maintain operational flexibility while adhering to minimum wage requirements.
5. Mitigating Regulatory Risks: By outsourcing certain functions, companies can reduce the administrative burden of complying with complex labour laws. Outsourcing partners typically assume responsibility for compliance with labour laws, including minimum wage regulations. This relieve companies from the need to manage these aspects in-house, reducing the risk of non-compliance.

Key Sectors Benefiting from Outsourcing

Certain industries in Nigeria are likely to benefit more from outsourcing as a strategy to cope with the new minimum wage. These include:

1. Manufacturing: With rising labour costs, manufacturers can outsource non-core functions such as transportation, logistics, and packaging to third-party providers. This reduces the need to hire and manage in-house teams while still maintaining operational efficiency. Outsourcing allows manufacturers to streamline operations and focus on production quality and cost control.
2. Information Technology (IT): IT outsourcing has grown significantly in Nigeria, as companies seek to reduce the costs associated with maintaining internal IT teams. By outsourcing IT services, businesses can access the latest technologies and expert support without investing in expensive infrastructure and personnel.
3. Human Resources (HR): HR functions such as payroll processing, recruitment, and employee benefits administration can be outsourced to specialized firms. This not only reduces costs but also ensures compliance with wage regulations. Many companies are now using HR outsourcing to handle the complexities of payroll administration and labour law compliance.
4. Customer Service: With the rise in digitalization, many Nigerian companies outsource customer service functions to call centers or online support providers. This approach enables businesses to offer 24/7 customer support without the financial burden of employing a full in-house team at the new wage rate.

Read… Outsourcing as a Veritable Business Model

Challenges of Outsourcing in Nigeria

Despite the clear benefits, outsourcing also presents certain challenges for Nigerian businesses, including:

1. Quality Control: One of the biggest risks associated with outsourcing is the potential for quality degradation. If the external vendor does not maintain the same level of quality as an in-house team, it could damage the company’s reputation and customer satisfaction. Companies must set clear performance standards and KPIs when outsourcing services.
2. Cultural and Communication Barriers: In cases where companies outsource functions to providers in different regions or countries, there can be communication and cultural challenges. It’s important to ensure the outsourcing partner understands the company’s values and business environment to avoid conflicts or misunderstandings.
3. Hidden Costs: While outsourcing can reduce direct labor costs, businesses may face hidden costs such as service fees, contract management, and the cost of transitioning from in-house to outsourced functions. These costs must be factored into the decision-making process.
4. Regulatory Compliance: Although outsourcing can help mitigate regulatory risks, businesses must still ensure that their outsourcing partners comply with local labor laws, especially regarding minimum wage regulations. Failure to do so could result in legal penalties for both the outsourcing provider and the client company.

Best Practices for Successful Outsourcing

To ensure that outsourcing delivers the intended cost savings and operational benefits, Nigerian businesses should adopt the following best practices:

Choose the Right Partner: Conduct thorough due diligence when selecting an outsourcing provider. Look for partners with a proven track record in the industry, strong customer references, and a deep understanding of the regulatory environment.

1. Set Clear Expectations: Clearly define the scope of work, deliverables, and performance metrics in the outsourcing contract. Ensure that the outsourcing partner is aware of the company’s quality standards and timelines.
2. Maintain Oversight and Control: Even though a function is outsourced, it’s crucial for businesses to maintain oversight and control. Regular communication, audits, and performance reviews are essential to ensuring that the outsourcing provider meets expectations.
3. Plan for Transition and Integration: Transitioning to an outsourced model can be challenging, especially for businesses that have traditionally handled functions in-house. Companies should develop a clear transition plan and ensure that internal teams are aligned with the new outsourcing strategy.

Conclusion

As Nigeria adjusts to the 2024 minimum wage increase, outsourcing presents a strategic solution for businesses seeking to manage labour costs while maintaining operational efficiency. By outsourcing non-core functions, companies can reduce costs, gain access to specialized expertise, and focus on their core competencies. However, outsourcing must be approached with caution, as it comes with risks related to quality control, communication, and regulatory compliance.

To succeed in the new economic reality, Nigerian businesses must carefully evaluate their outsourcing options, choose the right partners, and implement best practices to maximize the benefits of this strategy.

If you would like to talk about outsourcing with our specialists, kindly make an appointment with us (CREM Consulting) at your convenient time and we would respond immediately. We have been implementing outsourcing projects for several years and we would be happy to render our outsourcing services to you.

References

I) National Bureau of Statistics (2024). Nigeria’s Labor Market Outlook: Impact of the New Minimum Wage. Retrieved from [https://nigerianstat.gov.ng].

II) Eke, C. & Onyekwere, A. (2023). “Outsourcing as a Business Strategy in Nigeria’s Economic Landscape.” Journal of Business and Management Studies, 18(2), 101-117.

III) Adeola, O. & Olayemi, F. (2022). “Managing Operational Costs in Nigeria: The Role of Outsourcing.” African Business Review, 30(4), 45-60.

IV) Nigeria Employers’ Consultative Association (2024). Implications of the New Minimum Wage on SMEs and Large Corporations. NECA Report.

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