The Pros and Cons of Offshoring
Everything You Wanted to Know About The Pros and Cons of Offshoring
The advent and incredible growth of the internet and enhanced accessibility to technology and computing power have opened up massive offshoring opportunities. The offshoring movement gained traction in various industries in the early 2000s. This is after telecommunications between different countries improved and became highly available to companies worldwide. As a result, companies realized they could shed some business functions by contracting them to outside companies that could handle them more efficiently at the lowest costs.
Offshoring picked steam in America when foreign companies and partners could specialize and provide one service to numerous client companies at significantly lower costs than how the client companies would handle it in-house. Consequently, both companies benefited from this arrangement.
The purpose of this article is to provide much needed information regarding the pros and cons of offshoring. But they’re many types of outsourcing offered in the world of business. Once you finish learning about the pros and cons, click here to dive deeper into the various types.
All the same, even the best business strategies and approaches have their advantages and disadvantages. This article will take you through the pros and cons of offshoring to help you see if it is the right option for your business. But before that, what is offshoring?
Offshoring refers to the process of business activities and functions to a foreign company in a bid to increase efficiency while cutting down costs. Generally, companies might outsource part of the business function or process to lower-cost countries. Here, labor might be more skilled or cheaper than in the parent country. Some of the most common offshoring examples include:
- Manufacturing offshoring
- IT offshoring
- Financial offshoring
- Business process offshoring
Offshoring has become increasingly popular over the past years, with most companies citing numerous advantages, including increased workflow flexibility and reduced operational costs accompanied by enhanced productivity. Offshoring presents several potential risks, such as reduced access to crucial resources, lower levels of operational control, cultural differences between the different teams handling the projects, etc.
An often-confusing subject, offshoring is outsourcing. It’s a type of outsourcing that targets countries now near your own. We actually did the research for you, and more information can be found by clicking the link.
But despite these potential drawbacks, offshoring is one of the most viable business strategies for companies looking to streamline and enhance operations and outshine their competitors in the global marketplace. Here’s what Forbes had to say about it (1):
“In our experience, when clients insist on using overseas vendors, we let them know that they can probably easily handle the volume because they often have more personnel and work longer hours than firms here in the U.S. However, there may be some hiccups to work through before you accept an overseas vendor as your long-term provider.”
The Common Pros of Offshoring
Significant Cost Saving Potential
This is one of the most common pros of offshoring and a significant reason why companies choose to offshore their business operations and functions (2). According to experts, businesses that offshore their operations to foreign countries achieve an approximate saving of about 15%. The offshore vendor or overseas external agency is an entirely different organization responsible for virtually all their operational costs. You will not have to pay for the tools, resources, infrastructure, and technology. Note that all these elements and pre-evaluated arranged, and featured in the contract you sign with your outsourced partner. Even better, the elements amount to a reduced fraction of what you might have paid in developed countries.
The labor costs in most developing countries are significantly lower compared to developed countries. Besides, you will not have to pay for healthcare insurance, social security taxes, and a wide range of other compulsory costs like in developed countries such as the US. For instance, the salaries in the United States are about 12 times more compared to those in countries like India. Therefore, companies in the US can take advantage of the low labor costs by offshoring to an Indian company, thereby increasing profits.
Round the Clock Customer Support
There are no official working hours in this technological and internet era thanks to the accessibility of products and services round the clock. Therefore, if a client experiences a problem with your product or service, you can easily and quickly address the concern at any time. Therefore, if your country cannot provide a 24/7 customer care service, you might benefit from hiring an offshore agent from developing countries. By taking advantage of employees in opposite parts of the globe, offshoring allows companies to provide 24/7 customer support to their clients. After your standard operational hours, the outsourced partner can take up your roles and attend to the customers.
Unlimited Access to Experts and Specialists
Some of the most specialized fields, such as finance, software development, and IT, can be incredibly competitive, expensive, and, therefore, hard to hire domestically. Outsourcing these business operations is commonly referred to as knowledge process outsourcing. This will give your company access t experts with niche skills at considerably lower costs and reduced competition resulting in reduced hiring costs and, consequently, higher business outcomes. For instance, regions like the Philistines and India have a massive number of offshore developers and software engineers and professionals with college degrees and high English language proficiency. Besides, companies looking to launch new products might benefit from offshoring product development to countries like India, Vietnam, and China. This is because such countries are known for highly skilled manufacturing services. Even better, they already have the necessary infrastructure and resources to develop a product (or service) and ship it successfully. This will make the process much easier and cost-efficient.
Enhanced scalability and Improved Focus on Core Business Functions
Besides cost saving, perhaps the main offshoring benefit is the ability to free up resources that can be channeled into your primary business functions and operations, thereby increasing the profit. For instance, instead of spending your resources hiring and training an in-house crew to work on non-core operations, you can outsource and depend on an external agency to provide the perfect workforce for all your business operation needs. By doing so, you will have plenty of time and resources to handle the core business, grow your company and take it to the next level. Besides, by establishing effective offshoring teams, you can quickly build remote workforces overseas, allowing you to explore newer business markets to grow your business.
Favorable Government Policies
Generally, most foreign governments allow special incentives and tax exemption benefits to companies that choose to invest and grow their economy by providing employment. Consequently, these businesses will enjoy some operational environments, realize more profits and improve their bottom lines. For instance, regions such as the Philistines have set up fewer business regulations and provided financial incentives to attract more foreign companies to invest in their country. This translates to improved employment rates, enhanced economic development, and general growth of the company. In addition, the financial incentives and tax benefits make it more affordable and possible for foreign companies to offshore to such countries.
4 Common Cons of Offshoring
Sure, offshoring comes with plenty of benefits ranging from easy scalability, enhanced access to professionals, and massive cost-saving advantages. However, before you decide to take that route, you might want to evaluate the disadvantages of offshoring, weigh your options, and determine if this is what your company needs.
Below are 4 of the most common cons when considering an offshoring route for your business. However, outsourcing in general will bring its own set of obstacles. More than this list provides. If you’re interested, check out this article and how we answered the question: How can businesses overcome the challenges of outsourcing? After you’ve finished reading this.
Now, here are some of the common offshoring cons:
The Security Risk
Part of offshoring your business functions to foreign companies is sharing some of the most confidential and crucial information about your company with your partner. Well, most businesses considering these options express their concerns about the risk of a security breach. For instance, if you outsource your website’s software development to a company overseas, you might be worried about your code being copied. Besides, companies are responsible for protecting and keeping the client’s data classified to protect it from security threats (3).
“The biggest mistake people make is not managing the outsourcing supplier properly”
– Paul Simmonds, Global Information Security Director, ICI
In this case, you must implement strict protocols and security measures to avoid mishaps and keep your business operations running smoothly. You can do this by blocking remote access to crucial and sensitive data to prevent your offshore company from accessing and using it. You might also want to offshore your business functions to a company equipped with reliable prevention technology to help in controlling data flow.
Besides, confirm whether your prospective offshore company has network security policies that the employees follow to the core.
Reduced Control Over your Business Functions and Operations
Generally, you are not physically present to run your business, manage operations, and address issues as they arise. Unfortunately, a slight delay can translate to significant backlogs, and minor solvable problems can balloon to numerous times their initial size. Other issues that might arise include unreasonable supply mark-ups, missed deadlines, and products and services delivered with plenty of mistakes. Reducing control over the part of your business operation you are outsourcing is among the significant offshoring concerns. This makes it incredibly crucial that you take the time to do extensive research and enough due diligence on your prospective offshoring agency. Also, properly vet the foreign company or talent you choose to work with before you finally contract them. Do not just settle with the lowest bidder.
The difference in Time Zones
So, you want to offshore your company’s website software development project to a team in India. You might want to consider that the Indian standard time is approximately nine and a half hours ahead of the United State Eastern Time. This means that should you need to make some quick changes to your website development project; you will have to wait until the foreign team is back online. Similarly, if you send an email from the US at noon to China, where it is around midnight, you might have to wait up to 8 hours to get a response. Finding the perfect time to communicate with your team overseas effectively might be a significant problem, consequently impacting the successful running and ultimate success of your business. This is because the lag times and communication gaps might impact deadline-driven and time-sensitive tasks.
Fortunately, you can minimize the time difference challenges by establishing strict and clear guidelines on when the offshore team will be available for crucial business communications. This means having a window where the onshore and offshore teams are simultaneously available for communications and decision-making. You might also want to consider having several designated contact points.
Foreign Government Regulations and Hidden Costs
You might not be fully conversant with the government laws and regulations of the country where you are offshoring your business. Before anything else, you must clear up any questions, concerns, and issues you might have about intellectual property rights and responsibility with your offshore agency. Understand how the country’s legal infrastructure handles issues around the rights of its foreign stakeholders. Do enough due diligence and find out if your prospective offshoring agency has any past cases of breaches of contracts. Failure to do this could translate to losing your intellectual property to a foreign company, such as inventions, brand logos, and designs. You should also set clear guidelines on initial payments to avoid potential hidden costs.
An Alternative to offshoring
A popular alternative to outsource offshoring is nearshoring. It’s essentially the process of staffing teams from countries neighboring your own. However, we’re discussing offshoring in this piece. If you want to learn more about nearshoring and its details, click on the link (https://sonatafy.com/nearshoring/) to be re-directed.
Frequently Asked Questions About The Pros and Cons of Offshoring
What is Offshoring?
Offshoring involves handing over part of your business operations and functions to a third-party country in a different country, usually on another continent.
What are some of the most common offshoring destinations?
Some offshoring destinations include India, The Philistines, Ukraine, South Africa, Bulgaria, Columbia, and Mexico.
What are some of the most common offshoring services?
Some of the most popular offshoring services include customer support services, app development, and cloud or IT services usually outsourced to the Philistines, India, among other destinations.
Why do companies do offshoring?
Companies mostly do offshoring to reduce operational costs and improve profits.
- “In our experience, when clients insist on using overseas vendors, we let them know that they can probably easily handle the volume because they often have more personnel and work longer hours than firms here in the U.S. However, there may be some hiccups to work through before you accept an overseas vendor as your long-term provider.” – Forbes Quote
- The Real Savings from IT Outsourcing – MIT Sloan Management Review
- “The biggest mistake people make is not managing the outsourcing supplier properly” – Paul Simmonds, Paul Simmonds, Global Information Security Director, ICI