Offshoring is the practice of having a domestic company’s services or processes based in a foreign market. The primary goal of this practice is to save money because the foreign market has lower overall costs within the supply chain.
Offshoring is often confused with outsourcing. Where offshoring is different is in the fact that it is typically a geographic activity only. It takes advantage of cost differentials that are possible within a cheaper economy.
Here are the pros and cons of offshoring that are worth considering.
List of the Pros of Offshoring
1. Costs are much lower with offshoring.
Most companies consider offshoring because it is a way to save money on some of their highest costs. For many agencies, that means labor. The information technology sector in India is one such example of this practice. The national average salary of an IT professional in India is about $12,500 per year. In the United States, the national average salary of an IT professional is about $85,000. Offshoring one IT team of 10 people could therefore save a company more than $700,000 annually in straight labor costs.
2. New markets can be accessed through offshoring.
When a company establishes itself in a foreign market, it creates new opportunities for itself. It can become a local network that provides a new platform for goods or services that may not be offered currently.
3. It promotes diversity within the organization.
If there is a network of employees that are educated well and trained to complete high-skill jobs around the world, then there is diversity available in experience and perspective. Both qualities make it possible for the business to ensure that a high level of service can be provided to each customer. At the same time, it becomes possible to be more creative and innovative because there is a larger idea base from which to work.
4. Offshoring allows experts to do what they do best.
Many businesses find themselves asking their best people to handle mundane tasks. Duties like paperwork management, staff appraisals, and basic communications keep the best people in a business away from what their skill base can contribute. By offshoring these mundane duties and routines, the high-skill workers can delegate the routines away to focus on what they do best.
5. It can lower asset costs.
It’s not just labor costs that are high for businesses. Asset costs can be high as well, especially when looking at real estate. By reducing the domestic labor force, a smaller footprint can be established. At the same time, assets can be acquired for a lower overall cost overseas, expanding the footprint of the business. This combination can lower global assets costs without altering the services being provided.
6. Risks can be better managed through offshoring.
Taxation risks can be managed with offshoring processes. Personnel risks can be managed. Political risks can be managed. Through offshoring, assuming that the process is designed to serve risk reductions, corporations are able to create outcomes with predictable consistency. In return, better credit rates, contract offers, and other risk-associated transactions can be better managed.
7. Delivery times can be improved with offshoring.
For the cost of one domestic employee, a business could build an entire team through offshoring. That means multiple productions can be implemented without a massive budget increase. It means high-quality results can be delivered in a shorter time period. By improving delivery times, a business can improve their rate of return customers. At the end of the day, that means bigger profits.
List of the Cons of Offshoring
1. Offshoring often creates communication difficulties.
From a U.S.-based perspective, offshoring often involves working with nations that see English as a common language. Those countries may understand English, but the depth of their knowledge may be limited. Issues with accents can become problematic. Even different words or phrases may have unique meanings within a culture. This even happens between the U.S. and the U.K. “Pants” in the United States refers to trousers. In the U.K., it refers to underwear.
2. There are social and cultural barriers that must be overcome.
Doing business in a foreign market always requires some time to adjust. People in different countries and cultures behave differently than people in the domestic market. Some cultures prefer a straightforward and blunt perspective. Others may find such a technique to be abrasive or offensive. If the wrong approach is taken right away, it could cause an offshoring deal to derail before it even got started.
3. Timing is always an issue with offshoring.
It is hard enough for businesses on the U.S. East Coast to manage an office on the West Coast simultaneously. The three-hour time difference means that an 8am start time in New York is a 5am start time in San Francisco. For offshoring, the time difference may be 8-15 hours, which can make it difficult to coordinate teams. One group may be sitting down to have dinner while the other is just getting ready to have breakfast.
4. Security can be problematic.
Offshoring requires organizations to implement strict adherence protocols to ensure no intellectual property is lost. Safety measures may need to be assigned as well. In high-risk environments, a direct supervisor from the home office may be required to oversee the offshoring operations. This practice is intended to save money, but if it is not handled well, it could cost a business everything.
5. It takes advantage of cultures that may be disadvantaged.
A cheaper economy or labor market may provide cost savings. It also creates numerous ethics questions. Is paying a fair local wage ethical if that wage does not allow an individual to raise their family out of poverty? Will the same levels of expertise be received in the foreign market that offers lower wages or requires fewer benefits?
6. Quality is not always guaranteed with offshoring.
It is not uncommon for offshore agencies to promise expert services for low prices. Their definition of expertise might be different than the domestic corporation’s definition of it. That gap in expectations can lead to a lower overall quality of service being offered to the customer base. It can even lead to goods or services that stop fulfilling internal expectations. This issue can sometimes be seen throughout the entire chain. From idea implementation to delivery delays, there are many ways a project can “go wrong.”
These offshoring pros and cons show that businesses can help developing cultures establish a financial foundation for future success. At the same time, current customers can be served with a high quality of service while the company saves on overall costs. There are many potential benefits here, with risks that must be carefully managed if offshoring is going to be a positive experience for everyone.
Blog Post Author Credentials
Louise Gaille is the author of this post. She received her B.A. in Economics from the University of Washington. In addition to being a seasoned writer, Louise has almost a decade of experience in Banking and Finance. If you have any suggestions on how to make this post better, then go here to contact our team.