Offshore: Benefits, Disadvantages and Types

Offshoring is a process of relocating the company to another country, usually to reduce costs. In today’s era, when businesses are expanding globally, it’s an important strategy. Because it helps businesses in many ways, like saving money and getting access to talented people from around the world. But a lot of complex difficulties also come along with it, like language barriers, quality control issues, different time zones, etc. This article will help in understanding the concept of offshoring, its working benefits and challenges.

What is Offshoring?

Offshoring refers to the movement of a business, which includes its processes, services, or production to a foreign country. The main reasons for which companies do this is to reduce cost, get access to specialized skills and increase productivity. Offshoring can involve a wide range of activities, such as customer support, software development, manufacturing, and other business functions. There is also a similar term used, “outsourcing”, which is not the same as “offshoring” because outsourcing means specific tasks of business are contracted to a third party other than the company, which could be done locally or abroad, but offshoring does not necessarily involves third party it involves setting company’s branch in another country.

Benefits of Offshoring

Outsourcing can have multiple benefits for the company:

1. Cost Efficiency: During offshoring, the company usually moves to a lower-cost location because of that, labor cost in that country is usually lower. Lower labour cost helps in reducing the total cost spent on operational expenses, which allows the company to allocate resources more effectively in that place. For example, a clothing brand is getting 1 m specific cloth for 10 rupees, and the minimum wage they pay to labour is 10,000, but they move to a lower cost company where 1 m specific cloth costs 9 rupees, and the minimum wage they pay to labour is 9,000 so they will get a lot of cost savings.

2. Access to Global Talent: Moving to foreign countries allows them to get access to specialized talent from a bigger pool they can hire the top skilled employees, which are scarce( available in less amount) or expensive in their home country. Then these top talents will help in producing top-quality products of their expertise, which will enhance innovation, brand value and growth of the company.

3. Scalability and Flexibility: It will help enhance the scale and flexibility of the company. Like if a company moves from one country to another, then the people of both countries will begin to know about the company. There number of customers will increase. They will get to know about the preferences of people worldwide. They can adapt according to the needs of the company, which will increase their growth.

4. Increased Efficiency: They can shift certain tasks according to locations where they can performed more efficiently and according to their resources and demand in the area. Which helps in achieving higher productivity for the company. For example, a food company can produce Product A in a location where the demand and resources for Product A are higher. This is possible because they have got access to more locations due to offshoring.

5. Risk Diversification: It also allows risk diversification. For example, a toy company makes toys in five countries, and then in one country the supply chain is disturbed due to a disaster or national problem. Then, the supply in the other four countries will still work properly due to offshoring. In this way, it helps in reducing risk. They can also produce toys in other locations even if it’s not possible in some countries.

Disadvantages of Offshoring

Along with advantages, there are also some disadvantages associated with offshoring, like

1. Hidden Cost: As we know, offshoring helps in reducing costs of resources and labour production, but there are many hidden costs associated with offshoring. These can include travel costs for visiting offshore teams, expenses related to communication across different time zones, and adapting to local rules and regulations. So, while thinking of offshoring, companies must understand there might be some additional costs associated with it.

2. Negative Impact on Domestic Employment: Due to offshoring companies try to get the best foreign talent at lower costs, but this might lead to unemployment in the domestic home country. If the company’s production is in another country, then they will help in the economy of other countries by providing employment there but reducing employment in their own home country, which could create a negative image of the company in the home country.

3. Communication challenges: Offshoring means that employees are working in different countries, which might create problems in easy communication because teams are in different time zones and locations. This communication barrier can create problems among teams like trust, accuracy in work, quality, etc. Also, people will feel language and culture differences.

4. Payrolling and compliance issues: It can lead to complex payrolling as different countries have different rules and regulations regarding tax, minimum wages and legal matters. The onshore company may have to deal with multiple jurisdictions, currencies, and regulations, which can increase the administrative burden and risk of errors and penalties. Considering these things, companies have to pay on time and correctly to their employees. It is a major problem associated with offshoring.

5. Quality control issues: In offshore companies ensuring quality standards and expectations of products could be challenging because they have to work under different conditions, cultures, and legal standards. Also, working with dispersed teams could be problematic, and consistent quality standards are important as lower quality standards can result in customer dissatisfaction, reputational damage, and legal liabilities.

What do you need to do before you Offshore?

Following are simple steps, which will help you understand important factors which you need to know before offshore.

Step 1: Conduct proper research on the following factors

• Skilled Talent: You should find out whether the country you are thinking of outshore has skilled people in particular fields because you were going to work with them. Assess the educational infrastructure, training programs, and industry expertise in the region. Skilled talent is a valuable asset for productivity in the company.
• Legal frameworks: Understand the legal requirements and regulatory environment. Whether they are profitable or loss for you, how much tax will be imposed on your products, etc. You should also consider political stability in the country.
• Economic Conditions: It will directly impact the operational efficiency of any company. So, consider factors such as inflation rates, currency stability, and overall economic growth. A good and growing economy can provide many opportunities, while economic volatility can lead to risks.
• Initial setup costs: Find out how much will it cost to set up your operational branch in a country, which will include facilities costs, resources, hiring costs, operational costs, etc. Compare these costs with the benefits, which you can get by offshoring.
• Complexity: It’s initially a complex thing for setting up a company branch in a new country. A lot of have to travel there than setting up facilities, working within different time zones, working with people of different cultures, and problems in payrolling. You should consider these and find ways of managing them properly.

So, by considering all these things choose a location which is suitable for offshoring your organization.

Step 2: Find a reliable offshore partner or set up your own offshore team

Then, you will need an offshore partner, who can help you in setting up your offshore business. As you don’t know much about new locations, it’s necessary to get a good offshore partner. You should evaluate the reputation, experience, quality, and communication of potential offshore providers or candidates. Then, define the scope, timeline, budget, quality standards, and deliverables of each offshore project.

Step 3: Make Transition

You should provide all the info about your business processes, policies, and culture to the offshore partner or team. Also, you should continuously monitor and evaluate your offshore operation. For example, if you have a software development company, then you should hold an introductory session to introduce your company, products, customers and expectations. You should also provide them with the necessary documentation and software, which are required for working.

Types of Offshoring

Offshoring is divided into two parts :

1) Production offshoring: As the name suggests, production offshoring means when the manufacturing or assembly operation of any company moves to a different country. It is generally done to have benefits such as low labour costs, optimising production costs and enabling businesses to use global resources. For example, if A clothing company in the United States moves its garment manufacturing to a facility in Southeast Asia to benefit from lower labour costs and a well-established textile industry. In this way, they can produce the product for cheap but sell it for the same price.

2) Service offshoring: This is when the location of production remains the same, but its services are offshored to different countries. This can include many services like, in our previous example the clothing company can do service offshoring by selling their clothes in other countries this could be done online or by exporting them to other countries and also providing customer care and IT services as well. But their production place will remain the same. This can help in scaling service operations around the globe, getting access to talent, etc.

Conclusion

Hence, we understood that offshoring helps in spreading business all over the world, which helps the organization by saving costs, increasing brand value, and getting access to global talent. But, there are also a few disadvantages associated with it like culture & language barriers, travel & initial setting costs etc. These challenges can be reduced by doing proper research, strategic planning, and adaptability. In the end, offshoring is not about moving things around from one place to another, but it’s more likely a door which opens to a bigger world where people can connect, grow and learn with other skilled people.