Offshoring involves moving your operations partly or completely abroad to save costs while growing your business. This helps companies gain a competitive advantage in their home country.
But from communication delays to security risks, offshoring can have some potential negative effects on your business.
In this article, we’ll explore the seven most common disadvantages of offshoring and suggest ways to overcome them.
This article contains:
(Use the links below and jump to a specific section)
- 7 Disadvantages of Offshoring (With Solutions)
- Does Offshoring Have Any Benefits?
- Offshoring vs. Outsourcing vs. Nearshoring
Let’s get started.
7 disadvantages of offshoring (with solutions)
Offshoring is the practice of moving business operations abroad, usually to a developing country. It helps companies take advantage of lower operating costs and vast talent pools to scale their businesses quickly.
If you want to read more about offshoring and its advantages, skip ahead to this section. You can always scroll back here when done.
However, offshoring comes with some inevitable challenges that could pose significant risks to your business.
Let’s explore the seven most common cons of offshoring and how you can manage them:
1. Time zone differences
Companies can reap the benefits of offshoring only when there is a significant drop in operating costs abroad. In other words, it makes sense to offshore operations only if it’s profitable for your business.
This can take companies far away from their home countries, usually to another continent in a different time zone.
In recent years, countries like the Philippines, India, and China have become popular offshore destinations for western countries. But in this case, western companies will have to work across more than a five-hour time difference with their offshore partners.
As a result, teams in different time zones can face delays in communications and deliverables. For example, it could be hard to set up a team meeting with all the team members.
How to manage time zone differences
It’s important to have at least a few shared work hours for your in-house and offshore teams. Set two to three-hour slots during the day when both teams can collaborate on work.
Another way to manage the time difference is to turn it into a tool for productivity.
While the onshore team may begin a task, the remote team can carry it forward during their work hours. It’s an opportunity for companies to have a 24-hour workflow.
This way, your clients can benefit from an almost all-day-long service, especially useful for call center outsourcing.
And to ensure smoother communication between the two teams, each side can have a dedicated team working shifts to coordinate with each other.
2. Cultural and language barriers
Offshoring may transcend geographical boundaries, but cultural and linguistic differences remain.
Most popular offshoring destinations, like the Philippines, have an English-speaking workforce that’s broadly familiar with global culture. However, English is usually their second language.
Moreover, executives back in the headquarters are likely to be unfamiliar with the local culture of their offshore developer or service provider.
This can affect everything from the holiday calendar to day-to-day communication. Basic misunderstandings related to body language or sense of humor can become points of confrontation between team members.
How to manage cultural and language barriers
The management of the offshoring company must scout the offshore location thoroughly before venturing out there. The more your teams are familiar with each other’s cultures and language, the better it is for business.
Additionally, both the offshore team and the parent company must understand and respect each other’s cultures. Here are some tips to help you out here:
- Design company policies to reflect internal diversity.
- Train the management to understand and bridge the cultural gaps between the two teams.
- Celebrate and acknowledge local holidays and customs.
3. Quality control issues
Offshore development of products always comes with its fair share of quality-related challenges.
However, offshore outsourcing (hiring third-party vendors abroad) can cause even greater concerns in this department. This is because local production conditions and regulations may differ greatly from your home country.
Despite repeated instructions and communication, the deliverables of an offshore company may not match up to your expectations. Moreover, breaks and delays in the local supply chain can further impact the end delivery.
How to manage quality control issues
The quality issues of production offshoring may differ greatly from something like offshoring software development.
You should deploy a team to understand the local administration, regulations, and business practices of the offshore location. Preferably, onboard a local guide early on in the process.
Once you’ve completed the setup, you need to design a business process full of checks and balances for your outsourced partner to ensure quality and timely delivery.
Hire and train quality control professionals to regularly conduct check-ins with the offshore team.
Additionally, let the outsourcing provider know that there are consequences to delays or quality issues. To improve your outsourcing relationship, you could also incentivize them to meet your quality standards.
4. Security and intellectual property (IP) issues
Any exchange of critical business information puts you at risk of theft.
However, the geographical distance of offshore locations increases this risk.
For one, any patent protection is usually country-specific. Local laws will govern the security of your company’s IP. And acquiring this protection is another layer of paperwork that you’ll need to spend resources on.
Additionally, no matter where your customers are, their data could get stored on servers in offshore locations. The data protection laws of these countries might leave you vulnerable to breaches.
How to manage security and IP issues
While the data security risks of offshoring are substantial, they’re also manageable.
Start by ensuring you’re not violating any domestic laws or client contracts by offshoring sensitive information. You should also reassure your customers that their data is in safe hands and make your data storage information publicly available.
Get started with the paperwork to protect your IP before setting up any extensive physical infrastructure or begin production in a foreign country. Consult with your lawyers or legal advisors to understand IP and data security laws and regulations.
For example, a US-based company can check the Department of Commerce’s Office of Standards and Intellectual Property (OSIP) to navigate the systems in offshore countries.
However, it won’t provide legal aid or represent you in case of any legal issues abroad. For this, you’ll need trustworthy local partners who have your best interests.
5. Payrolling and compliance issues
Offshoring involves managing two parallel systems for payrolling and compliance — one at home and another in the offshore location.
This will no doubt increase your paperwork, adding to the hidden costs of offshoring.
More importantly, you run the risk of incurring fines if you inadvertently miss out on a domestic or offshore compliance requirement. These complications may affect the productivity of your employees and your bottom line.
How to manage payrolling and compliance issues
The best part about offshoring is that you can benefit from an industry that serves companies like yours. You can hire experts for any business function that your in-house team lacks expertise in.
For example, hiring an outsourcing company for payrolling and compliance formalities is a convenient and cost-effective solution.
However, it’s also recommended that you hire a few legal experts for your team. And in case of any legal disputes with employees or non-governmental bodies, consider mediation or third-party arbitration over litigation in the offshore country.
6. Negative image due to a loss of domestic jobs
Generally speaking, offshore outsourcing is frowned upon in most countries.
Most people see it as a drain of job opportunities from the home country to places that don’t create jobs or generate tax revenue. And in recent years, there has been a lively public debate about the drawbacks of offshoring business in the backdrop of economic uncertainty.
Any company outsourcing several jobs could attract a lot of negative press and even employee dissatisfaction.
How to manage the negative attention due to job loss
Firstly, it’s important to acknowledge that public fears about losing jobs are real concerns. Businesses should not dismiss them or take them lightly.
Companies should reach out to their critics and employees to explain their reasoning behind offshore outsourcing. Encourage the public to see it as a mutually beneficial relationship in which both countries gain something.
However, if local employees lose jobs directly due to offshore outsourcing, the situation needs to be dealt with more care. For example, you could find a way to rehabilitate them in your company or compensate them fairly.
7. Day-to-day operational challenges
Finally, the fact that offshore locations are essentially remote places significant hurdles on a day-to-day basis.
Most companies face some form of communication issues. Combine this with time differences and language barriers, and it’s a real management challenge.
This hampers overall productivity at every level.
Here are some direct consequences of the physical distance between the onshore and offshore locations:
- Lack of transparency: Employees may suffer from too much or too little information on crucial tasks.
- Scheduling problems: Teams may work without knowledge of what’s happening in other teams.
- Inevitable delays: Due to different workflows and supply chain management on both ends.
- Employee performance issues: Managers may have trouble assessing their offshore employees’ productivity.
How to manage day-to-day operational challenges
Offshore companies should prepare for such human resource management challenges ahead of time.
And the easiest way to do this is to leverage the right technology.
Whether it’s information dissemination or workflow management, there’s an app for your business needs. Some tools help foster long-distance collaboration with your outsourcing partner, while others allow you to monitor your offshore team’s performance.
One such productivity management app is Time Doctor.
Large companies like Ericsson as well as small and medium businesses like Thrive Market use Time Doctor to keep track of their employees’ productivity during work hours.
Here’s how this powerful employee productivity tool can help you overcome several remote team challenges at one go:
- Get detailed productivity reports on each offshore employee.
- Maintain a log of their shifts and schedules.
- Track all working hours with an easy-to-use timer.
- Integrate your payrolling with Time Doctor.
- Use the mobile apps to monitor your offshore teams with ease.
Does offshoring have any benefits?
Offshoring involves sending a part or all of your business operations to a foreign country.
And while we’ve covered offshoring’s disadvantages in detail, it also has some significant benefits.
Companies in developed countries have traditionally preferred offshore destinations in Asia, Latin America, and Eastern Europe to save money due to the lower cost of living in these regions.
Here’s a quick look at some key offshoring advantages:
- Cost savings from lower production costs.
- Lower administrative and operational costs.
- Access to a skilled labor pool at a lower cost than in your home country.
- Fewer staffing and recruiting concerns if you engage in offshore outsourcing.
- Opportunity for business development in a new market.
- Ability to provide round-the-clock operations across various time zones.
- Benefit from favorable government policies.
- Improved business flexibility and ability to take risks.
Learn more about offshoring pros.
Offshoring vs. outsourcing vs. nearshoring
Offshoring, outsourcing, and nearshoring often confuse most people. Since we have already covered what offshoring is, let’s see how it’s different from outsourcing and nearshoring.
In outsourcing, businesses hire a third-party vendor to take care of specific functions such as accounting, hiring, public relations, etc.
However, if a company hires a third-party vendor in a different country, it’s known as offshore outsourcing.
Check out more differences between the offshoring and outsourcing business models.
Now, if you want most of the benefits of offshoring without the time difference or cultural barriers, you can seek a nearshore partner.
Nearshoring or nearshore outsourcing involves shifting your operations to a nearby country for cost savings.
Read more about nearshoring.
The many disadvantages of offshoring are enough to make any business owner question whether it’s worth it.
After all, just because offshoring is a popular cost-saving model doesn’t mean it’s right for you.
You must clearly understand the various challenges you could face before taking the offshoring route for your business. Use this detailed guide to know how you can better prepare your company for the leap towards offshoring.
Andy is a technology & marketing leader who has delivered award-winning and world-first experiences.