As business strategies and requirements change, companies need to adopt different processes that can help them grow.
And one of these processes is offshoring.
This article contains:
(click on the link to jump to a section)
- A Successful Example of Offshoring: General Electric (GE)
- 5 Other Offshoring Companies
- 2 Types of Offshoring
- 3 Popular Offshoring Destinations
- Pros and Cons of Offshoring
Let’s get going.
A successful example of offshoring: General Electric (GE)
It’s a cheaper and more convenient way of completing projects without burdening your in-house employees.
Let’s take a look at how General Electric successfully offshored its operations:
A. About GE
General Electric is an American multinational conglomerate (multi-industry company) founded in 1892. Headquartered in Boston, USA, GE deals in aviation, digital industry, power, renewable energy, etc.
The company ranked 33rd by gross revenue among the Fortune 500 companies in the US.
B. Why offshoring?
GE was one of the earliest companies to offshore its business activities — as early as the 1970s. The company’s then CEO, Jack Welch, believed that public corporations should primarily consider the interest of their shareholders.
Their main intention was to benefit from a lower cost of labor and maximize profitability by transferring business operations to an offshore location.
General Electric decided to offshore to India. It invested approximately $130 million to set up a state-of-the-art research and development (R&D) center in Bangalore. This is GE’s second-largest R&D center in the world and employs skilled Indian professionals.
D. Services offshored
GE offshored some of its major business processes to India, including operations, data maintenance, and call centers.
They created a specialized department in India called General Electric Capital International Service (GECIS) that provided services such as:
- Customer verification
- Finance and bookkeeping
- Business analytics
- IT outsourcing and support of software development
By the end of 2004, GECIS had a staff of over 12,000 offshore workers. And because they had offshored these processes to India, where the cost of living is much lower than the US, they could save a significant amount on wages.
The company’s overall savings have been almost USD 30 million!
Unlike some companies that prefer captive offshoring (setting up an offshore unit that caters only to your company), GE decided to convert GECIS into a standalone unit to provide similar services to other companies.
In 2005, GECIS was renamed Genpact and made into an independent company.
Genpact (headquartered in New York, US) is now a global professional services platform. Apart from GE, it provides various new technologies and intelligent operations to Global Fortune 500 companies and other large brands.
5 other offshoring companies
GE isn’t the only example of successful offshoring. Many other giants have successfully relocated some of their business operations to an offshore location.
Let’s take a look at the top five ones:
Google is one of the many industry leaders that has benefited from offshoring.
In 2019, the company acquired CloudSimple, a cloud-based service provider that enables VMware users to move their on-site operations to the cloud.
CloudSimple has an office in Ukraine. In the process, Google transferred its research and development center to that office, technically offshoring its R&D process.
Of course, the offshoring decision wasn’t due to a lack of expertise but was mainly based on reducing business expenses through offshore hiring.
The globally acclaimed cell phone company relocated its production unit from the US to China.
Foxconn, which is Apple’s outsourcing vendor in China, employs around 230,000 domestic workers in manufacturing jobs to make iPhones and iPads.
The primary reason for selecting China as the offshoring country is because it’s one of the most cost-effective electronics manufacturing destinations globally.
WhatsApp offshored many of its software development operations to Eastern Europe, particularly Russia, because of the enormous talent pool.
Offshoring allows the in-house teams to focus on the most relevant business issues at any specific point. And that’s why WhatsApp relied on its offshore talent to handle design solutions and the core app development.
This enabled their in-house engineers to focus on client-centric tasks such as customer support, which were extremely crucial during the initial stages after the launch in 2009.
Utilizing the resources wisely resulted in WhatsApp becoming one of the biggest messaging apps. This forced Facebook to overcome its giant competitor by acquiring the company for $19 billion.
4. JPMorgan Chase
JPMorgan Chase is a financial service provider located in New York City, US. It’s one of the prominent providers of services such as investment banking and finance.
The firm is a major employer of BPO services in the Philippines.
Additionally, JPMorgan Chase and Co. has three other business models in the Philippines:
- Corporate infrastructure
- Corporate investment banking
- Global service center
The bank has also offshored around 30% of its back office and support jobs to India.
BigCommerce is a technology company based in Texas, US.
It offers web hosting, search engine optimization, and other innovative IT services for e-commerce companies.
After establishing the company in 2009, they wanted to expand their team but faced a scarcity of skilled IT engineers in the US.
That’s when they offshored their R&D center to Ukraine. This center now provides developers that help people set up their e-commerce sites, customize category pages, create mobile versions of websites, etc.
2 types of offshoring
Offshoring aims to help businesses minimize service and production costs, avail tax benefits, and comply with less stringent regulations.
Additionally, if your in-house employees don’t have the skills for taking up a particular project, you can offshore it to experts with the right core competency set for it.
This enables you and your team to focus on your core business operations, such as taking inventory, building products, handling clients, etc.
Developing countries like the Philippines, India, Ukraine, Mexico, Colombia, etc., are the top offshoring destinations for western companies. The major advantage of selecting these countries is their advanced infrastructure and relatively low labor cost.
Here are the two types of processes that you can offshore to these destinations:
1. Services offshoring
Services offshoring involves setting up units in offshore countries that carry out service-related operations like:
- Customer service.
- Technical support.
- Human resources.
- Information technology (IT).
- Accounting, and more.
For example, a US-based software company can relocate its business process outsourcing (BPO) operations to a different country like the Philippines. This developing country is known for lower labor costs and a high level of English proficiency among its workforce.
2. Production offshoring
If you establish your manufacturing unit in another country and import the finished product to sell it in your domestic market, it’s known as production offshoring.
For example, a cell phone company located in the US can move its cell phone production and manufacturing jobs to an offshore country like Brazil.
Cost saving and a vast pool of workers are the major advantages of outsourcing or offshoring your manufacturing to Brazil.
3 popular offshoring destinations
Until a few decades ago, only textiles, automobiles, and steel manufacturers would relocate their operations. However, with the tech revolution, many countries now prefer offshoring their software and production processes.
Offshoring helps them reduce business costs by hiring highly talented employees at lower wages.
So what are some popular offshoring destinations?
Let’s take a look.
According to Kearney Group’s Global Services Location Index (GSLI), India holds the top rank as an offshore destination for businesses. The ranking is based on financial attractiveness, favorable business environment, availability of skilled labor.
The primary reasons for India’s popularity are:
- Technologically and technically skilled workforce.
- Relatively low-cost labor.
- Good English proficiency.
- Workforce with higher education.
- Willingness to work in 8-hour shifts, ensuring continuous work.
- Investment-friendly government policies like Biotechnology Ignition Grant, Agriculture Export Policy, etc.
The major cities for outsourcing or offshoring are Bangalore, Pune, Mumbai, Chennai, Delhi, Hyderabad, etc.
Read more about offshoring to India.
Ukraine is a popular offshore outsourcing country located in Eastern Europe.
The developing country also has 10+ IT companies featured in the 2021 Global Outsourcing 100 list.
Additionally, the Ukrainian government has made various provisions for improving the ease of doing business in their country. Formalities related to offshore manufacturing or other services are significantly hassle-free in Ukraine.
3. The Philippines
The Philippines is another popular Asian offshore country.
In the last two decades, it has emerged as one of the top destinations for companies to offshore their BPO.
One of the major reasons for the success of the BPO industry here is the professionals’ high English proficiency, an easy-to-understand neutral accent, and reasonable pricing.
Additionally, the country’s business cities like Manila, Cebu, etc., are equipped with 24/7 high-speed internet that enables an offshore company to run its operations smoothly.
The Philippine government also has various favorable laws and policies for the growth of an offshore company, including the Data Privacy Act (2012), tax benefits, and investment assistance offered by the Philippine Economic Zone Authority (PEZA), etc.
Pros and cons of offshoring
Here are the advantages and disadvantages of offshoring:
1. Offshoring pros
Many companies have benefited from offshoring some of their business processes.
Let’s now look at the reasons why these companies decided on offshoring:
- Focus on core tasks: when a company offshores or outsources some of its secondary services, it allows the in-house team to focus on its core business functions.
- Cost reduction: an offshore location generally has lower labor costs and a lower cost of raw material and other operating expenses.
- Availability of skilled labor: many offshore developing nations generally have a large population of skilled workers and professionals.
- Streamlining processes: offshoring, especially offshore outsourcing, ensures that a remote team works only on the offshored operations, thereby facilitating all the work.
- 24/7 working: having an offshore team in a different time zone can ensure that somebody is working on your tasks even if you’re asleep.
- Tax and other benefits: various offshoring locations offer some financial incentive, tax holidays, and less stringent business regulations to attract foreign investments.
Learn more about the benefits of offshoring.
2. Offshoring cons
As is the case with any business process, offshoring also has some limitations.
Some of these disadvantages include:
- Language and communication issues: offshore countries may often use an entirely different language than that used by your company. This, along with time zone differences, can make communication challenging.
- Long distances: your offshore company may be located far-off from your home country. This may make it difficult to travel to and manage the remote team in a different country.
- Supply chain issues: long distances can also significantly lengthen the supply chain for a manufacturing company, causing delays in delivering the products.
- Social and cultural differences: a foreign country will most probably have different cultures and customs from those of your company’s home country. Cultural differences such as public holidays, festive seasons, etc., may make collaboration difficult among teams.
- Political unrest or instability: certain offshore countries may have political disruptions such as protests, worker strikes, riots, wars, etc., making it challenging to complete the tasks within the given time.
- Safety and security concerns: your company’s offshore unit may face threats from local companies or communities if they feel that it’s harmful to them.
While relocating all or some of your business operations to an offshore outsourcing country, you should consider these hurdles to make an informed decision.
Here are some more factors that you should consider before offshoring.
Over the years, many large corporations have realized that they can benefit from transferring their business processes to an offshore location.
The examples of offshoring mentioned above prove that it’s possible to overcome the challenges to grow your business.
Careful planning and effective implementation can help in successfully offshoring your operations. And we hope that this article helps you make an informed decision regarding offshoring your operations.
Andy is a technology & marketing leader who has delivered award-winning and world-first experiences.