Gone are the days when companies did everything on their own.
Powered by globalization and technological advancement, offshoring business operations has become increasingly popular among several companies. They move their business activities to a foreign country to benefit from cost savings and highly-skilled workforces.
But is offshoring right for your business?
In this article, we’ll explain everything important about the offshoring process and why your company should be on the list of offshoring companies.
We’ll also highlight some major companies that make use of offshoring services.
This article contains:
(Use these links to jump to specific sections)
- What is Offshoring?
- 4 Industry-giants Who Offshore Operations
- Why Should Your Company Choose To Offshore
- 4 Things To Consider When Offshoring
Let’s dive in.
What is offshoring?
Offshoring involves shifting the business operations of a company from the home country to a foreign country. Commonly offshored activities range from manufacturing to accounting and administrative tasks.
Put simply, offshoring lets you expand your team at a lower labor cost. This helps you increase your company’s overall output because of the skilled workforce.
And while the cost saving aspect mainly drives offshoring companies, other factors such as lack of talent in the home country can also prompt companies to move to an offshore location.
For example, India is a popular offshoring destination for US-based software companies due to the availability of skilled talent at an inexpensive rate.
2 types of offshoring
There are two types of offshoring:
1. Services offshoring
Popular banking companies such as Citi and IBM have offshored their IT services to developing countries such as India. JP Morgan (headquartered in New York) has been engaged in offshore development from way back in 2005.
When it comes to other services like human resource management, companies often choose to outsource it to contractors rather than perform offshoring.
2. Production offshoring
In production offshoring, companies shift their manufacturing processes to other countries — motivated by cost savings and fewer regulatory measures.
It started with the NAFTA (North American Free Trade Agreement) trade agreement, which saw many US companies offshore operations to Mexico.
And the opening of Chinese markets attracted a large corporation – apparel industry giant Nike to offshore manufacturing. So much so that China is often known as the world’s workshop, home to many manufacturing industries.
However, companies can also onshore business processes.
Instead of hiring foreign workers, an onshore company employs local workers. You move business activities to states/provinces that can help you cut costs.
Other benefits of onshoring are the absence of cultural differences or cultural barriers that can cause miscommunication.
Key differences between offshoring and outsourcing
Here’s a handy table to help you visualize the differences between the two:
|Nature of work||Companies shift their business operations to a foreign country where the cost of living is lower. ||Work such as telecommunication support is delegated to a third-party contractor. It can be within the home country or in a foreign location. |
|Administration||They have to set up their offices, hire employees, and manage them.||Companies don’t have to worry about hiring and administration as a third party handles it.|
|Benefits||Create a global, skilled workforce that is better integrated for collaboration.Have complete control over the entire product development and business process.||Cut costs by making use of cheap labor.By delegating the outsourcing services to a vendor, companies can focus more on their core tasks.|
|Risks||The socio-economic and political conditions of the foreign country can impact the business. They may also have different jurisdictions, which can complicate things.||The risk for sub-quality products/ services increases if the third party is profit-driven.|
4 industry-giants who offshore operations
Here are four popular businesses that are some of the most successful offshoring companies in the world:
It’s hard to imagine that a popular social networking app, one that was sold for $19 billion to Facebook, was powered by offshore development.
Usually, software development folks from the United States are sought after the most globally — and they constitute a good portion of American jobs.
But as a small startup at an early stage, WhatsApp offshored its services to developers from Eastern Europe. It helped them reduce labor costs, which they could invest in marketing and other areas.
These developers handled most of the development, while in-house engineers in Silicon Valley focused on client-focused tasks like customer support.
Eventually, WhatsApp onboarded some of these developers when they started growing rapidly.
It might be strange to find Google on this list — considering they have some of the best software development training programs and developers in the world.
But even for companies like Google, cost saving is a major priority.
In 2020, they acquired a US-based company — CloudSimple. It allows cloud vendors like Microsoft’s Azure to deploy and manage workloads on the cloud.
CloudSimple had offices in Ukraine and India. After acquiring the company, Google opened its R&D center in CloudSimple’s base in Ukraine with employees from CloudSimple working there.
This acquisition helped them cut costs significantly and indirectly implement an offshore development company.
The American multinational giant had hopped on the offshoring train way back in 2000 – investing a whopping $150 million+ in Cisco’s research and development center in Bangalore, India.
As a result of investing continuously over the years, the Bangalore R&D center now employs more than 7000 engineers. It’s also one of Cisco’s largest R&D centers globally and possibly the most important offshore partner.
This R&D center started as an offshore company for Cisco and now powers all their customer and technical support services.
4. General Electric
General Electric followed the same path as Cisco and decided to offshore some of their operations for better performance. But GE has been associated with offshoring in India for way longer.
Back in the 90s, investing in India was considered to be a risky venture. Jack Welch (ex-CEO of GE) was the man responsible for making India one of the preferred offshoring destinations by taking the offshoring initiative.
GE was among the first to invest in new technologies and business service provider sectors.
They now have a major research and development center in India, responsible for communicating with GE’s partners, suppliers, and other stakeholders.
Why should your company choose offshoring
Here are four crucial reasons why you should offshore:
1. 24×7-time zone coverage
Why would you want to have all-day coverage?
Mainly for two reasons:
A. Handle global clients
Companies are increasingly working with clients and customers all around the world. But the different time zones pose a significant problem for business hours.
For example, let’s say it’s 11 A.M. at your client’s office when it’s 11 P.M at your office. If the client requires support, your company won’t be able to offer it. This can lead to client dissatisfaction.
Often big companies have an offshore team in each continent to handle clients from nearby countries and cater to that continental region.
B. Maintain a continuous workflow
Let us go back to the example of JP Morgan offshoring their services.
A large investment banking firm, JP Morgan does all their trading during the day and documents it. After the trading is over, they send over these records to their offshore team in India.
The Indian team monitors the records to see for financial irregularities and reports them back to the main office. This way, they have a continuous workflow across their global workforce.
2. Cost savings
Here’s how offshoring companies can enjoy financial benefits:
A. Employee salary and benefits
Most of the offshoring locations are developing countries, with a relatively lower cost of living.
So you would have to pay offshored employees lesser salaries and benefits than their domestic counterparts. This leads to significant cost savings for companies, helping them hire talented people at a lower cost and receive quality output.
B. Administrative cost
Building or renting a new office in countries with a lower cost of living saves you money. Management work such as legal filings (for offshore jurisdictions of countries) and payroll also becomes cheaper in developing countries.
Moreover, the governments of these countries encourage companies to set up their offices by offering income tax breaks and other amenities.
Companies in their home countries may have to pay significant income taxes. But offshore outsourcing to certain countries can help you reduce all kinds of tax.
All these contribute to increasing your company’s overall profit margin.
3. Expands your talent pool
When you offshore your activities, you’ll have access to top talent from other countries.
You’ll be able to find experienced professionals for software development, content production, and more.
And if you’re offshoring to countries with lower costs of living, you’ll be able to recruit talent at a cheaper rate than it would cost you to hire in-house or upskill a current employee.
Exactly what WhatsApp did.
Additionally, countries like the Philippines have a literacy rate of 97% and offer a continuous flow of skilled workforce that you can effectively utilize to ensure high quality of work.
4. Easier to scale
Scaling means growing your company by investing in more resources for your company.
One way to offset the risk and make scaling easier is to cut down on expenses by paying a lower cost for items and amenities. Economies of scale can help you with that.
For example, in a specific offshoring country, every new product is priced 5-10% cheaper. This may not seem like a considerable discount.
But if you look at the big picture – investing $100,000 in your home country might translate to $90,000-95,000 in the offshore region.
Offshoring offers multiple opportunities to benefit from economies of scale. On top of that, a cheaper supply chain also helps you with scaling by sourcing and transporting products at a low cost.
Here are more offshore outsourcing pros and cons.
4 things to consider when offshoring
There are a lot of factors at play when deciding about the offshoring process.
But these four will help you learn whether you are headed in the right direction or not:
1. Explore other options
Sure, offshoring provides some great benefits, but it may not always be the right option for your business.
There are three models to choose from:
- Completely offshoring companies.
- Completely outsourcing companies.
- Hybrid companies – companies choosing both outsource and offshore options.
It is essential to list your company’s needs that cannot be compromised and choose a business model accordingly.
Two questions that can help you answer if offshoring is right for you:
- Do you want to have control over the processes?
- Do the services and processes require technical knowledge specific to your company and its operations?
If you answered yes, then you should explore offshoring.
If you answered no, outsourcing services could get the work done efficiently as well.
2. Consider all the risks
The entire point of offshoring is to cut down on costs.
Even when you hire employees for your company at a cheaper cost overseas, you may still have to rely on third-party vendors — similar to an outsourcing company.
The responsibility for tasks such as setting up the office, staffing them with essential workers, and managing it could fall on those vendors.
Contracting such tasks help cut costs for the offshoring or outsourcing company.
But it also brings a degree of operational risk that can disrupt your daily operations.
Suppose your offshoring company transfers all the required processes to a third-party vendor and soon becomes dependent on them. In such situations, your company risks losing the vendor if their demands are not met.
3. Determine what processes to offshore
Offshoring has two major stakeholders – the vendor and the offshore company.
One big mistake companies may make is to focus on vendors instead of which process to send for offshore outsourcing.
Avoid this by understanding the three types of processes:
- Core: These processes are central to the business – they shouldn’t be offshored.
- Critical: Services from top-notch vendors can substitute these processes.
- Commodity: Processes that primarily deal with raw materials or support other processes – can be offshored.
4. Prepare for administration challenges
Offshoring work provides users with both pros and cons. Despite the geographical distance between them, your in-house employees and offshore employees need to be on the same page.
One way to achieve that is by monitoring their work.
An in-house employee is easier to monitor. But things get challenging with an offshored employee.
However, tracking time spent by the offshore team on various tasks remains a critical challenge.
To solve this problem, you could use Time Doctor.
Time Doctor is a powerful remote productivity tool used by industry giants as well as small and medium businesses like Thrive market.
About 50 years ago, GE became one of the first offshoring companies — essentially giving birth to an entire industry. Over the years, technology companies such as Google and IBM followed GE’s path to offshore some of their operations.
And one of the major reasons why companies continue to offshore operations is to acquire better services for lower costs.
But you also have several challenges to face before you can offshore business operations. Use this guide to understand if offshoring is right for your business and how you can go about it.
Liam Martin is a co-founder of Time Doctor which is software to improve productivity and help keep track and know what your team is working on, even when working from home.