Between elevated inflation, rising supply chain costs, and persistent labor shortages, businesses of all sizes are feeling the crunch. This means any measures that can help cut costs are on the table. One way to reduce costs, increase margins, and potentially improve service is to use offshore outsourcing, also known as offshoring.
Here, we’ll look at the pros and cons of offshoring and share some tips for starting to use overseas labor for a portion of your operations.
What is Offshoring?
Offshoring is when a company moves some or all of its business operations to another country, typically to lower costs or improve profits.
Technically speaking, the term offshoring usually describes the physical relocation of a business’s operations overseas. For example, if Acme Corporation built a manufacturing plant in China and hired workers there, Acme would own the plant and the workers would be direct employees of the company.
Then there’s offshore outsourcing, which means a third party located overseas takes over a certain aspect of a business’s operations. In this type of arrangement, rather than opening its own manufacturing plant, Acme would contract with an existing plant in China to take over manufacturing without hiring its own employees. Offshore outsourcing is frequently used to lower manufacturing and call center operations costs.
For our purposes, we’ll cover the pros and cons of offshoring and offshore outsourcing.
Despite the common argument that offshoring has negative consequences for domestic workers, an NIH 2023 study suggests otherwise. Researchers found that increased offshoring in the United States resulted in higher productivity and capital investment locally, thanks partly to firms’ lowered costs and higher profits.
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Pros of Offshore Outsourcing
1. Cost savings
Most companies choose to outsource overseas due to potential cost savings. Offshoring certain types of labor, like software development, can reduce labor costs by as much as 70%. Offshoring can also help companies save on raw materials and improve efficiency, which further contributes to reduced expenses.
2. Access to specialized expertise
Specialized labor, like IT or financial services, can be expensive and competitive to hire domestically. Offshoring these specialized business functions, which is known as knowledge process outsourcing, gives companies access to workers with niche skills at lower rates and with less competition, which results in lower hiring costs and potentially better business outcomes.
Some of the most common knowledge processes that are outsourced internationally include market research, intellectual property research (like for patent applications), legal services, training, research and development, and design.
3. Access to innovation
In addition to helping companies leverage specialized expertise, offshoring can also give firms access to innovation in other areas, like machines and processes. By offshoring the development of a physical product, for example, a company might be able to use specialized equipment that already exists in another country and has been refined for a specific purpose versus allocating the time and resources to develop or assemble the necessary equipment to make the product in-house.
4. Round-the-clock uptime
Today’s consumers demand 24/7 service. The internet made standard business hours all but obsolete for industries like retail and entertainment; now, when a customer encounters an issue with your service, they want to have it resolved at the moment, even if that moment is at 2 a.m.
By capitalizing on workers in a range of time zones, offshoring makes it more feasible for companies to offer round-the-clock uptime, such as 24/7 technical support.
5. Improved focus on core business tasks
Cost savings aside, the greatest benefit of offshoring is its potential to free up resources that can be redirected to focus on your core business operations, ultimately increasing profits.
For example, let’s say your HR department spends five hours a week manually reviewing and approving employee timesheets. It’s a necessary task but one that contributes virtually nothing in terms of business or intellectual output. By outsourcing this task to a qualified offshore partner, you’d free up 20 hours a month that could instead be spent on activities that will drive revenue, like attracting qualified salespeople.
6. Speed to market
By leveraging external knowledge, tools, and resources, companies can respond to consumer demands and bring new products to market faster. This can be a significant competitive advantage, especially in industries driven by rapidly shifting trends like fashion or technology.
7. Business continuity
Diversifying the geographic location of your operations serves an important purpose for business continuity. Suppose a production hub or server in the home country experiences an outage. In that case, a company with offshore headquarters can continue service without interruption by tapping the other locations to pick up the slack.
8. Risk mitigation
Some countries fare better than others in times of economic downturn or global/regional crises. COVID-19 was a perfect illustration of this. Spreading operations across multiple countries reduces a company’s reliance on the whims of any single economy or political situation.
9. Tax advantages
Some countries (aptly known as tax havens) offer tax conditions that are highly favorable to corporations. Other countries offer incentives to attract certain industries, like manufacturing or R&D. Companies can lower their overall tax burden by taking advantage of these business-friendly tax environments.
10. Reduced regulatory burden
From labor laws to environmental restrictions, regulations vary from one country to the next. Moving select aspects of a business overseas can help firms minimize their compliance costs and the resources associated with staying on the right side of the law.
Cons of Offshore Outsourcing
1. Less control over your operations
When you’re not present in person to manage timelines and address issues, small delays can turn into massive backlogs and fixable issues can balloon to multiple times their original size. An entire Reddit thread is dedicated to offshoring horror stories describing missed deadlines, unreasonable supply markups, and “final” products delivered with mistakes.
One of the main concerns about offshoring is losing control over the part of your operations you’re outsourcing. That’s why it’s hard to overstate the importance of doing your due diligence and properly vetting any overseas talent or company you plan to work with rather than just going with the lowest bidder.
2. Logistical challenges
Operational challenges are one thing, but even the most trustworthy offshore firms can encounter logistical challenges that are inherent in working with a partner located halfway around the world.
First, there’s the language and cultural barrier. Though many overseas workers speak English, doing business involves certain nuances that can easily be lost in translation. If a complex technical issue arises, do you have a game plan for communicating about it?
Then there are those tricky things known as time zones. If both firms operate primarily during their country’s normal business hours, this can lead to multi-day lags in communication that can slow down projects. For example, if you send an email at noon from New York to Beijing, where it’s midnight, you might not get a response for eight hours or more. This means your reply would likely happen the following business day, and so on.
Minimize time zone challenges by establishing clear guidelines on when key leaders will be available for communications, ideally during a window when both parties are simultaneously available so decisions can happen immediately. Having more than one designated point of contact on both sides is also a good idea.
3. Public image concerns
Generally speaking, Americans have a negative view of outsourcing labor overseas. For instance, in domestic labor opinion polls, between 76 and 95% of Americans surveyed said the offshoring of production and manufacturing work was a reason the U.S. economy was struggling, and more workers weren’t being hired at home.
Whether or not this is actually true in your company’s case, you’ll need to be prepared for potential criticism of the decision to use offshore labor in the public arena. Resources like this paper on the public fear of offshoring can help you better understand people’s concerns with the practice and equip you with the fact-based information you need to dispel negative feelings among customers.
4. Employee morale
Similarly, internal parties may have negative feelings about the use of offshore labor. Domestic employees may feel threatened by the possibility of their job being outsourced overseas, a fear that may come to fruition and result in lowered morale. Workers may experience reduced engagement because of their disapproval of the company’s approach.
Related: Employee Incentive Programs to Motivate and Engage Your Staff
5. Payroll and tax complications
Dealing with America’s tax system is complicated enough on its own; when you introduce an entirely different country into the mix, it comes with a whole new batch of laws to navigate and tax systems to understand. The last thing you want is to unintentionally run afoul of another company’s laws regarding registering your business or employing its workers.
There are many ways to pay overseas workers; the one that’s right for your business will depend on several factors, like the country’s laws, where the worker has citizenship, and the location they claim as their full-time residence—enlisting an international tax or payroll expert to help you stay on the right side of labor laws when offshoring is wise.
6. Lack of knowledge transfer
When certain aspects of business are conducted in a separate geographic location, knowledge about that part of the business becomes restricted to that region, as well. Knowledge transfer is limited, both on an individual-to-individual level and within the organization as a whole.
7. Security concerns
Security, particularly cybersecurity, is a major priority for businesses today. Sharing sensitive information across national borders can increase the risk of data breaches and cyber-attacks. Intellectual property may also be at risk in countries with weaker IP laws.
How to Choose the Right Offshoring Location
As you review various options for offshore outsourcing, consider the following factors that may impact the location’s success.
Time zone
In some lines of business, the time zone may not matter much. In others, it will make or break the ability to communicate effectively. If time zone compatibility is a priority, consider “nearshoring,” which is choosing an offshore location that’s geographically close to your home country.
Political and economic stability
Look for countries with a stable government, a legitimate legal system, and a pattern of strong economic growth, as these all indicate a secure place to conduct operations.
Infrastructure
Reliable infrastructure is critical for smooth operations. Assess the quality of a country’s power grid, telecommunications network, and transportation infrastructure to determine whether you can reliably do business there.
Regulatory environment
Before you decide on an offshoring location, it’s important to understand the country’s laws as they pertain to your business. Pay attention to corporate regulations and data privacy laws.
Cultural compatibility
Countries with similar values are more likely to collaborate successfully. Things like a shared work ethic and a similar communication style will make it easier for employees in different locations to interact. Also, consider the quality of life in the country, as this will impact offshore workers’ morale and productivity.
Language barrier
An estimated one in five people worldwide speaks English, and the number is even higher among working adults. Still, it’s important to understand the language proficiency level of the population you want to engage to ensure it meets your expectations.
3 Ways to Test the Waters with Offshore Labor
If you’re considering using overseas labor for the first time, follow these three tips to ease into it.
Offshore non-customer-facing functions
Building trust with an international partner takes time. Before you start having customers interface directly with reps overseas, begin instead by outsourcing a more behind-the-scenes function. Data entry, document management, research, claims processing, and IT maintenance are all good options. This allows you to build an effective working relationship while giving your partner time to learn your business before interacting directly with customers.
Deal in non-confidential information
Confidentiality is another legitimate concern when moving business operations overseas. Avoid sharing trade secrets or sensitive client data with a new offshore partner whenever possible. Additionally, you’ll need to ensure you’re not violating your existing business contracts, some of which stipulate that all work must be performed domestically.
Get references
Some of the best offshore relationships we’ve seen are the result of referrals from someone who’s already had success working with a vendor. If you can’t get a recommendation from a trusted contact in your network, ask the vendor to provide international references that can speak to their experience collaborating on projects similar to yours.
Strike the Perfect Staffing Balance with 4 Corner Resources
Do you need help analyzing your current staffing strategy to arrive at the right mix of domestic and offshore labor? 4 Corner Resources can help. We’re experts at helping companies attract and hire talent that will facilitate growth and drive innovation. Whether you’re looking to hire for a single department or need to find candidates to fulfill a range of business functions, we’ll take sourcing, screening, and interviewing off your plate.
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