Pros and Cons of Offshoring

Offshoring is when a company outsources a service, usually to a foreign company. The company may choose to do so because it wants to save money on labor costs. It may also want to avoid complying with specific regulations or laws.

When a business decides to move some of its operations overseas, it usually happens because the cost of doing business in a particular location is too high. The company may decide to move production to a lower-cost location, or it may choose to outsource certain services to a cheaper provider.

Offshoring became a trend in the 1980s when many U.S. manufacturers moved production overseas because of cheaper labor costs. Today, most major corporations use offshore locations to cut costs and increase profits. However, offshoring has pros and cons, and businesses regularly review the cost-benefit analysis.

China became the most prominent offshoring provider after it acceded to the World Trade Organisation in 2001.

Operational services like administration, accounting, support services, and call centres, are popular for offshoring and technology has also gotten into the act too, particularly with software development services.

There are many countries ideal for offshoring, Asia has the most representation in A.T.Kearney’s Overview, and here are some of the countries among their top ten:

• India
• China
• Malaysia
• Mexico
• Brazil
• Bulgaria
• Egypt

G20 nations are among the top 20 countries for offshoring, including Germany, India, Indonesia, Mexico and the USA.

What are the reasons for offshoring

Lower labour and operational cost

The primary reason for offshoring is to reduce labour cost, and since profit-boosting is necessary for a competitive market, this serves as a great benefit.

New markets

There are high opportunities of finding a lucrative market and having a local hub to provide a whole new platform for business.

Wider knowledge base

Having your employees trained and educated to a high and better standard is one of the major benefits of offshoring. This would ensure a high level of service.

Handling mundane tasks

Delegation of routine and mundane tasks like staff management can be offshored, too, just to reduce costs on a labour-intensive project.

Let’s look into the positives and negatives of choosing to go offshore.

Pros and Cons of Offshoring:

The pros and cons of offshoring are many. Some people believe that offshoring is good because it allows companies to save money on labor costs. Others argue that offshoring harms the environment and violates human rights.

Some of the pros and cons of offshoring include:

• Cheaper labour costs
• Less tax obligations
• Lower real estate expenses
• Social and cultural barriers
• Communication challenges
• Security concerns
• Higher utilities costs

Pros

Do the pros outweigh the cons of offshoring? Let’s find out.

Cost Savings

In a competitive market, when a company requires a profit boost, the business operations can be offshored to reduce cost and labour expenses.

Less Real Estate

Reduced staffing would lead to a reduction in space. Real estate costs are usually high in places where staffing cost is high too. But many offshore locations can have low costs on land purchase.

Managing Risk

Offshore locations that have been well-planned serve to reduce associative risks with offshoring. This is true in case of outsourcing the offshored processes as the companies would be a specialist in this field.

Tax Advantage

Offshoring provides a lot of tax benefits, especially for these overseas companies.

Cons:

Offshoring also challenges economies where a lack of jobs results in a brain drain and loss of expertise.

Communication issues

One major drawback of offshoring is the language barrier. English may be the common language, but understanding ascents are challenging and cause confusion and miscommunication of orders and requirements.

Cultural and social barriers

There will always be challenges with adapting to a new environment and culture. In the workplace, the way people behave is likely to differ from what you’re used to, and this may also apply to your attire.

Even in regions that speak the same language, some nuisances can get in the way and cause some initial alienation.

For example, in the USA, straight-talking is appreciated, whereas to do likewise in a more religious nation may be considered offensive.

Time zone differences

Appropriate shift patterns need to be assigned to match the time differences between zones.

Security

Offshoring does come with security issues and hence strict protocols and safety measures need to be implemented.

Loss of Intellectual Property

Overseas loss of IP would mean the multiplication of the original cost.

Higher offshore cost

The offshore labor cost might be about 70% lower, but other utilities might be costly, like electricity in some countries.

Conclusion:

While offshoring comes with its advantages of reducing labor costs and facilitating new markets and opportunities, it has challenges, too, like social, cultural, and communication barriers, as discussed in detail in this book. Hence offshoring pros and cons must be considered before choosing to offshore your entire or even part of your business operations.

With COVID-19, offshoring worked both for and against many organizations, and you can read all about it in our next article on the same topic – the new threat to offshoring.