Offshoring or outsourcing consists of subcontracting particular services to other specific geographical areas to reduce costs. The companies often offshore their production process to countries where work power is cheaper than in their original countries. It also offers the perfect opportunity for possible expansion and even more flexibility, such as customer service hours. For example, having a customer service team based in Australia will help you cover the hours of a 24-hour phone line.
Offshore services are very common in business. For example, many companies outsource their customer service to a mobile operator. In this way, they handle customer service from places where this service is cheaper and saves the company’s costs. You can also outsource via hiring a single foreign worker who may be better equipped for the job than talent near your company’s location. If you can do the job remotely, why not open a global search?
Types Of Offshoring
Depending on the company and its needs, there are different types of outsourcing. Depending on the point of view, we could classify different types of outsourcing according to the following characteristics:
- Offshoring: The company sets up offices in the areas it plans to move to, and the company itself provides the capital and assets to implement the processes.
- Outsourcing: The company enters into an agreement with the company for the development of a process or service. An external and independent company performs these tasks.
- Distant territories: In these countries, you can get lower production costs. However, there is a more significant cultural asymmetry.
- Nearshoring: Moving to nearby areas. This practice is becoming more and more common, especially in the United States and its neighboring countries. Hence the name “nearshoring”.
- Services: This consists of providing services abroad. It is very common in services such as customer service.
- Manufacturing: Outsources production processes to factories and production facilities abroad.
- Sales: This happens when companies want to open new markets and establish new sales networks.
- Research and development: This consists of transferring activities that increase the value of the service or product abroad. In this way, many companies establish their research centers in more developed locations.
Advantages And Disadvantages Of Offshoring
When a company decides to apply offshoring in its business, it should be aware that it is not all advantages. Although the cost savings are significant, other risk factors, such as the loss of intellectual property, have caused significant problems. Therefore, if a company decides to go abroad to a distant country, it should be aware that many advantages and disadvantages are fundamental.
Among the advantages, we could highlight the following:
- Cost efficiency
- Increased productivity
- New market entrance
- Less costly labour
- Diversification of risk
On the other hand, the disadvantages include:
- Loss of intellectual property
- Cultural and linguistic conflict
- Loss of product quality
- Precarious workers
- Loss of control in the company
This is probably the most visible benefit of outsourcing. By moving to a country where labor is cheaper, you automatically save on both services and production (as long as delivery is not more expensive).
The mainland where the accounting is located is likely to have much lower rental costs. This benefit includes labor costs in the country where you have moved abroad, as well as office space costs. You don’t have to worry about where the accounting is located if it is on another continent.
This is another great way to save money. If you choose your outsourcing location carefully, you can take advantage of tax breaks if a foreign government tries to stimulate the local economy by lowering corporate taxes.
Moving parts of your business abroad makes it easier to open new markets. After that, it’s much easier to expand in the country you’re moving to, and hiring new foreign workers is less of a financial burden.
With the help of outsourcing, you have access to professionals in a completely different field and create a versatile and talented team by hiring foreign workers with lower labor costs.
Offshoring is an excellent option to significantly reduce production costs and expand business. As we can see, it is also necessary to weigh its disadvantages. For this reason, it is necessary to draw up a detailed plan that defines the objectives of the business strategy. It is important to address the risks or disadvantages that certain activities in a foreign country may involve.