Outsourcing to a distant country
Offshoring 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 is very common in business. For example, a lot of companies outsource their costumer service to a movil phone operator. In this way, they manage customer care from locations where this service is cheaper and saves costs for the company.
Offshoring also includes hiring a single foreign employee who may be better equipped for the job than the talent available 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 offshoring. These can be understood from other points of view, as it can be done in many different ways.
Depending on the point of view, we could classify the different types of offshoring according to the following characteristics:
Offshoring: The company establishes sites in the regions to which it intends to relocate, with the company itself providing the capital and assets to carry out the processes.
Outsourcing: The company agrees with a company to contract the elaboration of some process or service. An external and independent company carries out these tasks.
Offshoring to distant territories: You can get lower production costs in these countries. However, there is a more significant cultural asymmetry.
Nearshoring: Relocation to nearby territories. This practice is increasingly common, especially in the United States with its neighboring countries. Hence the name “nearshoring.”
Services: This consists of the provision of services abroad. Very common in services such as customer service.
Manufacturing: outsource of production processes to factories and production sites abroad.
Sales: This occurs when companies wish to open up new markets and establish new sales networks.
Research and development: This consists of offshoring those activities that add value to the service or product. 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. Even if cost savings are significant, other risk factors, such as the loss of intellectual property have caused significant problems.
For this reason, if a company decides outshore to a distant country, it should be aware that several advantages and disadvantages are fundamental.
Among the advantages of offshoring, we could highlight the following:
- Cost savings.
- Increased productivity.
- Opening up new markets.
- Hiring cheap labor.
- Diversification of risk.
On the other hand, the disadvantages of offshoring include:
- Loss of intellectual property.
- Cultural and linguistic conflict.
- Loss of product quality.
- Precarious workers.
- Loss of control in the company.
1. Cost savings
This is probably the most apparent benefit of offshoring. By offshoring to a country where labor is cheaper, you automatically save money on both services and production (as long as shipping is not more expensive).
The continent where the accounting department is located is likely to have much lower rental costs. This benefit includes labor costs in the country where you have offshored and the cost of office space. You don’t have to worry about where to put the accounting department if it is on another continent.
2. Tax benefits
This is another excellent way to save money. If you choose your offshoring location carefully, you will be able to take advantage of tax breaks if the foreign government is trying to stimulate the local economy by reducing taxes for businesses.
3. New markets and ease of scaling up
Offshoring parts of your business will meke much easier for you to open up new markets. After doing that, is much easier to expand in the country you are offshoring to, and hiring new foreign workers is less of a financial burden.
Offshoring allows you to access a completely different field of professionals and create a diverse and talented team by hiring foreign employees at lower labor costs.
Offshoring is an excellent alternative to significantly lower production costs and expanding a business. As we can see, it is also necessary to weigh up the cons of offshoring. Because of that, it is essential to draw up a detailed plan that determines the objectives of the business strategy. It is critical to deal with the risks or drawbacks that certain operations in a foreign country may entail.