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What is offshoring? Offshoring is the moving of business operations from one country (the home country) to another country (the foreign country). In other words, it is the migration of an operation of manufacturing or supporting nature such as human resources, customer service, content creation, design work, marketing, and accounting. These services are usually used by businesses in developed nations. The outsourcing is done to countries that are less developed. E.g. countries like China, Mexico, Ireland, the Philippines, and India.
The term ‘offshoring’ gained prominence in the 90s for businesses around the world. The term ‘offshore outsourcing’ was first used in 1937 by Ronald Coase, an economist in a published paper that described this form of organizing business. A couple of years ago, outsourcing business activities were rare; today they are an integral part of most businesses with an international presence.
Offshoring-related statistics
As per a recent report cited by researchers, approximately 80% of Europeans and US firms ranked India as their most preferred outsourcing destination. On the other hand, Global Sourcing Association (GSA) named Ukraine as the Outsourcing Destination of the Year in 2017.
A separate report called ‘The Grant Thornton International Business Report’ pointed out that 40% of global business leaders either outsourced their operations or were planning to do so. The report was released back in 2014 and the number has only climbed steadily over the years.
As per the same study, 46% of businesses had outsourced their IT processes and 36% had offshoring services related to HR and payroll.
The benefits of outsourcing
Offshoring or outsourcing is a strategic move for many reasons including (but not limited to) fewer stringent labor regulations and proximity to raw materials not available in the home country. Here are some more reasons to opt for offshoring of your operations:
- Economic viability: A home country can reduce the operational cost of doing business by hiring a company based outside its boundaries. Compared to hiring employees within the origin country, the labor cost of foreign employees is relatively lower. Also working in the parent company’s favor is the ability of the offshoring company’s workers to churn out the same quality or almost the same quality of work for a lower salary. Besides enjoying savings in salary disbursement, you can expect frugality in benefits and perks too. Your outsourcing partner will entirely foot the bill for health insurance, for example. Infrastructure, material, and utility (such as electricity and telephone) costs are also lower in less developed countries. Also, a lower wage rate combined with a lower cost of management equals profit.
- Advantageous financial conditions that work in your favor: Offshoring destinations such as India are advantageous due to the tax benefits offered by such countries. South Africa has specially made a dent on the outsourcing map due to the tax incentives it offers. As the Rand continues to weaken further, cost savings can be projected. Did you know: In April 2020, the Rand was at record weak levels.
- Enable focus on core businesses: As companies scale up, their customer base grows too. This is where offshore companies come into the picture with their back-office services, among other supporting services. By offloading repetitive, time-consuming, and often boring non-core competencies, you can focus on growing your business through innovation and sales, which will add to your bottom line.
- Legal liabilities reduced: The BPO is hired on a contractual basis, so any lawsuits that are raised by staff members are dealt with by this organization itself. Your outsourcing provider will bear the entire legal risk that comes with managing a team of employees.
- Access to intellectual capital: Many of the workers in offshoring destinations are highly educated and have an excellent working knowledge of English. As a company, you can tap into this skill (among many others) and have a workforce ready to carry out your daily menial tasks.
- Offshoring is a win-win solution: The social status of this generation of young workers is improved in comparison to their parents. Improved standard of living enables workers to not only support themselves but also their families. Also, there is better infrastructure in countries due to development over the years, For instance, internet penetration is higher in many of the foreign countries. Also working in your favor is the fact that most less developed countries, which are havens for outsourcing your operations, have a large population. Higher the population, bigger the workforce capability.
- Maturity of offshoring companies: Companies that offer offshoring services have upped their game and matured over the past few years, not only on the work ethic front but also on the deliverance of high-quality services and products.
- The world has become a global village: Favorable internet penetration has brought countries closer to each other. Face-to-face interactions are just a Skype or Zoom call away.
- Time zone advantages for time to market: Time restraints in origin countries compelled companies in these nations to look at foreign shores for a solution. The time zone differences enable fast turnaround times. E.g. there’s a time difference of 12 hours between India and the US. Since India is many hours ahead of the US, work is completed earlier than expected.
- Ability to sidestep management woes: While the main company is still responsible for allocating tasks and training, experienced human resource management will handle tiny niggles on your behalf such as ensuring workers are not tardy, dealing with sick leaves, and vacation leaves and tax returns, among many things.
The drawbacks of outsourcing
Though there are a countless number of benefits of building an offshoring counterpart, there are also some disadvantages to it. Read on in order to make an informed decision.
- Barriers to communication: Despite many offshoring destinations using English in government transactions and business, workers in these countries may not be aware of some of the nuances of the language and may make blunders during important phases of communication. Accents that are a common characteristic of local workers also act as hurdles in many instances.
- Cultural differences: Business etiquette is not the same across all countries of the world. For example, small talk is seen as essential for an American executive before he can delve into more serious conversation. A Chinese executive, on the other hand, may revert to his seniors to know how to proceed with such talks.
Another difference is personal space expectations. While it is common to see Japanese bowing at the beginning and end of business interaction, it is not unusual to see female Russian colleagues walking hand in hand with each other on their first meeting. Cultivating cultural understanding is key to overcome any such hurdles and differences.
- Time zone differences: Finding a strategic time for the parent company to communicate with the offshoring company over different time zones can be challenging. It would be especially exasperating if an urgent decision needed to be made and either of the companies could not reach the other in time.
Tips for building your offshore team
- Explore various avenues for building your offshore team. Should you invest in a foreign subsidiary or hire an offshore services company? Small to medium business owners should consider budgetary constraints and the bottom line while making this decision. The budget-friendly option, in this case, is hiring an offshoring company because of how competitive the industry is. You will most likely find a reasonably priced company to outsource your work to in this business model. Do enquire into surreptitious budgets, unforeseen costs, and quotes before taking on a company.
- Specify the services you want to outsource. Gauge where your strengths lie and focus on those core strengths. Your offshore team will handle all parts of your business that don’t need your personal attention. Recognize which operation is taking up most of your time and shifting your energy from the core business. Don’t waste time on minute tasks that could better be handled by an offshoring company.
- Conduct a rigorous hiring process. Carefully examine the service provider’s capabilities and be prepared with questions to ask your prospective offshore vendor.
- Set a budget. What are you willing to pay? Do the profits from outsourcing the operation offset the cost of management? Ask yourself such relevant questions before even getting in touch with an offshoring company in a foreign country.
- Expect a delay of three to four months for the migration of your operations from the home country to the offshore vendor to be complete. After your first offshoring experience, you will need to have best practices in place, which will reduce the duration of the migration to four to six weeks.
- Change management in the form of legal and regulatory pre-emptive moves within the company is crucial during the migration of services from the parent company to the offshoring company.
- Break down communication barriers in the workplace by being very clear in your instructions. Conduct feedback sessions when possible and ensure there is constant communication.
- Provide appropriate training to the remote team when needed.
- Be reliable and responsible and become the go-to person in times of emergency.
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