Offshoring is a solution. For several decades, medium to large corporations and firms have been challenged to generate output, solve critical problems, decrease costs, allow higher revenue, and add more value to their businesses.
As these challenges cannot be avoided, especially for companies with a rapidly growing clientele, certain business tactics and strategies have been acted on to sustain the demands.
Companies begin to decide whether or not to forward the workload to a domestic branch that is also owned by the company or employ an onsite model. Some instances allow these companies to commission services from other businesses within the locality or country.
This is business outsourcing. However, some companies export their processes abroad to lower operational costs. This process is called offshoring.
Now, we may have heard of the term “offshoring” before and, oftentimes, mistaken it for outsourcing. Outsourcing pertains to obtaining goods and services from a third-party resource that would be essential to the company’s productivity.
Meanwhile, offshoring is also a process of obtaining goods, processes, and services but under the conditions that the resources are from abroad. Also, the resources are under the company. These conditions are the basic descriptions of what offshoring is.
What are the pros and cons of offshoring?
One of the benefits of offshoring is the overall cutback of costs on operations. The reason for this is that many offshoring countries usually have a higher labor force but with much lesser wage costs.
In countries with lower-middle economies, such as India and the Philippines, the average wage cost is relatively lower than in countries with higher economies. These include the US and other countries in the Western Hemisphere.
In light of these differences, the company may also benefit from lower regulatory costs since a lot of offshore countries are less strict with their labor and trade regulatory standards. As contentious as it sounds, developing countries are very much subject to unrefined management regulations.
If you do the math, then there is not as much value in the regulatory standards in these countries. It may come off as a flaw in the operations but will definitely act as an incentive to cut additional costs.
For companies that require the acquisition of raw materials for their products, it is an ideal strategy to offshore facilities that the company may or may not own. Offshoring in the right countries reduces the need to source raw materials in the global market. Having an offshore facility to cater to the company’s needs also increases productivity without spending too much on production costs.
The company can also cut costs with its access to a foreign market. It will not have to pay export or import tariffs and taxes for raw materials required for production
For companies with physical products, the cost of raw materials will be reduced. However, once the products or parts are finished, the company will incur shipping costs.
Despite the benefits of offshoring, companies may also encounter challenges as they go forward in their business operations and transactions. Among those that will come into play are communication, culture, language, and time zone differences. Because of this, the company must choose an offshore country with flexible manpower that can overcome these hurdles.
A proactive solution will be training the offshore employees with the standards of the main facility. It will align them to the company system operations, regardless of location.
The lower regulatory cost is an economic advantage, but it could also be an operational flaw due to uncertainty with the regulations. One example is the document processing of employees that can be plagiarized, forged, or neglected. If that happens, the operation of the offshore branch may be compromised.
The foreign exchange rate is not an issue with domestic outsourcing processes but poses a critical risk to offshore operations. It would be best to have a fallback plan should economies in host countries fluctuate.
On the production side, there is also uncertainty about the quality of products. Not all companies are very well represented in quality assessment and testing in their offshore facilities or outsourced businesses abroad. The company should observe strict quality control protocols in the offshore facility to avoid issues with the products and performance.
Domestically, a company with offshore affiliations will also contribute to certain external factors, such as decreasing the employment rate and opportunities within their locality.
Whether the costs outweigh the benefits or vice versa, the company’s decision-making power, strategy, and control determine the value of offshoring to the business.
Impact of offshoring
The impact of offshoring throughout the decades has been one of the defining factors in raising the economies of developing countries. It has opened foreign markets to small, medium, and big business owners.
Although criticized for its risks and ethical concerns, offshoring continues to gain momentum. Key cities in developing countries globally take part in this industry to grow economies and move forward with globalization.
Full Scale on Offshoring
At Full Scale, we see offshoring as an opportunity to expand operations around the world and fully scale towards the path of globalization. This opportunity will expand our company’s reach in the global market and provide access to a wider client database.
The need for companies to offshore always boils down to its benefits like significant cost savings. While some may consider it a destructive force for their economies, the truth is it drives the global economy forward.
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