What is Offshoring?
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 which is also owned by the company or onsite model. Some instances allow these companies to commission services from other businesses within the locality or country. This is referred to as business outsourcing. But certain companies practice extending their processes abroad in order to obtain lower operational costs. This process is called offshoring.
Now, we may have heard of the term “offshoring” before and, oftentimes, mistaken it with outsourcing. Outsourcing pertains to obtaining goods and services from a third-party resource that would be essential in 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 because many offshoring countries usually have higher labor force but with much lesser wage cost. In countries with lower-middle economies, such as India and the Philippines, the average wage cost is relatively lower compared to countries with bigger economies such as the United States and other countries in the Western hemisphere.
In light of these differences, the company may also benefit from lower regulatory cost since a lot of offshore countries are less strict with their labor and trade regulatory standards. As contentious as it sounds, the developing countries are very much subject to unrefined management regulations. If you do the math, then there is not as much value with the regulatory standards in these countries which may come off as a flaw in the operations but will definitely act as an incentive in cutting off additional costs that may be incurred.
For companies that require the acquisition of raw materials for their products, it is an ideal strategy to offshore those facilities that may or may not be owned by the company. Offshoring on the right countries lessens the sourcing of raw materials that will be used in production by the company instead of buying those materials in the global market. Having an offshore facility to cater to the needs of the company is also one of the factors in increasing productivity without compensating too much on the production costs.
Additional cost cuts may be also incurred as the company will have access to a foreign market without having to deal with paying off the tariffs and taxes for each raw material required for production in time for export and/or import. For companies with physical products, the cost of raw materials will be lessened but once the products or parts are finished, it will entail shipping cost to the home company.
Listen to Episode 47 of the Startup Hustle Podcast – Offshoring, 10 Tips
With an infinitive amount of benefits from offshoring endeavors, companies may also encounter challenges as they go forward in the operations and transactions of their business. Among these challenges is communication. In some processes, culture, language, and time constraints will come into play. Because of this, it is integral that the company chooses the right offshore country with flexible manpower that surpasses these hurdles regardless of timezone differences, cultural practices, and communication channels and proficiency. A proactive solution will be training the offshore employees with the standards of the main facility to align the company system operations as a whole regardless of distance.
As mentioned, the lower regulatory cost that is an economical advantage could also be potentially an operational flaw as there is an uncertainty with the regulations. Document processing of employees is one example of uncertainty since these are elements that may be plagiarized, forged, or neglected. If such a thing happens, the operation of the offshore branch will be dimpled.
The foreign exchange rate also poses a threat to having offshore operations. This is something a domestic outsourcing process does not experience but, more so, very critical on offshore equivalents. It is just wise to supplement a fall back plan should economies on developing countries that host offshore services drop or rise.
On the production side, there is also an uncertainty on the quality of products since it is not in all companies that they are very well represented in the quality assessment and testing in their offshore facilities or outsourced businesses abroad. Quality control should be strictly observed in the offshore facility to avoid incurring possible damages and liabilities on the products and performance of the company.
Domestically, a company with offshore affiliations will also contribute to certain external factors such as decreasing the employment rate and opportunities within their locality.
Above everything else, management should be the area that the company would gear focus towards since concerns on maintenance, regulations, and signatories, among others, will be very inevitable.
Although whether the cost outweighs the benefits or vice versa, it is still in the company’s decision-making power, strategy, and control that will ultimately tell the value of what there is with engaging in offshore business endeavors.
Impact of offshoring
The impact of offshoring throughout the decades has clearly been one of the defining factors of raising the economies of the developing countries and feeding the growth of unemployment rate. This trade has opened foreign markets to be accessed by small, medium, and big business owners.
Although this system is very much criticized for the risks and ethical concerns, there seems to be no stopping offshoring from gaining momentum. Key cities in developing countries around the world have already taken part in this industry as a way of lifting economies and moving forward with the concept of 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 does not only expand our company’s reach in the global market, but it will also pose as an avenue for a wider client database. This means that aside from providing services and convenience to a multitude of small to medium enterprises, we are also opening opportunities and employment for industrialized cities that we expand in.
On talks about the need for companies to offshore, it will always lead to its many benefits such as the notable cost cuts and coverage of any timezone. These traits alone pretty much consolidate the participation of our company into being a progressive business model to keep the world of businesses and technology very much alive.