A lot of American companies are entering the offshore outsourcing industry. In this article, uncover why offshoring is considered a favorable business strategy for a lot of small and large businesses.
“Why Offshoring?”, “Is offshore outsourcing a wise strategy for startups?” These are common questions raised when a startup company seriously considers outsourcing business processes to a foreign location.
One of the reasons why companies offshore are to leverage global offshoring success and gain business momentum. But, there are two key reasons why companies choose this strategic approach.
Let’s get to know why offshoring is a top choice for businesses.
What Motivates Companies to Offshore
In the concept of offshoring, we have two dynamic heroes: startups and offshore companies. Startups want to battle the expensive margin of productivity and learning. On the other hand, offshore companies want to offer unique differentiators such as a highly competent workforce, a culturally sensitive environment, and low-cost IT services.
Compared to the home country, the lower cost of producing goods and services in an offshore country motivates many companies to consider overseas options.
For example, IBM employed more than 364 thousand people worldwide just in 2020. The New York Times once reported that the American Company has more employees in India than in the United States. IBM’s operations in India helped lower the cost of producing and supplying IT tech services to corporations and governments in the face of competition from other IT companies.
Why Offshoring Accomplishes Company Goals
Many companies use offshoring to accomplish several business goals that benefit their employees, investors, shareholders, and long-term financial health. Here at Full Scale, the success of our clients is our main goal. We laser focus on the degree of integration of our offshoring practices to provide success to early-stage startups and even scale-ups.
Our clients and companies have seen the pros and cons of outsourcing. Here are the two key reasons why offshoring is beneficial.
1. Companies Use Offshoring to Save on Costs
Money is the number one factor that motivates companies from the United States to relocate their business processes to the Philippines and other popular offshoring destinations. That is a strategic approach.
However, startups often fail to acknowledge the critical points in starting offshore operations, such as objectives and key results. But upon thorough consideration, startups with the ability to integrate offshore’s best practices will see volumes in their success.
American companies should not overlook the massive savings in labor costs, operational costs, lower taxes, and other costs. The cost reduction is why offshoring continues to motivate U.S. businesses to engage with other countries.
Compared to the U.S., the labor market from the Philippines provides direct savings. There is a considerable difference in wages, employee taxes, social security, health insurance, worker’s compensation, and business operating expenses.
The cost reduction enables parent companies to free up financial resources that they can use for their local operations. These include investments in research and development.
Furthermore, it also contributes to generating additional revenues and maximizing income, providing profits for its investors and shareholders. All of these is why offshoring can make the company cost-efficient, productive, and profitable in the long term.
Low costs of operations and production
Manufacturing industries benefit from the lower operating cost for their manufacturing processes in developing countries compared to their home country. Companies can take advantage of the low labor cost, cheaper raw materials, equipment, parts, and supplies available in offshore locations.
Many factories in foreign areas act as offshore companies. These companies can manufacture products for much less than the cost of producing the same products in the U.S.
Many offshore manufacturing companies can make high quality products according to the precise specifications provided by their clients. When a parent company from the U.S. partners with a good and effective offshore manufacturing provider, it garners good results. It improves production efficiency, produces faster turnarounds, and completes projects without sacrificing product quality.
Service industries also benefit from offshoring their business processes overseas. Many of them set up subsidiaries or hire offshore service providers in countries with a skilled and experienced workforce. Most of this workforce is willing to work outside of regular office hours, resulting in 24/7 operations. Sometimes, that’s enough to prove why offshoring is strategic.
The working setup is beneficial for call centers and software development companies in the U.S. That is because in-house employees can turn over any unfinished tasks to the offshore teams. Ensuring a streamlined transfer of tasks and continuous work on the projects is a big why offshoring improves productivity.
2. Shortage of skilled labor
Many U.S. companies express their sentiments that the shortage of employees is a huge problem today. Looking for personnel with the required skills is one of the main reasons they offshore business processes to other countries.
A powerful reason why offshoring makes sense is the talent pool. Unlike many developed countries, offshoring nations have an extensive supply of qualified professionals. Employers can ensure that these workers have the qualifications, work experience, and skills that companies need.
Other Factors That Motivate Companies to Offshore
Aside from savings in costs and tax benefits, another factor why offshoring continues to encourage companies to export business processes is tax incentives.
The tax benefits include tax holidays, lower corporate taxes, and tax and duty-free importation for a certain period. Many countries offer tax holidays to fully or partially exempt a company from paying corporate income taxes. This is in exchange for establishing a new business or expanding their current business.
The various tax incentives provide cost-saving benefits, increase revenues, and retain financial resources. Additionally, the savings aid to continually grow and expand the businesses in countries where they are located.
A good example of tax incentives offered to offshore companies can be found in the Philippines. There are primary government agencies that provide incentives to investors: the Philippine Economic Zone Authority and the Board of Investments. These agencies offer generous tax incentives for foreign companies that establish new businesses or expand current operations.
A company that qualifies for incentives gets a 100% exemption from corporate income taxes for as long as four to six years. Upon the expiration of the tax holiday period, the company will only get a 5% special tax rate on gross income and is exempted from paying all national and local taxes.
The company will also get tax and duty-free importation of equipment, spare parts, and supplies. These tax incentives have contributed to making the Philippines one of the top offshoring destinations for IT companies.
Why Offshoring is Best with Full Scale
Your journey to answering why offshoring starts with us. Our highly skilled team will help you to lower the costs of operations and improve productivity. We will help you efficiently build solutions, thus generating more revenue in the long run.
Full Scale is a company in Cebu City, Philippines, that works with offshore resources and focuses on key areas needed for your startup. We have helped American companies grow and expand by partnering with them to establish offshore operations in Cebu.
Using our Guided Development program, we have successfully fulfilled the business goals of GigaBook and Stackify. These are U.S.-based companies that offshore their developer teams from us on a long-term basis.
Despite the considerable opportunity in offshoring, startups still fail every day. This is primarily because of failed relationship management. Remember that this is a partnership; startups must treat their offshore personnel as part of their family – your startup.
Many startups make this mistake which eventually leads to the failure of an offshoring strategy. But Full Scale believes otherwise. We see that offshoring is a compelling strategy for startups. Right now, we provide teams and services to dozens of clients in the U.S. and create business momentum and foster their growth.
Contact us today to learn more about our offshoring services.