Pros and Cons of Offshoring
What is Offshoring?
Offshoring is the relocation of a business process to another country. The offshoring operation can be performed by a subsidiary of the same company, or by an offshore services provider. Offshoring can either be production offshoring or services offshoring. Production offshoring is the relocation of physical manufacturing processes to another country while services offshoring is the relocation of a company’s administrative and technical services such as accounting and finance, human resources, sales services, and software development.
If you are a business owner thinking about offshoring your company’s business process, the first thing you might ask yourself is “what are the pros and cons of offshoring?” Other questions you might have in mind are “what are the offshoring benefits and disadvantages?”, “who can help you build an offshore team?”, “should you establish a foreign subsidiary or hire an offshore services company?” and so on. This article will help you decide if offshoring is ideal for your business.
Advantages of Offshoring
Companies obtain many offshoring benefits when they relocate their business operations to overseas locations. The following are the major advantages:
- Lower labor costs – It is more affordable for companies in the United States to pay foreign employees who have lower salaries compared to employees within the country. Offshoring will make a good business practice for business owners if offshore workers can do the same type of work as their American counterparts for much lower labor costs. This is especially important for labor-intensive businesses such as manufacturing and service jobs where reducing labor expenses can help in reducing costs of operations, increasing revenues, and maximizing income.
- Cost savings – Aside from salaries, other types of compensation and benefits are much lower in offshore countries compared to the United States. Employers can save from lower costs in Medicare taxes, Social Security benefits, health insurance, workers compensation, and other costs associated with employees based in the U.S. Costs of utilities, infrastructure and materials are also lower in developing countries like the Philippines, India, and other countries that are cost effective for labor-intensive industries such as manufacturing and call centers.
- Tax benefits and financial incentives – Many offshoring destinations such as the Philippines offer tax holidays, financial incentives and fewer business regulations to attract foreign direct investments and stimulate growth in industries such as offshoring and business process outsourcing. Those tax holidays and financial incentives make it more affordable for companies to relocate to offshoring destinations.
- Returning earnings back to the U.S. – A company earning more revenues from tax benefits, financial incentives, and other costs savings from offshoring will be able to achieve its goal of more income and maximum profits. It can return those revenues to its U.S. operations by making additional wages and benefits for local employees, investing in research and development, returning the profits for investors and shareholders, and paying state and federal taxes.
- 24/7 operations – Companies can cover time zones not handled by their operations through offshore subsidiaries or by hiring offshore service providers that offer 24/7 operations. For business process offshoring, the local team in the U.S. can turnover unfinished tasks to the offshore team so there is continuous work on a project until it is finished.
- Availability of skilled labor – Offshoring locations such as the Philippines and India have a vast pool of skilled labor from which U.S. companies can recruit employees for their offshoring operations. These countries have a rich pool of talent in terms of English language proficiency, college degree earners, and the skills of their workforce.
Disadvantages of Offshoring
As much as companies obtain many benefits when they offshore their business processes to other countries, there are also some disadvantages of offshoring for them. Below are some of these disadvantages:
- Language and communication barriers – Many offshoring countries use English as an official language in business and government transactions. But there are different degrees in the depth and understanding of knowledge of English between the workers of the offshore country and their foreign counterparts. The accent can also be a challenge when offshore employees come from a region with a strong local accent and they have to talk to foreigners with distinguished accents.
- Cultural and social issues – Offshore countries have cultural and social customs that are very different from the countries of the originating companies. For example, an American executive may talk in a candid, outspoken manner while his Filipino employees are more reserved and not used to the frank approach of communicating. Both parties may miscommunicate what they intend to say to each other and this could lead to misunderstanding.
- Quality control problems – For manufacturing offshoring, ensuring that a product is strictly built according to the parent company’s standards may be a challenge under the offshore location’s manufacturing set-up. Even if the parent company provides quality guidelines, the differences in working culture, language, logistics and supply chains of the country where the factory is located may affect the quality of the finished product.
- Effect on jobs in the home country – The parent company may have to terminate the employment of its local workers if it offshores their jobs to overseas subsidiaries or hire the services of offshore services providers. This can contribute to a high unemployment rate in the local community where the workers were laid off and affect its economy. Another issue is the impact on the remaining jobs in the factories or offices where the company laid off many workers. Stagnation of wages, uncertainty about job security, and low morale could affect the output of employees. This could eventually lead to low productivity and affect business operations. The company’s public image may also be damaged if there is a lot of negative publicity generated in the media about the local economy losing jobs to other countries.
- Time zone adjustments – The time zone differences between the home country and offshore country can be a problem for both manufacturing and services offshoring. It can be challenging for the management in both countries to organize shift patterns that are not disruptive for both sides. This can be an issue when both sides have to find an appropriate time to talk to each other. The gaps in communication times could also affect the decision-making process. For example, the offshore country needs to make an important decision about a project, but it cannot move forward without consulting with the home country. The time it takes to wait and get a decision could affect urgent tasks that are time sensitive and deadline driven.
Listen to Episode 47 of the Startup Hustle Podcast – Offshoring, 10 Tips
You have read the offshoring benefits and disadvantages in this article. Hopefully, this will help you make an informed choice if offshoring is a good business model for your company. If you have decided to proceed with offshoring, then choose Cebu City, Philippines, and hire Full Scale as your offshore services provider.
We can provide you with an offshore team that has the skills to fulfill projects in software and web development, graphics design, illustration services, content writing, and search engine optimization. Contact us now to find out how our offshoring services can help your business to expand and grow!