Why Companies Use Offshoring

Why Companies Use Offshoring

When a company is seriously considering whether to offshore its business process to a foreign location, the first thing it would ask itself is “why offshore?”. Well, there are several factors why companies choose to offshore to other countries but cost savings is the main factor that influences their decision.

What Motivates Companies to Offshore

The lower cost of producing goods and services in an offshore country, compared to the home country, motivates many companies to relocate overseas. For example, IBM employs more than 130,000 employees in India, which is more than the other countries where it has operations including in the United States – where it originated. IBM’s operations in India helped to lower the cost of producing and supplying IT tech services to corporations and governments in the face of competition from other IT companies. IBM has benefitted from an abundant labor force in India that is low-cost, highly skilled and proficient in the English language.

Companies Use Offshoring in Order to Accomplish Their Goals

Many companies use offshoring to accomplish several business goals that will be beneficial for their employees, investors and shareholders, and for the long-term financial health of the company. These goals include being cost-efficient, lowering the costs of operations, improving productivity, generating more revenue, increasing income, and turning in profits. Let’s discuss further the reasons or factors that influenced them to decide on offshoring as the best option to achieve these business goals.

Companies Use Offshoring in Order to Save on Costs

When companies ask themselves “why offshore?”, the most common answers they would usually come up are the savings on costs and other financial benefits. Money is the number one factor that motivates companies from the United States to relocate their business processes to the Philippines, India and other countries that have become popular offshoring destinations.

The massive savings in labor costs, operations expenses, lower taxes, and other costs associated with operating a business in an offshore country cannot just be overlooked by American companies. The savings in costs motivated U.S. businesses ranging from large, established companies that have presence in many countries to small to medium-scale companies with only local operations, to relocate to other countries.

The difference in the costs of wages, employee taxes, social security, health insurance or medical care, workers compensation, and business operational expenses in the U.S. compared to offshore locations like the Philippines and India provides a lot of direct savings for companies who want to offshore.

The savings enable the parent companies to free up financial resources that they can use for their local operations, such as investments in research and development, and to increase the salaries and benefits of their local employees boosting morale and productivity. The savings in costs can also contribute in generating additional revenues and maximizing income which can provide profits for the company’s investors and shareholders. All of these can make the company more cost-efficient, productive and profitable in the long-term.

Companies Use Offshoring For Tax Incentives

The tax incentives that many offshoring countries provide to relocating companies is another factor that motivates offshoring. The tax benefits consist of tax holidays, lower corporate taxes, and tax and duty-free importation for a certain period of time. Many offshoring countries offer tax holidays to fully or partially exempt a company from paying corporate income taxes in exchange for establishing a new business or expanding their current business. The various tax incentives provided to offshoring companies enable them to reduce costs of operations, increase revenues, and retain the financial resources to continually grow and expand their businesses in the countries where they are located.

A good example of tax incentives offered to offshoring companies can be found in the Philippines. The primary government agencies that provide incentives to investors – the Philippine Economic Zone Authority and Board of Investments – offer generous tax incentives for foreign companies that establish new businesses or expand their current operations. A company that qualifies for incentives get 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 for its business. These tax incentives have contributed to making the Philippines one of the top offshoring destinations for IT companies.

Other Factors That Motivate Companies to Use Offshoring

Aside from savings in costs and tax benefits, other factors that motivate companies to offshore their business processes are the shortage of skilled labor and low costs of operations and production.

Shortage of skilled labor
Many U.S. companies say a shortage of employees with the required skills is one of the main reasons why they offshore some of their manufacturing or business processes to other countries. The offshoring countries have an abundant talent pool of workers in terms of employment-ready college and technology graduates, work experience, and the skills that companies need.

Low costs of operations and production
Manufacturing industries benefit from the lower cost of operating their manufacturing processes in developing countries compared to their home country. Foreign companies can take advantage of the low cost of labor, cheaper raw materials, equipment, and parts and supplies available in offshore locations. There are many factories in these locations that act as offshore companies who can manufacture the products of their clients for much less than the cost of producing the same products in the U.S.

Many offshore manufacturing companies have the ability to make products of high standard and quality 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 results in improved production efficiency, faster production turnaround, and completion of 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 that have a skilled and experienced workforce that is also willing to work outside of regular office hours which result in 24/7 operations. This working set-up is beneficial for call centers and software development companies in the U.S. because any unfinished tasks can be turned over to the offshore teams ensuring a streamlined transfer of tasks and continuous work on the projects.

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In summary, the benefits from savings in costs, tax incentives, and low costs of operations and production answers the “why offshore?” question that many companies ask themselves when considering to relocate to offshoring destinations. It cannot be denied that the advantages of offshoring outweigh any disadvantages it may have; that’s why many companies from the U.S. and other developed countries continue to offshore.

Offshoring with Full Scale
The lower cost of operations, tax incentives, low cost of labor, abundance of skilled labor, and other benefits from offshoring are not motivators just for big, established companies in the United States to offshore to other countries. These benefits are the reasons why many small to medium scale American companies offshore to developing countries such as the Philippines.

An example is Full Scale – an offshoring services company in Cebu City, Philippines. We have helped companies from the U.S. fulfill their goals of growth and expansion by partnering with them to establish offshore operations in the Cebu. Two examples of companies that we have successfully fulfilled their business goals are GigaBook and Stackify – U.S. based companies that offshore their developer teams from us on a long-term basis. Contact us to learn more about our offshoring services.

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