A Startup Strategy—Why Companies Use Offshoring
“Why Offshore?”, “Is offshoring a wise strategy for startups?” These are common questions raised when a startup company is seriously considering to offshore business processes to a foreign location. Reasons include wanting to leverage global offshoring success to gain business momentum. Well, that’s just one reason why companies choose to offshore to other countries, but cost savings is the primary factor that influences their decision.
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.
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 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 the long-term financial health of the company. Here at Full Scale, the success of our clients is our main goal. We laser focuses on the success of the degree of integration of our offshoring practices to provide early-stage startup success.
Companies Use Offshoring in Order 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, India, and other countries that have become popular offshoring destinations. Offshoring is a wise move, but oftentimes, startups fail to acknowledge the important points in startup offshore operations such as objectives and its key results. However, upon thorough considerations, startups with the ability to integrate offshore’s best practices will determine the volume of its success.
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 a 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, worker’s compensation, and business operating expenses in the U.S. compared to offshore locations like the Philippines and India, provide 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. Also, increase the salaries and benefits of their local employees, boosting morale and productivity. The savings in costs can also contribute to generating additional revenues and maximizing income, which can provide profits for the company’s investors and shareholders. All of these can make the company 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 are 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. 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 offshore 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 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 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 express their sentiments that the 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 can make products of high standards 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 results in 24/7 operations. This working setup 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.
Listen to Episode 26 of the Startup Hustle Podcast – How I Ended Up in Cebu City
Offshoring with Full Scale
Your journey to 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 companies from the U.S. fulfill their goals of growth and expansion 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 huge opportunity in offshoring, startups still fail every day. This is primarily because of failed relationship management. Remember that this is a partnership, and startups must treat their offshore personnel as part of their family – your startup. Many startups made this mistake that eventually dictates the failure of offshoring strategy.
But Full Scale believes otherwise, it firmly believes that offshoring is a very powerful 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.