Have you heard of ‘Offshoring’? Nowadays it’s earned verbification status it’s that popular. But it’s not to be confused with ‘outsourcing‘. So what is it? It’s production or services carried out in another country. China became the most prominent offshoring provider after it’s accession to the World Trade Organisation in 2001. Operational services like administration, accounting, support services and call centers, are popular for offshoring and technology has also gotten into the act with software development services.
Countries ideal for offshoring are China, Philippines and India.
What are the reasons for offshoring:
- Lower labor and operational cost: The primary reason for offshoring is to reduce labor cost and since profit boosting is necessary in a competitive market, this serves as a great benefit.
- New markets: There are high opportunities of finding a lucrative market and having a local hub to provide a whole new platform for business.
- Wider knowledge base: Having your employees trained and educated to a high and better standard is one of the major benefits of offshoring. This would ensure a high level of service.
- Handling mundane tasks: Delegation of routine and mundane tasks like staff management can be offshored too just to reduce costs on a labor intensive project.
While offshoring comes with some primary importance, it is important to know about offshoring pros and cons. Let’s look into these:
Pros and Cons of Offshoring:
- Cost Savings: This is really important for companies that are labor intensive. In a competitive market when a company requires profit boost, the business operations can be offshored to reduce cost and labor expenses.
- Real Estate Cost Lowering: Reduced staffing would lead to reduction in space. Real estate costs are usually high in places where staffing cost is high too. But many offshore locations can have low costs on land purchase.
- Managing risk: Offshore locations that have been well planned serve to reduce associative risks with offshoring. This is true in case of outsourcing the offshored processes as the companies would be specialist in this field.
- Tax Advantage: Offshoring provides a lot of tax benefits specially for these overseas companies.
- Communication issues: One major drawback of offshoring is the language barrier. Most of the countries consider English language as a common language but the understanding and depth of knowledge differs. Accent issues also come to play which makes understanding very difficult.
- Cultural and social barriers: It is always difficult to get accustomed with a new environment and a new culture. Also the way people behave may be different. While some countries prefer talking in a straightforward manner a few others might be reserved and rather take offense.
- Time zone differences: Appropriate shift patterns need to be assigned to match with the time differences between zones.
- Security: Offshoring does come with security issues and hence strict protocols and safety measures need to be implemented.
- Loss of Intellectual Property: Overseas loss of IP would mean multiplication of the original cost.
- Higher offshore cost: Offshore cost of labor might be about 70% lower but other utilities might come costly like electricity in some countries.
While offshoring comes with its advantages of reducing labor cost and facilitating new market and opportunities, it has challenges too like social, cultural and communication barriers. Hence offshoring pros and cons must be considered before choosing to offshore your business operations.