Pros and Cons of Offshoring

Offshoring, onshoring, or nearshoring versus outsourcing – do you know the difference between these popular business practices?

Let’s start by understanding the practice of outsourcing. It’s when an organization uses a third party to manage specific business functions on its behalf. The company may do so to save money, particularly on labor costs.

Today, almost every business function can be outsourced. However, the common areas of a company that is prime for outsourcing include all areas of technology, from software development to I.T. customer support. Accounting, marketing, customer service, supply chain, distribution and logistics are the other standard business activities managed by third parties.

Onshoring, nearshoring, and offshoring are different ways of relocating business functions or processes to another company or individual. These terms fall under the broader category of outsourcing.

When a business chooses to outsource locally or within the same country, it’s called onshoring. Nearshoring is choosing a provider within the same continent; and offshoring is when the business chooses a provider located internationally and far away.

This article looks at the pros and cons of offshoring.

Offshoring

There are many reasons for choosing offshoring, including avoiding complying with specific regulations or laws or because the cost of doing business in a particular location is too high.

For example, a company may move production to a lower-cost location like Asia.

Offshoring became a trend in the 1980s when many U.S. manufacturers moved production overseas because of cheaper labor costs.

Today, most major corporations use offshore locations to cut costs and increase profits. However, offshoring has pros and cons, and businesses regularly review the cost-benefit analysis.

China became the most prominent offshoring nation after it acceded to the World Trade Organisation in 2001.

As mentioned earlier, there isn’t a business function that can not be outsourced. Operational services like administration, accounting, support services, and call centers are famous for offshoring, and technology support and software development services are also best performed in countries with highly skilled workers on lower incomes.

There are many countries ideal for offshoring. Asia has the most representation in A.T.Kearney’s Overview, and here are some of the countries among their top ten:

• India
• China
• Malaysia
• Mexico
• Brazil
• Bulgaria
• Egypt

G20 nations are among the top 20 countries for offshoring, including Germany, India, Indonesia, Mexico, and the USA. Ukraine is also worth mentioning as it is highly compatible with Western cultures and languages. Estonia, Poland, and the Philippines are top destinations for offshoring technology development.

According to Techopedia, A.I. development may switch the focus back to the USA, UK, Israel, or Canada.

Pros and Cons of Offshoring

Despite the many benefits, offshoring can face challenges such as cultural differences, language barriers, geopolitical risks, and potential backlash from domestic stakeholders concerned about job losses.  See this comprehensive study on the actual effects of offshoring.

Pros

First, let’s look at the many reasons to choose offshoring, including:

• Tax benefits – tax incentives and savings and desirable regulatory environments
• Risk diversification spreads risks like natural disasters or social, political, or economic instability.
• Skilled Labor—The scarcity of skilled labor is a driver for offshoring, where there is access to a larger pool of trained and experienced workers.
• Cost savings and efficiencies – lower labor costs, especially for low-value roles, and increased operational efficiencies – e.g., lower utility costs, cheaper real estate
• Market expansion and opportunities to establish a foothold in new markets attract organizations to offshoring.

Cons

The practice of offshoring also challenges economies where a lack of jobs results in a brain drain and loss of expertise. Some may also argue that offshoring harms the environment and violates human rights, so let’s start with these issues.

1. Human costs

Large companies offshore significant business functions such as customer service, which can have devastating consequences for families and local economies that rely on local spending.

In countries where offshoring is common, worker conditions may be jeopardized, resulting in lower wages and potentially unsafe work environments. Health and safety standards regulated by laws in the West are traditionally much lower in some offshoring regions, which imposes a human cost.

2. Environmental costs

Big polluters can operate in regions with weaker environmental laws. Businesses offshoring production to nations with less stringent environmental regulations can contribute to heightened pollution levels, such as increased air and water pollution caused by factories, improper waste disposal, and a rise in greenhouse gas emissions.

3. Security Risks

Offshoring can put sensitive business data and intellectual property at risk of security breaches, theft, or unauthorized access. Robust security measures and protocols are necessary to mitigate these risks effectively.

Loss of Intellectual Property

Offshoring to certain countries may result in businesses experiencing the unfortunate loss of their intellectual property (IP). For example, organizations considering offshoring and outsourcing to China must have a robust IP strategy based on local laws and practices.  Wikipedia has an entry dedicated to allegations of IP theft in the country.

4. Quality Control Challenges

Quality standards are at risk when operations are moved offshore. Variations in work culture, standards, and expectations can lead to disparities in the quality of delivered products or services, potentially causing dissatisfaction among customers and stakeholders.

5. Cultural and social barriers

Adapting to a new environment and culture will always be challenging. In the workplace, how people behave will likely differ from what you’re used to, which may also apply to your attire.

Even in regions that speak the same language, some nuisances can get in the way and cause some initial alienation. For example, straight-talking is appreciated in the USA, whereas doing the same in a more religious nation may be considered offensive.

6. Brand Reputation

Customers, stakeholders, and the public may develop negative perceptions when certain operations are offshored, especially if there are concerns regarding job losses, compromised quality, or ethical implications. The company’s reputation can suffer, leading to a decline in brand loyalty and market competitiveness.

Offshoring needs to be carefully planned and managed to avoid these issues and potential reputational damage to a brand.

Conclusion

Outsourcing is expected to grow in the coming decade, with offshoring being a widely adopted approach. However, achieving success in this practice requires a well-designed strategy that carefully considers its advantages and disadvantages.