Every business aims to cut costs and maximize profit; without undermining customer satisfaction. Because of this, the management attempts cost reduction, trying different strategies, which involves evaluating both internal and external factors. However, when the only option to lower cost is to shift the business operations’ specific departments to a different county, the business then adopts offshoring.
Offshoring is taking the production or services functions of a business to another country, where the production cost is relatively lower. The production cost includes the cost of resources and labor, which are usually cheaper in developing countries.
In this situation, the company of business does not look for partnerships or subsidiaries globally. Instead, the business or company wants to minimize the cost of production and other supporting services.
After relocating its production unit or supporting services to another country, an offshore company can focus on the core of its business activities, knowing that the group in a foreign land will be professionally managed to achieve the offshoring process’s goals.
Offshoring provides two significant benefits to the offshore company – tax policies and getting the job done elsewhere. In effect, the company minimizes cost overseas and maximizes profitability in the base country.
Types of Offshoring
There are two most common types of offshoring: production offshoring and services offshoring.
a. Production Offshoring
Production offshoring involves setting up of a production or manufacturing unit in another country, with a bid to import the finished products for domestic distribution and sales. Production offshoring occurs in a country with an abundant supply of the needed raw materials and cheap labor that is skilled in the production task.
Leverage the cheap labor and abundant supply of raw materials in another country ensures uninterrupted business processes and significant profitability.
b. Services Offshoring
A company undertakes service offshoring when it sets up the affected units in other countries to provide service-related functions. The most commonly affect services during offshoring include marketing, information technology, customer care, human resources, sales, accounting, and lots more. Services offshoring is most favorable in a country with high availability comparatively cheaper technical human resources.
Offshoring has become the perfect alternative for companies and businesses to avoid lower profitability or force them into either bankruptcy or liquidation. However, offshoring gives offshore companies a lifeline to stay in business.
Benefits of Offshoring
A company embarks on offshoring for several reasons, but minimizing the cost of a particular business operation is the most prominent reason. So far, offshoring has offered several benefits not limited to the following:
1. Cost Minimization
Cost reduction is the primary reason for offshoring. Every company or business aims to reduce labor costs and other operating expenses that make up the overhead cost to allow a wider profit margin. This is possible in many Asian countries with Hugh availability of resources and cheaper labor cost. Many companies now establish production or service units in China, the Philippines, and India to enjoy cheaper but high-quality labor.
2. Cheap and Skilled Labor
Labor cost contributes significantly to the overall production cost. However, offshoring allows businesses or companies to benefit from cheap but skilled labor in other countries. As a result, labor costs can be minimized without sacrificing quality.
Offshoring allows businesses to benefit from cost-efficient labor present in developing nations.
3. Focus on Core Business
Offshoring certain functions allows companies to focus on their core functions. This brings about paying attention to detail, increased productivity, and expansion, which may not have been possible if the offshored functions remained the domestic or offshoring company’s country.
4. Professional Assistance
The offshore team has vast experience and expertise in the offshore production or services. As a result, the team will provide high-quality and professional assistance in solving any issues that come up, without becoming a burden to the offshore company. Consequently, the offshore company can focus entirely on the core business without distraction or intervention in the offshore production or service.
Many developing countries are looking for foreign direct investment. To achieve this, they offer several incentives, like tax holidays, to attract foreign investors. It would be an excellent benefit for the offshore company to enjoy 100% tax relief on its products or services in the overseas country.
6. Total Control
Offshoring enables the company to function independently and efficiently. The company can regulate all its operation correctly, while the offshore production or service will be efficiently
managed right there by the offshore team. The company has a better grip on its activities and core business activities.
7. Streamlined and Efficient Process
Businesses or companies are assured of an efficient process of their production or services in the offshore country. The offshore team will ensure efficient and effective processing for the best results possible. Similarly, the domestic operations of the offshore company will also be handled professionally.
8. Risk Reduction
Offshoring production or services reduces the risk of failure or bankruptcy. Companies can manage their finances more efficiently by factoring in the low production cost in the offshore country with the home country’s factors. This will enable efficient budgeting and application of resources to maximize returns or profit, having successfully cut down on labor costs and other related costs and expenses.
9. Seamless Operations
When services are offshore, it enables 24/7 availability of service and customer support, which may not be available in the domestic business unit. Offshoring enables full operations in the offshore country. The company will operate at full capacity.
10. Business Development
Companies can apply the freed-up allotted labor fund to grow and expand the business, instead of spending not entirely on labor in the company’s country. With production or services going on in another country, there is continuity of functions and responsibility. The company can expand and spread to other developing companies for greater benefits.
Offshoring benefits are immense, and companies that wish to minimize cost and maximize benefits for growth and expansion can take advantage of all that offshoring has to offer.
Outsourcing Vs Offshoring
Outsourcing Vs Offshoring are different terms, although they offer benefits to companies and businesses. Outsourcing is the process of transferring functions or responsibilities to another organization with a required level of expertise. However, offshoring is the act relocating of a company to another country.
Outsourcing can be done locally and internationally while offshoring takes place outside the country. Outsourcing and offshoring have different goals. The former is carried out to concentrate on the company’s core activities while the latter is undertaken for cost reduction.
Outsourcing and offshoring are tools for a company’s development and efficiency. The two procedures have a significant impact on the company, but while outsourcing does not give the company full control, offshoring keeps the offshore company in complete control of the activities of the offshore team, which is an extension of the company in another country.
Whether outsourcing or offshoring, the concerned company should weigh the possibilities, convenience, legal requirements, and other pertinent factors to choose wisely. Offshoring offers massive benefits too significant to be ignored.