As a business owner, you should not restrict yourself to a particular geographic location. There are a lot of global collaborations available to be explored. Offshore outsourcing can help you in connecting with the world for business processes. Exploring other geographic locations and third parties can help in cost optimization. Outsourcing is a popular term known by business owners, but what is offshore outsourcing? What do firms get by doing business offshore? Read on to learn more about offshore outsourcing and what it entails.
What is offshore outsourcing?
The process of hiring or collaborating with an external organization for completing business processes is called outsourcing. Offshore outsourcing is hiring a firm in some other country for the completion of business functions. The products/services will be manufactured/developed in some other country via offshore outsourcing. IT offshore outsourcing is widely adopted by firms worldwide as IT services can be delivered by online means.
Outsourcing refers to contracting external organizations to complete business processes, while offshoring refers to getting work done in another country. The in-house business activities are performed in some other country via offshoring. Besides the difference between outsourcing and offshoring, they both come together to denote the business processes/functions being outsourced at foreign locations. Offshoring is also referred to as inhouse offshoring sometimes, as some firms open an extension of their firm in some other country to perform the same in-house business activities. When firms transfer their in-house business functions to some other firm in a foreign geography, it will be referred to as offshore outsourcing. Read the example below to understand inhouse offshoring outsourcing and offshoring better.
For example, Harley-Davidson Inc. is a prominent motorbike manufacturer on a global scale. They are based in Milwaukee but have been offshoring their manufacturing process in various countries like India, Australia, and Brazil for many years. They have set up factories in many countries and manufacture the motorbikes there only. It helps them in saving cross-border transportation charges and hassles. It is a general example of offshore outsourcing.
Offshore outsourcing is a hot topic and can help businesses unlock new possibilities. Let us familiarize ourselves with the types of offshore outsourcing.
What are the types of offshore outsourcing?
Offshore outsourcing can be broadly classified into four types that are:
1. Production offshoring
2. System services offshoring
3. Innovation and software offshoring
4. Reshoring
Let us discuss these types of offshore outsourcing in detail:
1. Production offshoring – Any firm’s manufacturing and management process are relocated to a location that provides cost-effective labor and resources/materials. Production offshoring is also commonly known as BPO (Business Process Outsourcing) and is one of the most used outsourcing techniques worldwide. Production offshoring can be further
(i) Front-office – The front-end business processes are outsourced via front-office outsourcing. It can include various business processes like customer support service, telemarketing, tech support, virtual assistance, etc.
(ii) Back-office – The business processes that run in the business’s backdrop and are essential for the business’s survival are outsourced under back-office solutions. It includes mobile and web development, accounting and bookkeeping, human resource management, design and graphics development, etc.
2. System services offshoring – The outsourcing of information systems and services to some other firm at a distant location is termed as system services offshoring. IT firms tend to outsource their business processes in a country that has a robust communication infrastructure.
3. Innovation and software offshoring – Outsourcing related to innovation and software development falls under this type of offshore outsourcing. Global IT firms look for countries with skilled talent pools that can help them in improving their services. Besides cost optimization, innovation and software offshoring also helps in a shorter software development life cycle. This type of offshoring also helps in getting the software development process done at lower costs.
4. Reshoring – Moving back the business processes to the original country after it was shifted to some other country. Reshoring is also referred to as back shoring or inshoring. For example, a US-based company had outsourced its software development process to Ireland in 2016, but in 2020, they shifted it back to the US. They may have taken this step due to an increase in tax rates in Ireland. It will be termed as reshoring by the US-based country.
Besides various types of offshore outsourcing, there are two alternatives to offshoring based on the locations that are as follows:
1. Nearshore outsourcing
2. Onshore outsourcing
Let us discuss these two alternatives to offshoring in brief:
1. Nearshore outsourcing – It refers to offshoring business processes to firms that are located close to the original company. It includes offshoring to various states within a country or some countries nearby and removes the challenges of working with a firm in a completely different continent and completely opposite time zone (more often). For example, some American companies may have a nearshore process being run out of Mexico, Brazil, Costa Rica, or a Japanese or Australian company may prefer to have a nearshore center in the Philippines, Malaysia, or Indonesia.
2. Onshore outsourcing – Onshoring includes working with firms that are located within the state/country. Onshoring doesn’t save you much compared to offshoring and nearshoring, but you may make up for it via better output.
Why do firms opt for offshore outsourcing?
Offshore outsourcing has various pros other than just cost-saving. The main benefits of offshore outsourcing are as follows:
1. Cost optimization
2. Skilled workforce
3. Efficiency and speed
4. Easier regulatory constraints
5. Focus on core business operations
6. Invest more
7. Competitiveness
8. Risk mitigation
9. Serve round the clock ('Follow the sun' model)
Let us discuss these benefits of offshore outsourcing in detail:
1. Cost optimization – Firms look to outsource their business processes to developing or under-developed countries that provide labor at more cost-effective rates. Countries that have lower legal wages can boost the ROI (Return on Investment). Besides looking for lower labor wages, firms also look for lower material/resource costs before offshoring their business processes. The Asian countries are generally known to be the hub for offshore outsourcing due to lower labor costs and overall cost-arbitrage.
2. Skilled workforce – Offshore outsourcing helps in leveraging the talent pools of other countries. It also presents you with a diverse and skilled workforce that can manage your business processes well. Hiring managers retain the talented workforce of foreign countries, and the talent also gets to enjoy a sense of accomplishment that they are working for a firm in a foreign country.
3. Efficiency and Speed – When firms face a lot of workloads, taking aid from a fresh workforce via offshore outsourcing can help get the job done. It also helps in firms meeting the deadlines when more workload is there. The outsourcing firm will also take responsibility for your work and will help you in meeting the target timelines.
4. Easier regulatory constraints – If a firm is facing many regulatory obstacles in any country, it can outsource its business processes in a country with fewer regulatory constraints for businesses. Not every country provides the right business environment, and no profit from working in a business environment offers fewer opportunities. Firms also prefer countries with lesser taxation rates for outsourcing their manufacturing or services processes.
SCIKEY Offshore and Captive Solutions
5. Focus on core business operations – Firms outsource some of their business processes to offshore locations to use their workforce for core business processes. For example, if a firm is responsible for developing software(s), it will outsource its bookkeeping and accounting processes to some other firm. This will help the firm concentrate on its core operation, i.e., developing software(s). Besides down-prioritizing business processes, a firm can opt for outsourcing and offshoring to work across multiple organizations.
6. Invest more – The money firms spend on support functions isn’t an investment. They make revenue generation possible and are a straightforward business expense. By letting some other outsourcing firms take control of the support functions, companies can save more. The money saved can be utilized via investing in revenue-generating assets.
7. Competitiveness – Big firms/companies have dedicated departments for each business process like IT, HR, accounting, sales, etc. Small scale firms can enjoy the luxury of having dedicated departments via offshore outsourcing.
8. Risk mitigation – Firms rely on various types of technologies for their business processes. The technologies also possess a risk of being outdated which is more likely to occur in today’s scenario. Since firms do not specialize in all the business processes, and they do not know much about the risks associated with support functions. Outsourcing business processes to a company that specializes in it will help you in mitigating any associated risk.
9. Serve round the clock – Firms can cover their business processes across various time zones via offshore outsourcing. It helps them in providing 24-7 services to their customers across the globe. The tasks that the firm wants to be completed overnight can be outsourced to an offshore company that has its normal working hours at that time. This model is quite popular and is also known as the 'Follow the sun' model.
After referring to offshore outsourcing benefits, one can understand how it is opening global opportunities for firms/companies. Customers want high-quality products/services at affordable rates that can be achieved via offshore outsourcing. In this era, competitiveness is a key factor that decides the chances of growth of any firm/company. Job seekers can also work with an outsourcing firm and can get global experience. IT firms prefer offshore outsourcing as the services can be manufactured and delivered via online means, thus saving time and resources. Outsourcing recruiters should look for retaining the top talent from their own and other countries.
Cons of offshore outsourcing
Everything has its pros and cons, and so does offshore outsourcing. Besides many benefits of outsourcing, firms may face challenges and risks while working with other firms. Some companies may find it tough to work with a team that has a different working culture. Working across various time zones, which is advantageous for some firms, can be challenging for others. Firms may find it challenging to communicate in real-time due to time zone differences. Tax implications can also be a hindrance while opting for offshore outsourcing.
Analysis of business environments of various countries is also an essential process before outsourcing offshore. A country with lower tax rates and higher ease of doing business is an ideal choice for outsourcing and offshoring business processes.
The proper use of technology can help firms overcome the problems related to onboarding, communication, and collaboration. Better workflow management can help firms in achieving their targets. Before choosing a location outside the country for outsourcing, firms should thoroughly research the ease of business level in that country. Choose a country that has lower labor rates with a sustainable business environment and a reasonable availability of talent. Various technologies available in the market can help you train your team in some other country by digital means.
How to pick the right partner for offshore outsourcing?
Picking the right partner for offshore outsourcing is of utmost importance. If the offshore outsourcing firm doesn’t deliver services on time, firms can end up spending more. Various firms are available for IT offshore outsourcing, and the selection of a reliable firm helps achieve the predicted milestones. Read firms use the guide mentioned below to find the right offshore outsourcing partner.
1. Analyze requirements – Firms need to have a clear understanding of business processes that are to be outsourced. All the support functions except the core business functions can be outsourced to offshore locations. Specific detailing of requirements will also help the partner company understand the type of job they have to do.
2. Draft an RFP (Request for Proposal) – RFP is a draft that contains all details about the project being outsourced. The requirements and conditions are mentioned in an RFP and are sent to potential partner firms worldwide. Besides sending an RFP, you can also connect to outsourcing firms by other online means of communication. Various social media platforms and virtual meetings can also present a business proposal for offshore outsourcing firms.
3. Comparative analysis – Once a firm has identified several partner companies to work with, it should compare the outsourcing firms to choose the best partner. One can compare the partner firms based on past performance, market reputation, workforce, etc. A firm should not directly opt for an outsourcing firm with the lowest cost as they do not always provide the best services. The HR, CTO/CXO, or any other department analyzing the partner firms should also choose a suitable location to work in a better business environment.
4. Negotiate – After establishing all the working terms with the partner company like communication terms, timelines, etc., a firm looks to negotiate with the outsourcing firm. The outsourcing firm situated in some other country knows that labor rates in their country are cheaper and may charge more from the partner firm. Negotiation is a business art, and firms try to be their best at this.
5. Kick-off the project – Ensure that before kick-starting the project, you have designed a work plan that can be referred for tracking the partner firm’s performance. You should also monitor the performance of the outsourcing firm at regular intervals.
Freelancers' vs outsourcing firms
You can outsource business processes to offshore freelancers or outsourcing firms. If a firm has a good business relationship with a freelancer, they should outsource their requirements to that particular freelancer. Freelancers can also help you get the work done at lower rates and without hiring a dedicated employee. Freelancers are more open to negotiation in terms of expenses and deadlines. Outsourcing offshore to freelancers ready to work at lower rates can help firm slash costs.
However, a dedicated team at an outsourcing firm can perform tedious jobs and help you meet the timelines better, along with certain assurance of quality deliverables. Firms usually contact freelancers for jobs that a single person can do, like content creation, optimization, bookkeeping, etc. Outsourcing firms can be selected to perform business processes that require a dedicated team like customer support, software development, RD, sales process outsourcing, Knowledge Process Outsourcing (KPO), Business Process Outsourcing (BPO), Shared Services Outsourcing, Center of Excellence etc.
Freelancers are not available round the clock and may have family emergencies. With offshoring business processes to an outsourcing firm, companies will not depend on a single person. If firms know a trusted freelancer in contact that has been doing their work for many years, they can outsource their business requirement. In the rest of the cases, an offshore outsourcing firm is better. For example, firms hire an outsourcing firm for offshore software development as it requires a bigger team and is timeline-oriented.
In a nutshell
Offshore outsourcing can add value to a business along with aiding in cost optimization. Firms will have access to more dedicated departments and workforce via outsourcing their business processes. In the IT sector, firms transfer various business processes offshore, like software development outsourcing, bookkeeping, tech support, etc. Before outsourcing business processes, firms should compare multiple firms to choose the best one to help them optimize costs and meet target timelines.
Job seekers can also understand the importance of outsourcing and offshoring and can build a successful career as an employee, contractor, or even a freelancer while working with a reputed outsourcing firm. Offshore outsourcing will provide a global experience to working professionals. You will also feel privileged to work with a foreign firm that has a global reach. Start offshore outsourcing software development for businesses today!
Author Bio:
Karunjit Kumar Dhir, Co-founder, SCIKEY
Karunjit is an entrepreneur, award-winning business leader, and Co-Founder of SCIKEY – a market network for jobs, work business solutions, supported by an integrated services ecosystem. He enjoys building great teams businesses ground-up and has scaled multiple million-dollar businesses from scratch, with customers across India, Asia, and the US.
He is a Post-Graduate in Planning Entrepreneurship Management and holds a Bachelor’s degree in Computer Applications where he was an awarded merit scholar for all the academic sessions. He has been featured in 70 Rising Personalities on LinkedIn in Malaysia by Marketing in Asia(MIA) and has various other professional achievements spanning his career, including CEO’s Award, Allegiance Award, Outstanding Contribution, and many more accolades for his accomplishments.
