Offshoring Explained: Benefits, Drawbacks, and How It’s Different from Outsourcing

Historically, offshoring is perceived to apply only to companies focused on manufacturing and production assembly. In the ‘60s and ‘70s, large corporations such as General Electric pioneered the idea of offshoring their assembly lines to countries with lower labor costs.

However, since the ‘90s when the world witnessed the IT revolution, businesses found out that functions such as IT, sales, customer service, finance, recruitment, and more can be offshored. 

Since then, companies of different sizes and industries have enjoyed the benefits of offshoring. 

But to truly know your business’ readiness for offshore, you must know also the downsides to this business strategy.

In this article, let’s find out the pros and cons of outsourcing and offshoring. 

What is Offshoring?

Offshoring is a business practice where a company moves or transfers work or operational activities to a different country. Rather than have all business functions in your home country, you can opt to have specific functions moved and done in an overseas location.  Offshoring not just reduces labor and operational costs but also addresses the global talent shortage crisis.

Some business functions being offshored include helpdesks and customer/technical support, as well as manufacturing, networking, digital marketing, recruitment, finance, and accounting services, just to name a few. 

Related: Offshoring to the Philippines: A Viable Solution to Global Talent Challenges

How Does Offshoring Work? 

The first thing any business leader must do when thinking about offshoring is the goal of doing so. Are you looking to simply save costs? Access quality talents that are otherwise unavailable in your home country? Perhaps you’re looking to scale up or down easily? It’s important to get this clear from the get-go.

Next, you can start researching countries you want to offshore to. Factors such as timezone differences, English proficiency, expertise, and costs are crucial to understand for each country.

See also: Why the Philippines is One of the World’s Top Offshoring Locations

Third, know the implications of building your own entity in that specific country compared to partnering with an offshore staffing partner. 

If you decide to create a business entity, you need to understand the country’s local labor laws, taxation and compliance, and many regulations. 

On the other hand, these are all taken care of by an offshore staffing partner. All you have to do is hire your team members!

Now that your offshore operations are up and running, your in-house team can finally focus on key functions such as business development and strategy.

Offshoring vs Outsourcing: What is the Difference?

It’s easy to confuse the meaning of offshoring with another business practice called outsourcing when they’re being used interchangeably all the time. Remember, the definition of offshoring is relocating operations to another country – literally off the shores of your own country.

On the other hand, outsourcing is delegating internal tasks or functions to an external vendor or third-party service provider. The third-party firm can be located in the same country or overseas. 

But just like offshoring, outsourcing allows businesses to cut costs and do the work faster, allowing in-house teams to do more important functions. Because you have the extra help you need, you can focus on running your business and boosting your revenues.

Pros and Cons of Outsourcing and Offshoring

There are many benefits to offshoring. Of course, while the potential offshoring profits look very promising, there are downsides you need to consider as well. 

👍 Cost Effective 

One of the most significant advantages of offshoring is its cost-effectiveness. Because of the lower cost of living, hiring skilled talent to fill offshore jobs in developing countries like the Philippines is more economical than hiring the same talent in the U.S., U.K., or Australia. 

Because your offshore team members work remotely, you also save on overhead costs since a smaller office space requires reduced janitorial services, utilities, and maintenance costs. As a result, you can direct your savings to crucial business functions such as marketing, training, technology, or research and development.

How much will it cost you to hire employees locally versus through offshoring? Use our Offshore Staffing Calculator to find out!

👍 Highly Skilled Talent Pool 

Because of the increasing demand for globalization and expert talent, offshoring is on an upward trend. With offshoring, you can access world-class talents with specialized skill sets and expertise you cannot find in your home country. 

A good example is the current software developer shortage in the U.S. The International Data Corporation (IDC) has even predicted a global shortfall of four million developers by 2025. Offshoring can help address this shortage in talent, as you can branch out and hire competent workers overseas.

👍 Streamlined Business Processes 

Offshoring can help improve workflow and streamline processes, resulting in cost savings and improved operational efficiency. All the unnecessary steps are eliminated, leaving you only with the essential tasks that are the core of your business. 

Offshoring can also give you access to better resources, facilities, tools, and technology to improve your business operations, increase your savings, and boost your revenues. 

👍 More Scalable Business

Offshoring helps you scale your business while avoiding the usual barriers to expansion. It saves time and money since you can access top global talents who will comprise your offshore team. 

Offshoring companies also benefit from the different locations and time zones, allowing them to operate round the clock, speed up project timelines, and ensure timely deliverables for the expansion. 

See also: Hiring and Working With Offshore Teams: Know the Real Deal

But if there are benefits, there are also drawbacks. Here are some common problems associated with offshoring.

👎 Linguistic Barriers and Cultural Differences 

Offshoring involves interacting with people who speak a different language and come from a different cultural background. Although offshoring destinations like the Philippines have a large English-speaking talent pool, there may still be issues with informal language, accents, or cultural differences. 

Speaking clearly, avoiding vague instructions, and refraining from using slang may help with the linguistic barriers when offshoring.

👎 Differences in Time Zones

Although a significant time zone difference is beneficial in terms of 24/7 customer support, staffing flexibility, and continuity of business operations, it can also have a negative impact on communication and collaboration with remote teams.

Collaborative tools and technology that enable asynchronous work can lessen the repercussions of time zone differences among teams.

👎 Cybersecurity  Concerns 

As you move your operations overseas, your offshore team will need access to confidential business or customer information. There are safety measures to protect your intellectual property. 

However, safeguarding it can be complicated as some offshore partners may not have strict security standards. This is why working only with the most reliable and trusted offshore partners with high security protocols is essential.

Related: How to Secure Your Remote Team from Cybersecurity Threats 

👎 Compliance Issues

Another thing to consider is legal and regulatory compliance since every country has its own set of laws and regulations regarding different aspects of business. 

With offshoring, you must know your offshore partner’s compliance requirements to avoid legal and regulatory risks. 

Final Thoughts

Offshoring can help companies reduce operating costs and improve their bottom line. Although offshoring as a business strategy has been around for a while, it’s still a big decision to make.

Determine whether moving specific operations or departments overseas suits your business by weighing all the pros and cons of outsourcing and offshoring. Doing due diligence and research will greatly help. Keep yourself updated with offshoring news and the latest offshoring trends.

Additionally, you also need to consider how to start and how will it integrate within your larger operations and strategy. 

To make the decision easier and the transition seamless, work with an offshore partner with the experience, expertise, and dedication to help you scale your operations and achieve your business goals.