Peter Drucker once said, ‘Do what you do best, outsource the rest’.
Modern businesses live by this quotation. They see outsourcing and offshoring as potential ways to reduce business costs and streamline operations.
According to research, 59% of companies outsource to cut costs. Moreover, 65% of companies that have tried outsourcing plan to increase it.
It is primarily the global companies that opt for offshore outsourcing to get their work done in a different country. Mostly, they do it for cost savings and to build a competitive advantage.
Let’s see what overseas outsourcing is, its types, its pros and cons, the difference between offshoring and outsourcing, and commonly outsourced processes.
What is Offshore Outsourcing?
Offshore outsourcing refers to hiring a third-party organization in a different country to get the work done. It is a combination of outsourcing and offshoring that involves exporting business processes to other countries to reduce labor costs or save taxes.
Examples of offshore outsourcing would be help desks, call centers, and accounting services for the company’s internal operations.
Offshore recruitment refers to hiring a workforce in a different country. Most organizations prefer offshore recruitment to benefit from low-cost labor, easy and simple taxation, and access to specialized talent at low costs.
Types of Offshore Outsourcing
There are three main categories in offshore outsourcing. They are – Business Process Outsourcing (BPO) or production offshoring, system services (infrastructure and technology) offshoring, and software offshoring. Besides these three categories, we also have reshoring or inshoring.
Production or BPO offshoring involves overseas relocation of a physical production process, typically at lower labor and material costs. Again, there are categories for the range of processes outsourced in offshore BPO;
- Front-office solutions: These solutions include help desks, call centers, telemarketing, technical support, virtual assistants, etc.
- Back-office solutions: These solutions include accounting processes, HR and recruitment, graphics designing, web development, etc.
System services offshoring
System services offshoring mainly involves the outsourcing of information technology or IT processes. For system services offshoring, one of the most popular destinations is India. Back in the 1990s, communication infrastructure helped India with its large workforce of technically proficient and English-speaking professionals. The country attracted IT giants like Microsoft, IBM, Oracle, Hp, etc., to the country.
Innovation and software offshoring
Software offshoring is a common type of offshore outsourcing that involves outsourcing innovation and software development services. Several tech companies outsource innovation work to developing countries. For instance, Silicon Valley outsources innovation processes to countries like South Africa, Columbia, Mexico, etc. It ensures accessing a highly-skilled workforce, cost savings, and short production cycles.
Reshoring is also known as back-shoring or inshoring. It involves transferring the business process from overseas to the country where it was originally located. In short, reshoring is essentially offshoring coming back.
Example of reshoring – Companies like Apple, Walmart, etc., bringing outsourced processes or overseas manufacturing units back to the US to eliminate supply shortages and delays in shipping during and beyond the pandemic.
Staff Augmentation – A Part of Offshore Outsourcing
Staff augmentation is an outsourcing technique involving the evaluation of the internal team’s skill-set and recruiting a remote workforce for the additional skills.
Also known as team extension or IT staff augmentation, companies use this technique to strengthen the skills and talents within an organization. The external remote team hired in the process mainly includes experts who can supplement the in-house team in areas where they lack experience or knowledge.
Staff augmentation is a part of overseas outsourcing as it involves using the skills and expertise of remote teams in different countries. Adding staff to the in-house team for specific projects through staff augmentation can be advantageous for issues like cost-effectiveness, risk management, and project control.
Offshoring vs. Outsourcing: What are the Differences?
Though outsourcing and offshoring are often used synonymously, there are a few key differences between them.
- Offshoring involves moving some of the company’s operations or processes overseas. In contrast, outsourcing is when a company contracts out operations to a third party with a certain level of expertise.
- Offshoring can be the business setting up offshore operations without outsourcing them to a third party. Example – A tech company is moving its call centers to India to serve its Australian customers. In outsourcing, it is possible to outsource work to a supplier without sending the process offshore. Example – An Australian company may contract its accounting and taxation to a local firm instead of working internally.
- Offshoring is carried out internationally. At the same time, outsourcing may be international or local.
- The main objective of offshoring is to cut down on costs while outsourcing helps businesses to focus more on the core business activities.
Pros and Cons of Offshore Outsourcing
If you plan to try out offshore outsourcing, you must know its benefits and drawbacks. Hence, we have compiled a list of the overseas outsourcing pros and cons to help you out.
Huge cost savings
One of the most significant reasons behind overseas outsourcing is cost savings. The offshore vendors that companies hire for the work mostly pay for their operational costs. Hence, you can avoid paying for resources like technology, tools, or infrastructure.
In most developing countries, the labor cost is lower than in a developed country. Also, companies can skip social security taxes, healthcare insurance, and other mandatory employment expenses prevalent in the US. Hence, offshore outsourcing to a developing country can cut down on overall business costs.
For instance, the employee salaries in the US are much higher than in Asian countries like India, Thailand, China, etc. Hence, companies can lower labor costs and increase profits by offshore outsourcing work to these countries.
Focus on core business activities
Along with cost savings, offshore outsourcing enables businesses to focus more on the core business functions. For instance, outsourcing routine administrative work or back-office tasks enables you to use the business resources for addressing more complex business processes.
Several organizations prefer to outsource the seasonal recruitment processes. It saves a lot of time and operational costs. Also, offshore outsourcing of recruitment establishes a diversified workforce and scalable customer support service platform.
Access to a larger talent pool
If you are looking for niche skills like software development expertise, IT processes, or finance, overseas outsourcing works the best.
Countries like India have a wider pool of offshore developers and software engineers. The country offers several professionals with high proficiency in English.
Similarly, countries like Vietnam and China have skilled manufacturing services. Hence, offshoring to these countries can be beneficial to launch a new product or extend manufacturing facilities.
Cost-effective round-the-clock support services
Offshore outsourcing makes it possible for businesses to remain available 24/7. Today, if customers face an issue, they can immediately reach out to the company’s customer support service anytime.
A business wanting to offer 24/7 customer support must contract out support services to an offshore provider in a different time zone. It must be somewhere across the world where it is a reasonable time of the day and not the wee hours.
Thus, you can get people who are ready to handle the work and will take over until your employees are ready to work the next day again.
Many foreign countries have relatively lenient government policies that make the environment favorable for businesses. They grant incentives and special tax exemptions to companies that invest in the economy and increase employment opportunities.
For instance, the Philippines has fewer business regulations and offers financial incentives to attract FDI (Foreign Direct Investment) to the country. The country also promotes investment by providing investment incentives and special packages to investors.
These financial benefits and easy taxation make the Philippines one of the desirable offshore outsourcing locations for many companies.
Better expansion opportunities
Another benefit of offshore outsourcing is better scalability. Instead of establishing in-house teams to manage different project processessetting up new remote teams in different countries will help organizations to explore the new market for scaling the business.
Time zone differences
Differences in time zones can be problematic in overseas outsourcing. Say, you are a U.S. business and outsource certain project processes to an offshore vendor in India.
The US Eastern Time is 9 hours and 30 minutes behind the Indian Standard Time. If you want quick changes to your project or clarification for something, you need to wait for the offshore team to get back to work. Thus, the time difference may impact urgent and deadline-driven tasks negatively.
To ensure a smooth workflow, you must find the appropriate time to coordinate with the offshore team.
Sharing internal company information with an offshore vendor may seem a security risk to a few companies. For instance, copying the code or accessing sensitive company information may pose risks if a company outsources app development services.
Moreover, companies must keep their customers’ data safe to protect them from getting exposed to any cyber threat. Implementation of security measures like restricted remote access can ensure safety.
Companies must also ensure that offshore partners have appropriate prevention technologies to control data flow. Additionally, check for network security system policies and how the team follows them.
Cultural, social, and communication differences are bound to occur in overseas outsourcing. Especially in countries like India, China, and Southeast Asia, the cultures and languages are very different from the US and Europe. Hence, it may be difficult to adapt.
Moreover, Asian countries mostly follow a traditional approach toward work. They focus on structured processes and well-defined guides. In contrast, the Europe and US cultures appreciate the flexibility and proactive communication. This highlights the difference in work cultures and the significance of cultural compatibility.
Hence, to ensure success, businesses must be familiar with the cultures of the offshoring land. Identifying social traits, language barriers, and cultural differences can be the first step toward adaptability. Be open to conversations to reduce potential issues and establish diversity and inclusion.
Regulations and hidden cost
A disadvantage of offshore outsourcing is that you may not be familiar with foreign regulations and laws. Hence, clear your concerns regarding compliances with your offshore vendor before outsourcing.
Get to know about the intellectual property (innovations, brand logo, designs, programs) rights and its protection laws. Investigate the offshore vendor to identify any contract breaches committed in the past.
Further, ensure to know the payment details beforehand to avoid any hidden costs. For instance, you must ask about the maintenance cost after its delivery in software development.
Common Offshore Outsourcing Services
Below are the services that companies mostly consider for offshore outsourcing.
Call centers providing seamless customer support are crucial for businesses.
But it often becomes difficult for small businesses to afford in-house call centers as it requires huge investment in technology, software, and employees.
Hence, companies can outsource the process to a service provider to address customer queries instead of setting up internal call centers. In countries like the Philippines and India, several customer support service providers offer skilled support at relatively lower costs.
Among the offshore IT outsourcing services, software development, web, and app development are the most commonly outsourced processes. They are mainly outsourced to countries like India and the Philippines.
Businesses that have an online presence benefit from offshoring IT services overseas. For example, recruiting and training a software developer can be expensive in North America. Hence, companies outsource the process to an offshore company to cut down on costs.
Knowledge Process Outsourcing (KPO) services involve outsourcing core, information-related processes like market research, analytics, or financial research.
Setting up KPO service processes is time-consuming and takes a lot of effort to streamline the involved resources. It is a high-end service that demands processing a large volume of information. Hence, it is better to outsource the process.
Also, by outsourcing KPO services, businesses can access skilled professionals delivering high-quality work.
Take Overseas Outsourcing a Notch Higher with Multiplier
Offshore outsourcing is critical for modern businesses to strive in this competitive environment.
It involves delegation of work to third-party organizations and ensures quality too. Moreover, offshore outsourcing saves time, money, and other resources.
With platforms like Multiplier, employee outsourcing can become easier and seamless. Multiplier’s solutions can help your business with multi-country currency payments, managing payroll, employee benefits, and compliance with domestic labor laws for your international workforce.
Book your demo to explore further.