Offshoring 101: Definition, Benefits, Risks, Services and Production

In the world of the growing demand for specialties like IT and software engineering— combined with an eruption of talent in Asia, which has caused ‘offshoring’ to become the main business buzzwords.  In this piece, we will provide you with the offshoring definition, the benefits and drawbacks of this model within specific types of business and compare outsourcing vs offshoring. Let’s read on to find out whether offshoring is the best fit for your company.

What is offshoring?

Offshoring definition

Offshoring definition

Offshoring is primarily a geographic activity. In developed countries, products are expensive because the staff required to produce and distribute them are costly. By contrast, in the developing world, a vast cheap workforce provides an easy bedrock for a low-cost economy.

By relocating factories from costly countries to inexperienced economies, offshoring takes advantage of these cost differentials in order to sell the goods back in the West at a hefty discount and profit. Thanks to technological improvements, it has been the decades of productive offshoring that has lowered the costs of consumer products such as electronics and clothing.

Offshoring does not only relate to the production of physical products, but services also. Some offshoring examples such as the Indian IT industry has been powered by waves of offshoring by technological companies in the West. Therefore, with the question “Is offshoring good or bad” in this case, the answer is that going offshore helps you gain access to a large talent pool, while significantly decreasing costs makes the concept of offshoring to countries like India lucrative for businesses all across the globe. Thus, the question offshoring good or bad is not a hard question anymore.

Types of offshoring

Types of offshoring

The companies can plan for either production or services offshoring, depending on their business needs, activities, capital budgeting strategy, etc.

Let’s read the information below to understand both of these in detail

Services Offshoring

A company has service offshoring in setting up the units in other countries to carry out service-related operations such as information technology, customer care, marketing, accounting, sales, human resource, and many more.

Production Offshoring

When a company establishes its manufacturing unit in another country, to import the finished products for selling it in the domestic market, it is called as production offshoring.

The advantages and disadvantages of offshoring

Offshoring benefits

Offshoring benefits
  • Cost Reduction: The most important reason or advantage of offshoring is to reduce labour costs and other operating expenses.
  • Cheap and Skilled Workforce: It is a chance to get competent and cost-efficient workforce available in a developing nation.
  • Concentrate on Core Business: When the company offshore its other tasks, it can focus more on its core functions.
  • Complete Assistance: Because the offshore team holds expertise in its field, they can provide a relevant solution to every problem related to the production or services offshored.
  • 24/7 Operations: Another advantage is that the company can continue a 24/7 service such as customer support, which is otherwise not possible in the domestic business unit.
  • Tax and Other Benefits: Many developing countries will provide many types of incentives such as tax holidays, to attract companies for foreign direct investment.
  • Better Control: The business can ensure proper management and regulation of all its functions if it opts for offshoring.
  • Streamlines Process: It assures that a dedicated team is working on offshored production or services to complete the tasks effectively and efficiently.

Offshoring Risks

Offshoring Risks

Offshoring services seem to be quite challenging. While relocating a part or whole business operations to another country, the management should not overlook the following risks it may tackle:

  • Cultural differences: Different communication styles, decision-making styles, approaches to tasks, attitudes towards conflicts – these were all cited as main cultural factors that caused a difference of opinion between the two workforces.
  • Long Distance Locations: The offshoring units usually are located in geographically distant locations, which makes it hard for the manager to often visit these subsidiaries.
  • Ethical Issues: In case the organization pays dissatisfactory remuneration to the offshoring team or if they feel that the facilities are improper, it results in ethical problems and spreading of negative brand image. 
  • Geographical or Political Unrest: The geographical or political problems like shutdowns, riots, political instability, protest, etc. may prevail in the country where the company relocates its unit; ultimately affecting the business.
  • Security and Safety Issues: The company’s offshoring unit mostly deals with a threat to lockout and closure if the natives find it to be harmful or unethical for their nation.
  • Language Barrier: When the company enters into a developing country for relocating its business functions; it finds a huge gap between its native language and the local language of the area due to the difference in language and understanding. Therefore, the company is hard to establish effective communication with the offshoring team.

Which wins the battle offshoring vs outsourcing?

Finding the right balance between distributing core and non-core competencies of a business is always difficult. Both outsourcing and offshoring have their own pros and cons.   

For short-term projects that don’t last for more than a couple of months, a high-quality outsourcing provider is usually the strongest option. The third vendor will help you solve the task in the most effective way at a reasonable price.

However, if you’re a company looking to enhance your operations by building a team hand-picked from a deep pool of talent – while you still want to complete control of the process, then offshoring is the way to go.  Although there are some challenges that you must overcome, the result is that you get to work with a team that you can call your own.

Nevertheless, quality offshoring requires the guidance and assistance of experts in the field; experienced technology professionals will help you start offshore development in the right way.

Final Word

If you are searching for a reliable partner who knows how to leverage offshore outsourcing to grow your enterprise, we are here to help you. Magenest is proud to be a one-stop digital agency with 6+ years in business, we have helped brands transform their digital presence through our full-stack technology pack with Odoo, Adobe Magento Commerce, Salesforce, and Amazon Web Services. Let’s Contact us to learn more about our available offshore outsourcing solutions – we look forward to a long partnership and attaining your business goals at the same time.

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