Pros and Cons of Offshore Outsourcing

Last updated on 

February 16, 2022

by

The VA Reviewer

Organizations of all sizes feel the effects of Covid-19, which means that any cost-cutting measures are being considered. Offshoring, also known as offshore outsourcing, reduces costs, increases margins, and potentially improves service.

Here, we will look at the benefits and drawbacks of offshoring and offer some advice on how to start using overseas labor for a portion of your operations.

What is Offshore Outsourcing?

Offshore outsourcing is the process of having work completed for your company by qualified workforce solutions located in nations with cheaper labor prices.

Rather than constructing its manufacturing unit, a company would contract with an existing plant in China to take over production without hiring new staff. Manufacturing and call center companies typically use offshore outsourcing to reduce expenses.

IT, sales, and administrative roles are frequently performed for firms worldwide by countries like the Philippines and India. Access to other nations with more resources for people with specialized skills can help businesses. 

Customer service through call center firms is a common form of offshore outsourcing. These BPO companies provide excellent customer service at a fraction of the cost of hiring domestically.

Companies desire to outsource minor activities, like nearshore outsourcing, so that their in-house staff may focus on the core responsibilities of the firm. 

One advantage of offshore outsourcing for organizations is that they don’t have to worry about the overhead costs of adding more in-house personnel. Lower human resource expenses, equivalent or higher-quality outputs, and more significant profits could benefit the organization.

You May Also Like: A Comprehensive Guide to HR Outsourcing

Pros of Offshore Outsourcing

The world is becoming more and more diversified. The advancements in technology, software, and communications now provide us simple access to a global workforce. Offshore staffing has numerous advantages. The following are the most important ones:

Cost-cutting

The most popular reason for outsourcing to another country is to save money. However, the savings may not be as substantial as you believe. According to specialists in the field, companies that outsource to other nations save about 15% on average.

Lower labor costs, material prices, more efficiency, and expanded service offerings are all ways to save money, all of which contribute to more significant profits.

Access to Specialized Knowledge

Specialized labor, such as IT or financial services, can be costly and competitive to hire on the domestic market. 

Offshoring these technical business functions, also known as knowledge process outsourcing, provides businesses with access to workers with niche skills at lower rates and less competition, resulting in lower hiring costs and potentially better business outcomes.

Some of the most common knowledge processes outsourced internationally are market research, intellectual property research (such as patent applications), legal services, training, research and development, and design.

Availability 24 hours a day, seven days a week

Today’s consumers expect service 24 hours a day, seven days a week. The internet has rendered conventional business hours practically meaningless in businesses like retail and entertainment; now, when customers have an issue with your service, they want it rectified immediately away, even if it’s 2 a.m.

Companies may provide round-the-clock uptime by deploying staff in several time zones, such as 24/7 technical assistance.

Optimized Focus on Core Business Activities

Apart from cost savings, one of the most significant benefits of outsourcing is accessing resources that can be diverted to focus on core business operations, resulting in increased profits.

Let’s imagine your HR department spends five hours a week examining and approving employee timesheets manually. It’s a necessary chore, but it doesn’t add much to the company’s bottom line or intellectual output. You could save up to 20 hours per month by outsourcing this activity to a qualified offshore partner, which could be spent on activities that generate money, such as acquiring talented salespeople.

READ MORE: What is Insourcing? How does it differ from Outsourcing?

Cons of Offshore Outsourcing

Less Authority Over Operations

Minor delays can evolve into large backlogs, and fixable issues can balloon to three times their original size when you’re not there in person to manage timetables and address difficulties now. 

Offshoring horror stories abound on Reddit, with instances of missed deadlines, exorbitant supply markups, and “final” products delivered with flaws.

One of the most significant issues with offshore is the loss of control over the component of your business that you’re outsourcing. 

That’s why, rather than going with the lowest bidder, it’s challenging to underline the necessity of conducting your due research and carefully assessing any international talent or firm you want to engage with.

Logistical difficulties

Operational difficulties are one thing, but even the most reliable offshore companies face logistical difficulties due to working with a partner halfway over the world.

Then there’s the linguistic and cultural barrier to overcome. Even though many foreign workers know English, the business has specific nuances that can easily be lost in translation. 

Then there are time zones, which are a bit of a pain. If both companies operate primarily during their respective countries’ typical business hours, communication can be delayed several days, slowing down projects.

Reduce time zone differences by establishing clear guidelines for when vital leaders will be available for conversations, ideally during a time when both sides are open at the same time so that decisions can be made quickly. 

For both parties, having more than one designated point of contact is also a good idea.

Public Image Concerns

In general, Americans are opposed to outsourcing work to other countries. 

In domestic labor opinion polls, for example, between 76 and 95 percent of Americans thought that outsourcing of production and manufacturing work was one of the reasons the US economy was faltering and that more workers weren’t being hired at home.

Even if this is not true in your company’s circumstances, you should expect public criticism of your decision to hire overseas labor. This study on public fear of offshore can help you better comprehend people’s concerns about the practice and arm you with the facts you need to remove unfavorable feelings among clients.

Complicated Payroll and Tax Issues

Dealing with America’s tax system is difficult enough as it is; adding another country to the mix adds a whole new set of laws and tax systems to negotiate. 

The last thing you want is to unwittingly break the rules of another company when it comes to registering your business or employing its employees.

There are a variety of approaches to paying overseas workers; the one that is best for your company will be determined by several criteria, including the country’s legislation, the worker’s citizenship, and the location they designate as their primary residence. 

When offshore, it’s a good idea to hire an international tax or payroll expert to assist you in staying on the right side of labor rules.

Offshore Outsourcing Examples

For lower wages and higher quality work, companies look to offshore outsourcing. Companies seek to outsource minor jobs, like nearshore outsourcing, so that their in-house team can focus on the business’s core functions.

Customer service through call center firms is a common form of offshore outsourcing. These BPO companies provide excellent customer service at a fraction of the cost of hiring domestically.

Offshore Outsourcing Philippines

The Philippines is the world’s most popular offshore outsourcing destination. Large organizations and even small to medium-sized enterprises worldwide know that their Filipino workers and remote teams can give exceptional outputs, customer service, or IT assistance at cost-effective pricing, with 1.3 million BPO workers and counting.

Types of offshore outsourcing

Production offshoring

Production offshoring refers to the actual relocation of the physical manufacturing process overseas, typically at a significantly lower cost in personnel and materials.

The two main types of offshored processes and functions are front-office and back-office processes and procedures. Offshore services include customer service, inbound and outbound telemarketing, virtual assistants, and technical support.

Other examples of production offshoring include human resources and recruiting, accounting and bookkeeping, mobile and web development, and design and graphics.

System Services Offshoring

Given the variety of procedures and minute-by-minute operations that any corporate function entails, information technology (IT) will be a critical subject to master.

In the 1990s, a massive quantity of communication infrastructure allowed countries like India, which has a large pool of English speakers and a technically skilled workforce, to take the lead in the industry by enticing businesses like HP, IBM, Microsoft, Oracle Corporation, Intel, and Cisco.

Innovation and Software Offshoring

Asian countries are world leaders in computer science and software development services. Companies in the high-tech sector, including those in Silicon Valley, have begun to outsource innovation work to Colombia, Belarus, South Africa, Mexico, and Ukraine.

Using these countries’ highly skilled labor pools results in significant cost savings and shorter production cycles.

Reshoring

Offshoring is the inverse of reshoring, also known as back shoring or inshoring. 

In Europe, companies such as Google, Facebook, and Amazon have been chastised for allegedly concealing income and evading taxes. They reportedly accomplished this by routing non-US earnings from major advertisers through its Dublin branch in low-tax jurisdictions such as the Republic of Ireland.

As a result, it began recording earnings and paying taxes on profits in the countries generated in January 2018.

Takeaway

Outsourcing a part of your business activities to an overseas partner has various advantages. It allows you to delegate some of your most time-consuming processes as a business owner, allowing you to focus on what matters most. 

However, you must be cautious about what you share with your offshore staff, as doing so may expose you to security and financial dangers.

Evaluate the pros and cons of outsourcing listed here to determine whether you should begin employing offshore outsourcing services.

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