Offshore: the future of outsourcing
Outsourcing and offshoring are gaining an intense popularity nowadays, but at the same time both terms are often misunderstood and used as synonyms. Is offshoring and outsourcing really the same?
Outsourcing versus offshoring
Outsourcing is usually defined as a transfer of some processes and/or services to an external company, that specializes in a given activity. Tasks can be shifted to a third party located in the same country or elsewhere and this makes a basis for the following types of outsourcing:
- Onshore outsourcing — delegating tasks to a vendor located in your own country.
- Nearshore outsourcing — hiring a vendor, which is located within the same continent and with the same or a very similar time zone; usually in a neighboring country.
- Offshore outsourcing — choosing a vendor located far away from your country, often on another continent.
This shows offshoring is not the same as outsourcing, but it is a form of outsourcing. To say it simply — offshore outsourcing is shifting in-house jobs to a different country, usually oversea.
Offshore outsourcing — how did it start?
The beginnings of offshoring are closely related to the fast development of IT, increasing global competition and liberalization of regulations concerning international trade-in services. The trend to offshore some business activities started in the early 1980s, when organizations began to focus more on cost-saving strategies. This resulted in delegating to oversea vendors functions and tasks that are necessary to run a company, but are not specifically related to the core business. Companies started contacting providers in emerging markets to deliver services such as accounting, human resources, data processing and other IT activities. The trend significantly accelerated in the 1990s, when offshoring was a tool to cope with concerns coming with the Y2K issue.
One of the first companies to offshore its business activities, and at the same time a great example of the offshoring success, is General Electric. As early as in the 1970s the company decided to offshore some business operations to India. Their main goal was to benefit from a lower cost of labor and maximize profitability by transferring selected tasks to an offshore location. GE off-shored to India some of its major business processes, including operations, data maintenance and call centers. Currently, General Electric has about 30 offshore-based units which provide services in such areas as IT, customer service, HR, accounting and logistics. GE's most spectacular offshoring investment was spending approximately $130 million to set up a research and development (R&D) center in Bangalore, India, which is now the second largest unit of this type in the world, employing approximately 3,000 scientists.
Potential business advantages of offshore outsourcing
The basic benefits coming with offshore outsourcing are lower costs and access to a larger resource. But these are not all:
Lowers labor costs
One of the biggest advantages of offshoring is reducing employee costs and other labour-related expenses.
Enhanced knowledge of overseas markets
Setting up an offshore presence may enable a company to broaden its customer base to other countries. A local company usually has a better understanding of regional trends, markets, business risks and cultural norms in their origin country.
24/7 service
With offshoring, time zone differences are not a problem, actually they lead to a greater flexibility and availability of the service.
Alternate tax and regulatory benefits.
Many countries offer tax breaks and financial incentives to entice foreign companies.
Access to skilled resources
With offshore outsourcing, the availability of skilled and experienced employees for different roles and positions, is much bigger. Also the third party companies that are specialized in a given aspect of the business, are well-equipped with all types of equipment and technology required.
Offshoring services
There are mainly two types of offshoring: production offshoring and service offshoring. As for the latter, the most frequently off-shored services are IT and broadly understood Business Services often referred to as BPO (business process outsourcing). Typical IT departments subject to offshoring are: Support, Application Development, Reengineering, Security Audit. The top countries that excel in IT outsourcing are India, Ukraine, China, Poland, The Philippines and Romania. As for the BPO, it usually covers Finance and Accounting, Legal Services, Customer Service, Administration, Market Analysis and Research. The BPO leading countries are India, Brazil, China, Mexico, Poland, Malaysia and the Philippines. In both activities, countries are evaluated by their financial attractiveness, people skills and availability as well as business environment.
How big is the offshoring phenomenon likely to become?
The evolution of outsourcing has led to a wide variety of services available offshore. In global, post-pandemic economy the idea of offshore outsourcing makes more sense than ever before. With quick and easy communication across countries and continents, it’s much easier and more cost-effective for domestic companies to use services based in other parts of the world. It helps cost cuts, increases productivity, and enhances the quality.
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