With the COVID-19 pandemic, businesses of all sizes are taking every possible step to stay profitable, including outsourcing some of their business activities to offshore partners.
Offshore outsourcing helps companies save costs and gain a competitive advantage in their industries. However, it can also bring in challenges due to time zone differences, cultural barriers, and foreign regulations.
In this article, we’ll talk about offshore outsourcing pros and cons in depth. And as a bonus, we’ll answer four FAQs about offshore outsourcing, including the most common services you can outsource to an offshore company.
This Article Covers:
(Click on a link below to jump to a specific section)
- 5 Key Pros Of Offshore Outsourcing
- 4 Major Cons of Offshore outsourcing
- 4 Offshore Outsourcing FAQs
Let’s get started.
5 Key Pros Of Offshore Outsourcing
Offshore outsourcing is the process of hiring a third-party entity in a foreign country to manage some of your business operations.
There are several advantages of outsourcing to an offshore partner, making it a popular growth strategy for several companies. Some of these benefits include:
- Lower labor costs.
- Better access to quality talent.
- Round-the-clock business support.
- Frees up time and resources for core competencies.
- Can scale your business quickly.
- Favorable foreign policies to grow your company.
Here’s a detailed look at five popular offshoring pros:
1. Massive Cost savings
The most important reason for offshoring your business operations is the massive cost saving benefits you’ll gain.
The external agency or offshore vendor whose services you obtain is a separate entity responsible for most of its own operational costs. You can avoid paying for resources, tools, technology, and even infrastructure.
All these elements are pre-arranged and calculated into your contract with the outsourced partner. And they usually cost a fraction of what you’d pay in a developed country.
Most developing countries have lower labor costs than developed countries. You can also avoid social security taxes, healthcare insurance, and other compulsory employment costs in the United States.
For example, salaries in the US are approximately 12 times higher than in India. You can take advantage of the lower labor cost by outsourcing to an Indian company to increase your profits.
2. Access To Professionals and Specialists
Specialized fields like IT, software development, or finance can be difficult to hire domestically. Offshoring these technical business operations gives you access to professionals with niche skills.
Regions like India and the Philippines have a large number of software engineers and offshore developers. These countries also have a lot of professionals with high English language proficiency and college degree certificates.
Additionally, if you want to launch a new product, outsourcing product development to countries like China may be beneficial.
China, Vietnam, and many Asian countries are known for skilled manufacturing services. They would already have the necessary infrastructure required to develop and ship a product — making the process quicker.
3. 24/7 Customer Support
With the internet, standard business hours have become outdated as everyone has access to products and services all the time.
Today, if your customer faces issues with your product at any time, you should be able to address that concern quickly.
If your company does not have the means to provide 24/7 customer service, you can hire an offshore provider in the opposite part of the world.
By capitalizing on employees available in different time zones, offshoring gives your company a viable way to offer round-the-clock customer support. When your operational hours are over, the service provider can take it up and attend to customers.
4. Favorable Government Policies
Many governments in foreign countries grant special tax exemptions and incentives to companies that invest in their economy and provide employment. This helps you gain profits and improve your business’s bottom line.
For example, offshoring regions like the Philippines offer financial incentives and fewer business regulations to attract foreign investments in their country.
This foreign investment generates employment, promotes economic development, and contributes to sustained growth in the country.
The Board of Investments (BOI) and the Philippine Economic Zone Authority (PEZA) are the leading investment promotion agencies (IPAs), providing incentives and special investment packages to investors.
These tax benefits and financial incentives make it easier for companies to relocate to an offshoring location in a foreign country.
5. Better Scalability
Another benefit of outsourcing company activities to a foreign country is scalability.
Instead of hiring and training an in-house team to handle non-core operations, you can rely on the external entity to provide the right workforce for your needs. This way, you’ll have more time and resources to focus on core tasks and grow your company.
Additionally, by building offshoring teams, you’ll be able to establish remote workforces in foreign destinations. This helps you explore newer markets to scale your business.
4 Major Cons Of Offshore Outsourcing
From massive cost savings to easy scalability, offshore outsourcing offers several advantages to businesses.
However, before deciding to offshore outsource, you should also consider the disadvantages of offshoring to determine if it’s right for your company’s needs.
Here are the four major cons of offshoring:
1. Security Risks
As you’ll have to share confidential business information with your offshore partner, most companies feel concerned about security risks.
For example, if you outsource the software development services for your website, there is a risk of your code being copied.
Moreover, you have to keep your customer’s data classified to protect yourself and your customer from being exposed to security threats.
That’s why you should implement safety measures and strict protocols to avoid any mishaps. For example, you could limit remote access to any sensitive information so that your offshore partner cannot steal this data.
You should also ensure that your offshore outsourcing partner has the necessary prevention technologies in place to control data flow. Additionally, check whether your offshore service provider has network security policies in place and how well their employees follow these.
2. Differences In Time Zones
You may be thinking of outsourcing the software development of your company’s website to an offshore team in India.
However, remember that the Indian Standard Time is 9 hours and 30 minutes ahead of US Eastern Time. If you want to make quick changes to your project, you’ll have to wait till the offshore development team comes online.
Finding the appropriate time to communicate with your offshore remote team can cause communication gaps that can negatively impact your business. These lag times may affect urgent tasks that are time-sensitive and deadline-driven.
Fortunately, you won’t have such high turnaround times with an onshore development team as they’ll be in the same time zone as your company.
3. Foreign Regulations and Hidden Costs
Another disadvantage of outsourcing is that you may not be familiar with foreign regulations and laws. You should clear up any concerns you may have around intellectual property rights with your offshore outsourcing provider before you outsource.
Find out how well a foreign country’s legal infrastructure protects the IP rights of stakeholders. Investigate if the outsourcing partner had any breaches of contracts in the past.
If you fail to do this, you could risk losing intellectual property to the company you’re outsourcing to. Your company’s intellectual property includes inventions, computer programs, designs, brand logos, etc.
You should also iron out details regarding payment beforehand to avoid any hidden costs.
For example, you need to factor in how much it costs to maintain the software after the offshore development team has delivered it.
4. Language Barriers and Cultural Difference
If your company has decided to outsource projects to an offshore outsourcing partner, language and cultural differences may be a major barrier to your project’s success.
Many offshoring countries use English as their preferred language for diplomatic and political reasons. However, the depth of understanding English might be different in foreign countries compared to the US — your offshore team may not be aware of various figures of speech and common expressions.
Moreover, cultural differences like different approaches to tackling projects and decision-making styles can affect workflow, quality control, etc.
So before engaging in offshore outsourcing, companies should clearly understand any language and cultural barrier that can affect their business.
4 Offshore Outsourcing FAQs
Here are some FAQs about offshore outsourcing:
1. What Is Outsourcing?
Outsourcing or business process outsourcing (BPO) is when a company enlists a third-party organization to handle some of its internal business functions.
There are three types of outsourcing:
- Onshore outsourcing: When you hire a company within your country to handle some of your internal business processes on your behalf.
- Nearshore outsourcing: When you engage a nearshore partner from a neighboring country to handle some business operations. For example, when a US organization outsources to a company in Latin America.
- Offshore outsourcing: When you enlist the services of a third-party company situated overseas to take over a particular part of your business processes.
2. What Is Offshore Outsourcing?
Offshore outsourcing is when a company hands over part of its business operations to a third-party organization in a different country, most often in another continent.
Usually, in this type of arrangement, operations are moved to a developing country to take advantage of the lower cost. The offshore outsourcing business model can help you increase profits, enhance service quality, drive innovation, and improve customer satisfaction.
However, offshore outsourcing shouldn’t be confused with outsourcing.
Check out this article on Offshoring vs. Outsourcing to find out more about their differences.
3. What Are 3 Common Offshore Outsourcing Services?
Software development, cloud service providers, customer support, and research development are some of the most common services outsourced to an offshore company.
Here’s a detailed look at them:
1) IT/Cloud Services
Offshore software development, web development, and app development are the most common outsourced services to countries like India and the Philippines.
If your company has an online presence, offshoring these services may be beneficial for your business.
Hiring and training an entry-level software developer can be expensive in North America. Outsourcing software development to an offshore development company is much more affordable.
2) Customer Support Services
Let’s say you’re running an e-commerce business. You’ll need to speak to customers to address their queries.
But having an in-house call center or customer support team can be expensive. You’ll need to invest in costly software and telecommunication equipment and recruit and train the right support center employees.
Instead, you could outsource to a service provider in countries like India and the Philippines to get skilled customer support at a lower rate.
3) KPO Services (Knowledge Process Outsourcing)
KPO involves outsourcing core, information-related business requirements like data analytics, market research, or financial research.
This is a high-end service that requires processing large volumes of information. Setting up this process involves a lot of effort and resources; it’s much better to outsource this to an offshore partner.
By outsourcing this activity, you can get high-quality work done by qualified engineers and skilled professionals. Hiring in-house employees with these skills wouldn’t be cost-effective.
4. What Are Some Popular Offshore Outsourcing Destinations?
Here are some of the top offshore outsourcing destinations in the world:
- The Philippines
- South Africa
There are several benefits of outsourcing part of your business operations to an offshore partner. As a business owner, it allows you to delegate some of your most demanding operations so you can focus on what matters the most.
However, you’ll have to be careful about what you’ll be sharing with your offshore team, as it can lead to security and financial risks.
Go through the pros and cons of outsourcing mentioned here to help you decide whether you should start using offshore outsourcing services.
Lauren Soucy is the VP of Marketing for Time Doctor, the world’s leading time tracking and productivity software. She has 15+ years of experience in marketing at fast-paced companies. Her first passion is SEO, she can’t start her day without coffee, and she enjoys spending time at the beach with her two boys and her husband.