Choosing between offshore vs onshore is a major business decision for most companies while scaling up.
As a business owner, you can either offshore your business processes by sending them outside the home country or continue to expand while staying onshore, within your own country. Both are popular business models that help a company improve its bottom line.
So how do you choose one for your business?
In this article, we’ll explore offshore and onshore processes in detail. We’ll cover the popular services, advantages, and disadvantages of both these processes to help you make an informed decision.
Let’s get started!
Offshore vs Onshore: A Detailed Comparison
From understanding what each term means to their advantages and disadvantages, let’s understand everything about offshoring and onshoring!
1. Offshore vs Onshore: Definitions
A. What is Offshoring?
In the simplest terms, offshoring refers to any business activity a firm conducts outside its own country.
Companies may choose to offshore for cost savings, tax benefits, and favorable business laws in other countries. It can take many forms, such as:
- Offshore Company: An offshore company entails expanding your business or setting up a new company outside your home country’s jurisdiction.
- Offshore Outsourcing: Offshore outsourcing involves hiring third-party agencies or employees outside your home country.
For example, a French company looking to outsource mobile app or software development can choose an offshore development center in Asia. It’ll help them hire the best software developers while increasing their cost savings.
Check out this comprehensive offshore outsourcing article to know more about the process.
B. What is Onshoring?
Onshoring basically refers to any business, transactions, or investments that take place within your own country. Some popular types of onshoring are:
- Onshore Company: Onshore companies operate within your business’s country, sharing the same laws and regulations.
- Onshore Outsourcing: Onshore outsourcing is when you hire external companies located within your home country to carry out services like app development, payroll processes, etc.
For example, a New York-based IT company may outsource its software services to an onshore development center located in any other American city, like San Fransisco. Companies hire such development centers for onshore software development, maintenance, support, etc.
With that said, both offshoring and onshoring operations are usually associated with outsourcing business processes. So, let’s take a closer look at offshore and onshore outsourcing.
2. Popularly Outsourced Services
Here are some popularly outsourced offshore and onshore tasks:
You can outsource these services to a foreign country:
1. Engineering Services
Companies offshore engineering services to increase cost-effectiveness through skilled labor, superior technology, and reduced product-to-market time. Some industries that outsource engineering services are:
- Construction Industry: Many western countries like the United States and the United Kingdom are going through a crisis-level shortage of civil engineers. Outsourcing services like AutoCAD, architecture, etc., helps companies in these countries access affordable labor and technology.
- Software Development: India and countries in Eastern Europe, like Poland, Ukraine, etc., offer skilled software engineers at affordable wages. Some popular software outsourcing services include machine learning, quality assurance testing, UX/UI design, etc.
- Wind Power Industry: This industry requires wind farms, manufacturing of wind turbines, and installation of turbine foundations, which depend on highly skilled engineers. Ocean, structural, and mechanical engineering are some commonly outsourced services.
Availability of raw materials, labor, and infrastructure like machinery motivates companies to outsource manufacturing to lower-cost countries.
For example, Apple outsources 85% of its manufacturing processes to Asia. This strategy also helps companies explore new markets and reduce overhead costs like transportation, export-import, etc.
3. Human Resource Management
Business processes like recruiting, administration, payroll processing, etc., are time-consuming and error-prone. Companies outsource these processes to foreign countries like India and Mexico to reduce costs, save time, and decrease liabilities.
This is especially true if you outsource production, software services, or engineering processes to offshore development centers. Employing offshore HR teams in the same country will help you find suitable candidates for these processes. These HR teams will also manage their benefits and payroll while staying legally compliant.
Check out our detailed HR outsourcing guide to know more about the process.
Here are some processes you can outsource onshore to optimize your business.
1. Customer Support
Companies often choose onshore customer support services as it helps them access affordable infrastructure and well-trained call agents who share a similar culture.
This helps call agents have smooth conversations with clients, reduces miscommunication, and increases customer satisfaction.
2. Legal Services
An onshore company has a better understanding of its home country’s laws and regulations. Choosing an onshore legal agency allows you to outsource in-person legal processes such as court appearances, litigation meetings, etc.
It saves costs in recruiting and maintaining an in-house legal team. Here are some commonly outsourced legal processes:
- Legal research.
- Legal transcription.
- Contract drafting.
- Document reviewing.
3. Payroll Management
Businesses outsource payroll processes to onshore companies as they’re better acquainted with local employment laws, like overtime pay and minimum wages. Moreover, being in the same country lets them respond quickly to legal changes.
For example, you may take time to understand new taxation or employment laws. However, onshore payroll companies employ experts who understand these laws and quickly make changes in your company accordingly.
3. Offshore vs Onshore: 4 Incredible Advantages
Here are four amazing reasons why you should adopt offshore or onshore outsourcing for your business:
Apart from cost advantages, offshoring offers affordable infrastructure, scope for business expansion, and much more. Let’s take a look.
1. Increased Cost Savings
Cost-cutting is the primary reason firms outsource business processes. Here are some areas where offshore outsourcing helps you increase cost savings:
- Labor costs.
- Raw materials.
- Employee training.
- Technology and automation.
This allows startups and large-scale business owners to optimize their work processes cost-effectively.
For example, Microsoft has three offshore business units and employs nearly 1500 employees in Costa Rica to leverage the country’s affordable labor, infrastructure, and superior technology.
Check out this article to know the best cost-cutting practices and other reasons for offshoring.
2. Access to Skilled Labor
Countries in Asia and Latin America encourage outsourcing by offering a workforce that’s educated, English proficient, and experienced (from handling multiple clients).
For example, India produces around 1.4 million graduates annually and is Asia’s sixth most English proficient country. This means countries like the UK and Australia that face an acute labor shortage in areas like data analysis, R&D, etc., can offshore to India to access highly-skilled professionals.
3. Global Expansion
When you offshore your business process to another country, you immediately get access to new market opportunities.
For example, an American company outsourcing software development to China can use the opportunity to explore the Chinese market and tap into nearby markets as well.
Major companies like Samsung and Apple also adopt product and software outsourcing to maximize profitability and compete with local brands.
This helps you reach new markets faster than your home country, reduce production costs, and establish your business locally.
4. Round-the-Clock Availability
Since there are considerable time zone differences between your home and offshoring country, you’ll be able to offer 24/7 service to your clients.
For example, a company in North America offshoring its customer service to the Philippines will cover a time gap of nearly 12 hours. The different time zones allow Philippine call centers to cater to Asian and other foreign clients as well as take calls at odd American hours. For this, companies may offer multiple shifts to cater to your company’s needs.
The round-the-clock advantage also lets you adopt a 24-hour development cycle, especially in software development, to finish work faster than in the home country. This gives you a competitive edge over your rivals and an uninterrupted workflow.
Here’s how onshoring can help you improve your business.
1. Quality Control
Since your outsourcing partner is located in your country, it becomes easier for you to ensure high-quality products and services.
Similar time zones will allow you to have frequent discussions and in-person meetings, which are more efficient than phone calls and emails.
This may be why many companies choose an onshore or nearshore development center to outsource services like product design, software, or app development.
Moreover, you can check product qualities onsite and resolve issues quickly, reducing the turnaround time.
2. Local Market Knowledge
Onshore service providers are familiar with the local market and business trends. This allows them to tailor their services according to changing market demands.
For example, if a French company onshores its marketing, the local agencies will better understand consumer behavior and market demand fluctuations. This will help the company make better business decisions.
3. Cultural Affinity
Onshore outsourcing service providers usually share cultural similarities with the parent company. They’ll understand cultural nuances and local dialects, which are essential if you’re outsourcing processes with client interaction.
For example, onshore marketing agencies can create impactful campaigns which include cultural elements that appeal to the local audience and their preferences.
So, onshoring call centers won’t just give access to trained professionals and technology but also reduce communication issues due to language barriers.
4. Better Data Security
When onshoring business functions, your outsourcing team will share the same rules and regulations, like Intellectual Property rights (IP), Service-Level Agreements (SLAs), etc. This means you’ll have fewer legal hurdles as both parties know local laws well.
For instance, a German company outsourcing software development within its own country will be assured of data security. This is because both the outsourced team and the parent company would be bound by common data security laws like the General Data Protection Regulation (GDPR).
4. Offshore vs Onshore: 3 Key Disadvantages
Here are three crucial drawbacks of offshore and onshore outsourcing to help you understand these processes better:
Let’s take a look at a few things you should be aware of before offshoring.
1. Inability to Monitor Employees
When you choose to offshore software development, mobile app design, etc., it’s vital that you’re able to monitor your offshore team easily. But physical distance and time zone differences may make it difficult for you to:
- Establish similar quality standards.
- Monitor employee productivity levels.
- Ensure cost-efficient work processes.
But don’t worry!
These problems can be solved by a powerful productivity management tool like Time Doctor. This tool can track your outsourced team’s business hours, generate productivity reports, and check work hour usage via screenshots, web and app monitoring, etc.
2. Communication Barriers
As a result, it may be difficult to convey instructions, leading to miscommunication and disruption of workflows. This is especially true if you’re outsourcing customer care where agents have to interact with foreign clients.
Time zone differences also add to communication issues as you may struggle to hold meetings and talks at a time favorable to both teams.
You can resolve all these issues by adopting asynchronous communication, having open conversations, and adopting measures like accent neutralization training for your outsourced teams.
3. Security Concerns
Outsourcing to foreign countries opens your business to risks like disclosing sensitive information, such as client names, addresses, etc. You may also be unable to properly monitor your warehouses, offices, production units, etc., in another country.
So how do you ensure your business’s security while offshoring?
Apart from doing your due diligence, here are some things you can do to ensure data security:
- Choose a credible outsourcing partner.
- Sign Non-Disclosure Agreements (NDAs) and SLAs to protect IP rights, service quality, and data security.
- Use surveillance technology like CCTV cameras in your warehouses and production plants.
Here are a few things to work out before onshoring your business processes.
1. Overhead Costs
Since you’re outsourcing to the same country, you’re unlikely to see any major cost advantages. Here are some overhead costs you’ll have to consider before onshoring:
- Less preferential tax benefits.
- High labor costs.
- High infrastructural costs.
You may overcome this by outsourcing to a vendor in a low-cost region of your country. However, the cost savings are unlikely to be as high as popular offshoring destinations.
2. Small Pool of Talent
Some western countries like the United States and the UK have a shortage of researchers, software developers, etc. The available ones may be highly skilled graduates, but new students may not opt for these advanced careers – leading to a labor shortage.
This shortage of labor may create competition and increase employee wages. As a result, you may not save much on labor costs.
3. Limited Global Reach
You may only be able to access domestic markets with an onshore outsourcing company. That’s because they may not have a global presence and also lack knowledge about foreign markets and audiences.
So if you’re looking to expand your business to foreign markets, you’ll have to specifically look for onshore outsourcing companies that are well established and offer global services.
5. A Quick Recap
Here’s a quick summary of the difference between offshore and onshore outsourcing:
|Definitions||Offshore Company: Setting up a company outside your country’s jurisdiction. |
Offshore Outsourcing: Outsourcing business processes to a far-off country.
|Onshore Company: Setting up a company in your own country.|
Onshore Outsourcing: Outsourcing business processes to agencies in your home country.
|Services||Engineering servicesManufacturingHuman resource management||Customer serviceLegal servicesPayroll management|
|Advantages||Cost saving.Highly-skilled workforce.Access to global markets.Round-the-clock availability.||Monitor product and service quality.Local market knowledge.Ease of communication.Better data security|
|Disadvantages||Difficult to monitor offshore teams.Communication issues due to language, time, and cultural dissimilarities.Issues in data security.||High overhead costs.Limited pool of candidates.Less access to global markets.|
Offshore outsourcing helps you cut costs and accelerate turnaround times, while onshore outsourcing can help minimize communications issues.
But both these processes have their own drawbacks too. Communication issues may cause problems for you while offshoring. On the other hand, high overhead costs and the limited availability of skilled employees may affect your onshore outsourcing process.
You can use this guide to understand these outsourcing models and opt for the one that best suits your business needs.
Liam Martin is the co-founder of Time Doctor—one of the world’s leading time tracking software for remote teams. He is also the co-organizer of Running Remote, the world’s largest remote work conference.