Outsourcing VS Offshoring: What is Right for Your Business?
Outsourcing and offshoring are two different yet similar concepts.
This article will focus on offshore outsourcing for businesses to expand their operations while keeping overhead costs low.
What is Outsourcing?
Outsourcing is the process of contracting a company to handle tasks or functions that your company would normally handle in-house.
Outsourcing can produce cost savings for businesses, especially if they want to expand their operations and keep overhead costs low.
Companies outsource jobs that either cannot be performed at the company or are currently performed by employees who can be better utilized in other tasks.
Outsourcing can be successful if you find a good partner that will allow you to do what’s necessary for success in your industry with minimal risk and cost!
What is Offshoring?
Offshoring, or offshore outsourcing, is the process of sending one or more aspects of your business overseas to a company located in another country for lower wages and a higher skill set.
Offshoring is traditionally employed by developed countries to relocate some business or industrial processes to a workforce in a developing country to minimize cost and increase efficiency.
Why Should You Outsource Your Business?
Outsourcing can help maintain profitability by lowering operating costs. Many companies outsource their IT, saving money on software licensing and up-gradation of hardware while taking advantage of the specialized services offered in many countries that are not available stateside.
Benefits of Outsourcing For Your Business
The benefits of outsourcing your business are cost savings, flexibility in the workforce, and specialization. Let’s look at them in detail below:
Many companies outsource payroll processing to their international employees because it is cheaper to do so than to hire an employee with the same skill in their country. Oftentimes, wage rates and tax laws make payroll outsourcing a necessary option for success!
Flexibility in workforce
If your company needs a temporary boost in an aspect of its business, such as increased sales from client orders during a busy period, then you can hire a freelancer through oDesk or another outsourcing platform. You will be able to hire them only for the required time and then let them go without worrying about firing or rehiring. This can save your company thousands in hiring costs and time spent on the hiring process.
Customization of services
When you create a new product, such as a phone app, it is often cheaper to have an overseas company handle the programming and other technical needs. This way, your time will be spent creating the next big thing rather than learning how to program in basic HTML! When you outsource the manufacturing of a new game controller for your gaming software, the manufacturer will customize it to fit your requirements while producing it cheaper than what it would cost at home.
Why Should You Choose Offshoring For Your Business?
Globalization has made offshoring a viable option for companies looking to expand their overseas operations. Companies today can take advantage of these benefits:
- Lower labor costs, due to the lower salaries in other countries
- Lower overhead costs by not having to pay for insurance paid leaves, and other expenses that are negligible or non-existent in countries like Malaysia, India, and China
- Using other companies to handle the business processes that are most cost-effective
- Having a business partner (offshore service provider) can allow you to concentrate on your core competency while handling everything else.
Offshoring is not without risks, though. You need to make sure that your chosen partner will handle the jobs necessary for your business’s success.
Benefits of Offshoring Your Business
There are three main areas in which cost savings can be achieved when you utilize offshoring: labor, materials, and overhead.
Offshore companies generally have lower wages than U.S. businesses, especially for workers in non-technological fields such as customer service representatives and nurses. For example, U.S.-based call centers pay $7 an hour [in the US], while a Malaysian call center pays its employees about $1 an hour to answer customer calls. In addition, some companies cannot afford the costs of maintaining a building, cleaning staff, installing the technology, and other overhead expenses.
To offset these costs, they may opt to relocate their operations offshore. For example, an American manufacturing company has a factory in China that manufactures stereo equipment employing Chinese workers who earn less than $1 per hour. This type of business model is also known as a WFOE or Wholly Foreign-Owned Enterprise.
Other U.S.-based companies choose to own their overseas business in a Joint Venture format. This is similar to an ownership structure of 50/50 formed when two separate companies agree to pool their resources together to create new revenue streams. The U.S.-based company will partner with a Chinese company, creating an equal partnership so the decisions can be mutually beneficial to both parties.
The Pros and Cons of Outsourcing and Offshoring
Pros of outsourcing:
1. Your business has more time and capital to work on new ideas and projects rather than reinventing the proverbial wheel over and over again.
2. You have a dedicated team of professionals working to help you succeed, with one specific goal in mind: the company’s success. This is especially important if your business has reached its limit with growth and requires employees specializing in their industry.
3. If you fail or your partner fails, it doesn’t affect your success. You can get rid of the partner and find another one that will allow you to concentrate on growing your business without worrying about handling the business processes necessary for it to succeed!
4. With outsourcing, low-level employees are not as important to your business’s success because they may be replaced anytime with minimum cost or effort. The only consideration is who is the best or the most efficient candidate to handle your company’s needs.
5. You won’t need any additional space or office equipment. Your newly hired business partners are likely already equipped for what you need them to do.
The Cons of Outsourcing:
1. You have no control over how your product is made. You may be employing individuals who are not your ideal candidate to handle the task you are looking for, thereby affecting the quality of work.
2. If you do not have a clear idea of your business needs, you may be paying too much in labor costs or not getting good results from offshore employees.
3. It will be hard for you or your business partners to assess a candidate’s work ethic if you have never met them in person. You must trust that they are efficient at their job and can deliver quality work because communication between you is difficult without face-to-face interaction.
4. It may be difficult to recall employees due to high employee turnover.
The Pros of Offshoring:
1. It allows you to expand your business cost-effectively.
2. You can reduce expenses by having employees in foreign countries complete tasks for your business.
3. It is easy to find a partner who has the same work ethic as you do and can be trusted for as long or as little time as your business needs them.
4. You will have the ability to expand your business quickly.
The Cons of Offshoring:
1. If you have no knowledge of the laws in a foreign country, it may be difficult to set up an operation there.
2. Foreign countries may not be as reliable in having an infrastructure that can sustain your company’s success.
3 . Business partners in foreign countries may have different laws that are not always enforceable by U.S.-based companies or even local law enforcement. These companies may be taking advantage of the fact that they are home to many foreign companies looking for a cheap labor force to work.
4. It is hard to recall employees due to high employee turnover.
What is Right for Your Business?
Outsourcing is ideal for companies that want employees to focus on more important things like marketing or expansion. Outsourcing also allows you, as a business owner, to have more time and capital to work on your own ideas instead of spending it on hiring new employees and managing current ones.
Offshoring is ideal for businesses with limited capital looking to expand exponentially in a short amount of time. It is also an option for companies that want to introduce new technology into their existing business processes and need the help of foreign workers who have specific skills suited to those processes.
If you feel that offshoring is the right option for your business, finding a business partner overseas to build a long-lasting relationship is important. Choosing an offshore company that has a similar work ethic and professional standards as yours will help you get the most out of your outsourcing efforts!
If you feel that outsourcing is the better fit for your company, it’s important to find the right workforce to build a long-lasting relationship. Choosing an outsourcing company that prioritizes quality work with minimal wages will help you get the most out of your outsourcing efforts!