Offshoring is a business development strategy whereby a company transfers or locates a set of processes or functions to another region in order to capitalize on comparative cost advantages, economies of scale and to enhance its global presence. Many large companies from the United States offshore its facilities to countries such as China, the Philippines, Malaysia and India. Among these companies are Nike, Caterpillar and Bank of America.
There are many benefits to offshoring:
1. Lowers Cost of Business
Cost reduction is the primary reason why companies offshore part of their operations to another country. Offshoring is able to reduce costs by capitalizing on prevailing comparative cost advantages. Labor presents the highest comparative cost advantage.
A North American company will typically pay an entry level employee $20 per hour. If the company offshores the same skill to the Philippines, it will only pay the entry level Filipino employee $3.50 per hour.
Let us assume further that labor accounts for 20% of gross income. Then cost of operations in North America would average $100 per hour versus $17.5 in the Philippines.
2. Greater Involvement of Management
Unlike outsourcing whereby tasks are contracted to a third party service provider, with offshoring there is closer collaboration between the service provider and the client.
In offshoring, a foreign company will take in an offshoring partner which is a local company that is registered with the government regulating agency. The offshoring partner will oversee the set up of operations until official launch date.
The foreign company or the client will appoint people from its principal office to be assigned in the offshoring host country to manage operations.Thus, they will be more involved in the day- to- activities compared to outsourcing. Having more involvement gives the client more control over operations, better assurance on quality of work and reduces risks associated with offshoring.
3. Improve Productivity
By offshoring non- essential tasks and responsibilities that fall outside its core competencies, a company can improve its productivity a number of ways.
- Company can focus on its core functions.
- Cost savings can be re- purposed to business development programs that need funding.
- Company can delegate tasks and projects that require higher and more technical competencies without compromising its budget.
Thus, a company can increase its productive output through offshoring and not incur significant changes in its costs of operations.
4. Establish Global Presence
Brands like Nike set up offices in densely populated cities such as China and the Philippines in order to build their global presence.
In a global economy, offshoring gives you the opportunities to reduce costs of operation and present your products and services directly to a foreign market.
In effect you are marketing and promoting your company, products and services within the host’s economy. You are building new global markets which will further enhance your branding strategy.
5. Improve Profitability
When a company offshores or establishes a unit for manufacturing in a low cost country, it can lower the total cost of production.
By lowering the cost of production, it can reduce the costs of the finished product through price roll backs or promos and still make good profit margins.
Comparative cost advantages with offshoring is not only limited to labor. Other direct costs such as rent, Internet, telecommunications, power and water charges are also lower.
In addition, there are countries that encourage foreign investment and entice multinationals to set up offices by giving them access to ready credit, tax exemptions and other incentives.
These benefits will improve the financial position of the company, better manage their cash flow and earn higher profit.
6. Capitalize on Affordable Assets
Advances in technology are not proprietary to developed countries and the recognized global economic power houses. Many developing countries such as India have made great strides in digital technology.
In the 1990’s companies from the United States’ famed technology hub, Silicon Valley started exploring outsourcing arrangements with companies in India. For years, India had developed a reputation as having some of the greatest minds in Information Technology.
The arrangement yielded benefits for the American companies that soon they started offshoring processes to India. Not only is labor cost lower in India but the cost of technology itself is more affordable.
It is not just technology that can be capitalized on. Even the Human Resource can be optimized through offshoring. What India is to IT, the Philippines is to customer service.
English is the second language in the Philippines and the courteous, gentle and positive disposition of the Filipino has made the region the premiere destination for customer service work.
7. Your competition is also offshoring
Nike knows that its main competitor Under Armor is also offshoring. If Nike wants to remain dominant and competitive in the industry it has to offshore in order to have more flexibility in operations.
Flexibility is all about having enough weapons in your arsenal to accommodate various marketing and business development strategies of your competitors.
Reducing costs will give you the financial flexibility to support marketing programs, bring in more key people and expand capacity.
Before firming up your decision to offshore it would be a good idea to visit the country of the prospective offshoring partner and conduct a comprehensive market study. You should research on the following:
- Legal impediments; what are the current laws on foreign investment?
- Legal processes; what are the compliance requirements for foreign investors?
- Availability of infrastructure; are there ready locations for setting up facilities or should we build from the bottom up? How is the quality of the host country’s technology?
- Political and social considerations; how is the political situation in the host country?
- Cultural and traditional practice; what behavioral patterns exist that could affect the conduct of work in the hose country?
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Keep in mind that offshoring is never a guaranteed solution to the problems that afflict your company. It will take time, effort and patience to make the offshoring arrangement succeed.
But in a global economy where barriers have been lifted and new opportunities abound, offshoring will provide you the avenues to take advantage of lower costs and explore greater markets.