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What is Offshoring? Definition and Benefits

What is Offshoring? Definition and Benefits.
08.02.2023
7 min read

Offshoring, a practice of processing business operations from one country to another, has revolutionized the way companies approach software development. In most cases, business operations are transferred from developed industrialized countries to developing ones to cut down costs, enjoy tax benefits, as well as comply with less stringent requirements and regulations. How to handle offshoring right? What are its benefits? Let’s find out.

Introduction – Defining Offshoring

Offshoring is a process of relocating business operations to another country to take advantage of lower costs and differing labor laws. The process is quite popular in many industries and there is a wide range of reasons why organizations may choose to start offshoring some projects. Offshoring allows companies to expand their business and at the same time, reduce the cost of business operations. When a company decides to start offshoring, it usually re-establishes a business unit, process, or function in a country where the costs are lower. The rest of the firm’s business functions continue to operate in their country of origin.

Offshoring examples

There are various examples of offshoring in real-world businesses. Each of them has its challenges and benefits. The following examples of offshoring are the most common:

  • Tech offshoring – businesses benefit from lower costs and access to a larger pool of talents.
  • Manufacturing offshoring – businesses optimize costs and expand to new markets.
  • Business process offshoring – businesses save on labor costs, gain access to new markets, and increase efficiency.
  • Financial offshoring – businesses save on taxes and use their capital more flexibly.

How is offshoring different from outsourcing?

The terms are often confused. However, these are two different business activities. When it comes to geography, offshoring results in moving operations to another location, whereas outsourcing doesn’t have to. Outsourcing is a streamlining activity for a company, and offshoring is a geographic movement-related activity. Finally, offshoring is motivated by cost reduction and boosting profits, whereas outsourcing’s motivation is to allow you to focus on the key areas of expertise.

Benefits of Offshoring

Offshoring has many pros that make it attractive to rapidly growing businesses.

Cost Savings

First and foremost, offshoring brings financial benefits. It’s cost-effective for companies in labor-intensive industries like call centers and manufacturing. An offshore location is a great way to reduce in-house staffing needs. You don’t need so much office space and you can save more on real estate expenses. Offshoring allows companies to save money through lower labor costs as you can invest the capital saved in critical business needs. Also, training costs decrease significantly. If you hire developers in-house, you must spend additional money on technical expertise, research, and development. Another thing is tax savings and government incentives. When you start offshoring, you can usually save from lower costs on taxes, social security benefits, and other related incentives. Some governments grant tax breaks to businesses that invest in their economies which makes it much more affordable for companies to relocate to an offshoring destination.

Do you need a dedicated team of developers?

Access to Specialized Talent

The higher education system in Central and Western Europe is almost free, affordable, and focuses on technology and science. The result? Growing number of highly qualified specialists in tech and software development. In addition, most of them are fluent in English, as these language classes are often compulsory in schools.

The quality of education is confirmed by the rankings of the region. A study by HackerRank shows that Poland, Hungary, and the Czech Republic are among the top 10 countries in the world in software development.

In the opinion of Pawel Zmysłowski, CEO of White Label Coders: “Getting more for less money is only part of the story. More important is that we have professionals that are simply the best. We benefit from the competencies, experience, and advanced skills of the developers who are among the top in the world, with the honourable third position in the HackerRank ranking. They are familiar with many technologies, and several programming languages, have a solid academic education, and also unconventional approach to tasks. All this makes Polish developers appreciated not only in the country but also internationally”.

Industries that Benefit from Offshoring

Here are the three high-value industries that currently seek to benefit the most from offshoring:

  • Tech – moving part of your business operations abroad may be a great chance to both save on costs and speed up the time-to-market. Developing countries boast skilled and experienced software developers which is a great opportunity for companies to look for new talents and optimize expenses at the same time.
  • Healthcare – it’s one of the most challenging industries when it comes to marketing and profit generation. Offshoring may be the way to bring a breather and propel the industry a notch higher. Moving some part of your organization’s processes to the other country can ensure a constant flow of leads coming into the business.
  • Financial services – finance management and accounting build the foundation of a successful business. Therefore, some extra care is needed to make sure it’s aligned with your business operations. Delegating some tasks to a third-party provider may introduce a new perspective to relieve your business of some tedious activities involved in finance.

Improved Efficiency

A great advantage of offshoring is the ability to operate 24/7. Very often, offshoring providers are located in a different zone which gives you an advantage of getting the most out of 24 hours a day. Your partner is in a different time zone and can resume the work you started during your working hours. Efficiency improves as you get more tasks done in a day. Finally, you get access to technology and resources. Offshoring helps companies meet their performance goals using technology know-how that is a relatively cheap commodity in ample supply in offshore economies.

Processes that Benefit from Offshoring

Offshoring usually starts with simple, standardized, measurable, and manual processes that generate quick and relevant wins. It’s extremely popular in accounting and financial services – mainly auditing, accounts management, financial planning, budget, and cash flow, etc. External teams are trained and qualified to deal with the finances of foreign companies and the restrictions that need to be adhered to. Another example is data entry – one of the earliest functions to be offshored. There are also virtual assistants and human resources management teams (they handle recruitment, payroll, compensation, and performance evaluation, etc.). Finally, while talking about processes that benefit from offshoring, we cannot forget about IT services – commonly offshored business functions that focus on database and server management from a remote location so that you don’t have to worry about hiring and maintaining an expensive IT team onsite.

Increased Competitiveness

Moving businesses to another company located abroad can be a great opportunity to scale up sustainably. You can expand your offshore partner faster than in an in-house team which leaves you free to focus on core business initiatives that drive growth. You increase competitiveness both because of better efficiency and reaching new markets – your international labor force can support you in exploring new markets in various overseas locations. Finally, your competitiveness increases with greater availability for your customers if offshoring takes place in locations that allow you to offer 24/7 customer service in your original time zone.

If you consider offshoring schedule a free consulation for your project:

Companies that have succeeded with Offshoring

Looking for some real-life examples of companies that have offshored their business operations? Here are some industry leaders that have made it right:

  1. WhatsApp. Before its launch in 2009, WhatsApp offshored its software development to Eastern Europe, entirely relying on offshore talent. Their in-house engineers were only focused on client-related tasks.
  2. IBM. The company’s subsidiary in India employs approximately 131,000 employees which makes IBM the largest multinational employer in the country.
  3. Google. They officially launched their Research & Development center in Ukraine based on CloudSimple in 2020.
  4. Amazon. In May 2018, the company proceeded to offshore talent in the Philippines to handle customers round the clock in North America and the UK.

Potential Drawbacks

As with everything, offshoring also has some flaws. The following ones are listed the most often:

  • Cultural differences

Countries have different social and cultural customs. This can lead to misunderstandings when different cultures work together. Cultural differences are one of the biggest reasons why offshoring deals run into problems. Different approaches to completing tasks, different attitudes toward conflict, as well as different decision-making styles are factors you can’t ignore. The discrepancies in cultural and social practices can lead to both business and personal issues.

  • Language barriers

When working with a company from a different country, it is usually safe to assume that most people on your team speak English as a second language. However, the fact they can communicate in English doesn’t mean that communication will be as smooth as it is when communicating with a native speaker. Therefore, language barriers can be a challenge for offshoring. Sometimes, it can lead to frustration on both sides.

  • Loss of control

Some companies consider offshoring a risk connected with losing control. In fact, there are some processes prone to decreased control but still, decision-making usually stays in the company’s original country.

Conclusion

As you can see, offshoring has its pros and cons.

Pros:

  • It helps companies optimize costs (lower labor costs and tax incentives).
  • It frees up the workforce in the headquarters as manual and repetitive tasks are offshored.
  • It increases competitiveness and efficiency.
  • It grants you access to a large talent pool.
  • It offers 24/7 operations.

Cons:

  • It has cultural and language barriers.
  • There may be a loss of control.

Interested in offshoring some of your business processes? Make sure you understand your strengths and weaknesses first. When you decide that you are ready for offshoring and pick roles to offshore, time to find the right partner. Look for a company that will challenge you and your teams. Don’t cut corners on recruitment! Make sure you understand different contract models and define clear responsibilities.

At White Label Coders we make the hiring process simple for you.

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