The simplest offshoring definition would be when one business relocates its production from one country to another. It usually refers to business companies, although state governments may also employ offshoring. Offshoring products revolves around relocating the physical manufacturing process to a lower-cost destination. Such an act is typically known as product offshoring. Example of offshoring includes producing goods in countries like China or Vietnam. A significant incentive for showing arrival in the North American Free Trade Agreement made it simpler for firms to relocate manufacturing facilities outside of the United States. Later, the trend changed to China, which provided low pricing to cheap land, ease of environmental regulations, and vast economies of scale. Services such as finance and accounting, IT, application development are also known for offshoring. The is called service offshoring. One of the countries to benefit from this was India, as it has a large pool of English-speaking people and a technically proficient workforce. Because of inflation, high domestic interest rates, robust economic growth, and increased IT offshoring, the Indian IT sector has witnessed significant wage growth.
Offshoring for free trade is seen as beneficial for both the origin and the destination country by a lower cost of goods and services to the origin country and providing jobs to the destination country. Therefore both sides should see an increase in the Gross Domestic Product rate. The total number of jobs also increases in both countries as those workers in the origin country who lost their jobs can move to higher valued jobs in the country with a comparative advantage.
Pros and Cons to Offshoring:
Pros:
- One of the pros of offshoring is called differentials. Lower labor expenses are among the reasons corporations are shifting their operations offshore. Paying overseas workers is less expensive than paying employees in the United States. Costs of specific materials such as raw materials are cheaper, primarily if produced in companies offering jobs.
- Secondly, offshoring creates job opportunities in developing nations. Most multinational corporations relocate portions of their operations to less-developed countries with high unemployment rates. The developed nation’s condition and the economy will undoubtedly improve as more employees are made available to residents.
- Thirdly, they improve business operations. Offshoring to nations with various time zones would allow businesses to provide customer care 24 hours a day, seven days a week, and serve customers worldwide.
Cons:
- However, there are also disadvantages to offshoring. Offshoring incurs a cost to certain aspects. A company may save money from lower wages, but they might spend more on training and supervising employees overseas. In the end, the cost differential might not be as pronounced as one might have expected it to be. Products may be cheaper to produce abroad, but the cost of shipping them may not be as reasonable.
- Secondly, there may be problems with quality control. For example, making sure that a product is manufactured according to its standards may not be as easy as when produced locally. It would be hard to keep an eye on the overall operation. Even if guidelines, barriers to culture and language can still affect quality control overseas.
- Thirdly, offshoring affects domestic employment rates because most jobs are sent offshore, making fewer jobs available to the locals, increasing unemployment rates. Such can ruin the company’s public image, significantly when environmental abuse and child labor are associated with the company’s image.
How to choose the right offshoring partner?
The next step is to choose the correct kind of offshoring partner for one’s business. The given steps can be followed as a guideline to selecting the right offshoring partner.
1. Selecting the perfect destination for offshoring
It is crucial to choose a target location where employment is cheap, and the cost of raw materials is also comparatively lower.
2. It is vital to choose at least three viable BPO outsourcing companies.
It is essential to have a couple of choices when selecting the BPO company one would use for outsourcing and then compare them according to the quality of services they provide, pricing, and other relevant categories.
3. Checking on the price and quality
One must do thorough market research before investing in an offshoring partner. They might be providing their services at a cheaper rate than what one usually pays, but it may not necessarily be the best one. Therefore going through consumer reviews can be a vital part of selecting the correct offshoring partner. This process could also include requesting a trial run of the service they provide beforehand.
4. Establishing good communication with the concerned offshoring partner
Importantly, lucid communication can be established with the offshoring partner beforehand. This type of communication would include discussing key performance indexes, requirements, and expectations of the partner. If contact is effective, half of the job is done.
In short, there is no one formula for selecting an offshoring partner. Eventually, one needs to seek what works the best for their business. The discussed points are vital things one needs to keep in mind before navigating the offshoring industry. The rest of the tasks are subject to the company and the concerned owner looking to offshore his products.
