Offshoring is the practice of outsourcing business processes to offshore locations, including countries half a world away.
For the United States and the United Kingdom, offshoring generally refers to outsourcing in the Philippines, Sri Lanka, and other similar far-away destinations.
That said, business processes outsourcing can also take place near-shore or in locations that are close by, typically in countries with the same or similar time zone as the organization’s domicile country.
As a case in point, an Australian company in Perth outsourcing its processes to the Philippines is technically near-shoring rather than offshoring. It is also near-shoring when a U.S. company in Florida outsources its back-end functions to a place in Colombia.
It doesn’t matter whether one is outsourcing farther away or much nearer, however.
Whether it’s offshoring or near-shoring, businesses and economies both benefit when organizations choose to outsource their business processes and functions to offshore and near-shore locations.
The McKinsey Global Institute’s Offshoring: Is It a Win-Win Game provides a definitive analysis of why outsourcing can be a good move for economies and business organizations.
Here are eight reasons outsourcing offshore or near-shore makes business and economic sense.
1. Cost Savings
Different countries have differing wage standards. Outsourcing allows companies to take advantage of such wage differentials to reduce their operating costs.
To illustrate how significant a wage differential there is between wages in different countries, suppose a U.S. shipping company needs a customer support team that’s 10 members strong. If it builds such a team in the United States, one customer support personnel will cost it $37,200 in annual wages, so having 10 team members means a yearly cost of $372,000.
Contrast that to the cost of building a similar team in the Philippines, where an outsourcing agency estimates a customer service representative’s annual salary to be $13,188. That’s a salary differential of $24,012 per person or a total savings of $240,120 for all 10 customer service staff.
In its report, McKinsey points out that there can be other costs.
When building a dedicated offshore team, for instance, one has to invest in an office and administrative staff, too.
However, even with such costs accounted for, McKinsey says companies can still save at least 45-55% of the cost base. This can further increase when an organization redesigns or re-engineers its business processes. In this case, companies can save from 65% to 70%.
Additionally, companies can take advantage of the all-in outsourcing model offered by some offshoring partner agencies. Such companies will charge only the cost of the personnel hired plus a fixed service fee, ensuring offshoring clients have full transparency about their offshoring costs.
2. Job Creation
Job creation and economic growth in both the location and the off- or near-shoring client’s home country are also benefits of outsourcing.
The job creation advantage is evident in the host country. A U.K. company outsourcing its corporate accounting services to another country creates jobs in that country. However, how does outsourcing generate employment in the United Kingdom?
This benefit can be felt indirectly. While jobs may be taken away from the home country’s residents and citizens in the short term; in the long term, an organization that grows because of outsourcing would need more domestic employees to support its expansion. There will always be high-level jobs it cannot or will not outsource, and some jobs, like retail, must be performed locally.
3. Access to New Markets
Outsourcing to another location can help businesses tap into new markets and better understand local cultures and consumer preferences.
By setting up production facilities or outsourcing work to partners in emerging markets, companies can adapt their products and services to local tastes and needs. This can expand their customer base and improve their competitiveness in those markets.
4. Greater Focus on Core Competencies
Building a team or outsourcing functions overseas allows companies to focus on core competencies and expertise rather than getting bogged down in non-core processes and procedures.
For example, a medical aesthetic equipment distributor can keep its domestic team small by keeping only strategy, leadership, and its sales team at headquarters and designating back-office functions like accounting or payroll to outsourcing partners.
Doing this lets companies free up resources and devote more time and energy to revenue-generating and competitive-advantage-defining activities. This can lead to greater specialization and expertise in core business areas.
5. Improved Efficiency and Productivity
Time zone differences can pose challenges, but they also have advantages.
For instance, building a team in a different time zone can let companies provide 24-hour service to their clients or maximize productivity by implementing a 24-hour work cycle. A 24-hour workday can lead to faster production cycles, reduced turnaround times, and improved customer satisfaction.
6. Increased Capacity and Scalability
Outsourcing can also lead to greater flexibility.
When a company works with an outsourcing partner, it can scale operations up when prevailing market conditions demand or scale them down as its business needs dictate.
By outsourcing work to partners, companies can adjust their capacity as needed without worrying about hiring or firing employees.
7. More Talent and Innovation
Outsourcing lets a company in the United States tap into the expertise of specialists in the Philippines, Sri Lanka, Colombia, or some other off- or near-shore location.
It provides access to talent that may not be readily available in a company’s home country. Outsourcing agencies can also provide companies access to new technologies, fresh perspectives, and new ideas that can help drive innovation and business growth.
8. Competitive Advantage
The resulting cost reduction, 24-hour work cycle, opportunities for business process re-engineering and redesign, and access to premium global talent can provide businesses with a competitive advantage. These‌ can also lead to better customer experiences and profitability.
Outsourcing for Growth and Profitability
By outsourcing certain tasks, companies can increase their profitability and competitive advantage.
Further benefits of outsourcing include cost savings, access to new markets, more opportunities to focus on core competencies, improvements in efficiency and productivity, scalability, and access to specialists and other global talent.
While it may come with risks, these can be mitigated by working only with reputable outsourcing partners, conducting thorough due diligence, and developing effective communication and management strategies.
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