The terms “outsourcing” and “offshoring” are usually used interchangeably. For purposes of discussion, offshoring is outsourcing, though the geographical distance between the client and service provider plays a major role. It is the process of transferring one or more business functions to a service provider that is geographically far from where the client is based. A typical example of this business relationship is a company from the UK that transfers some business aspects to a firm in the Philippines.
Offshoring involves great distances, and if the client outsources work to a service provider located in a neighboring country, that process is called nearshoring. A UK-based company outsourcing work to a service provider in Mexico is an example of this process.
Countries such as China, India, Malaysia, and the Philippines are able to accelerate economic growth with offshoring. In fact, the industry has become one of the key income-generators for many outsourcing destinations. Experts say that offshoring is an evolutionary business method for the development of the global economy.
Benefits
Labor arbitrage remains the top reason companies transfer work offshore. Business processes can be done at relatively lower labor and operational costs compared to doing the same work domestically. Western companies turn to offshoring destinations such as India, China, and the Philippines as the process enables them to get significant cost savings. Here are the other benefits that this solution can offer:
• With the non-core business functions being dealt with by a service provider, the client has more time and resources for core tasks and other processes.
• It may be difficult for companies to look for skilled employees domestically, or their wages are way too high. With offshoring, they can gain access to a new pool of talented and creative professionals. Both the Philippines and India have a vast number of English-speaking graduates with skills that are suitable for call center and knowledge-based work. China, on the other hand, is ideal for manufacturing processes.
• This business solution allows companies to get a foothold in new market areas. Offshore operations bring services and products closer to the target market or boost the company brand in new territories. Also, companies can utilize local knowledge and expertise of the service provider.
Risks
This business solution has its own share of risks, and outsourcing players need to overcome them or at least minimize the negative effects to establish a mutually beneficial and long-lasting relationship. Here are some of the risks that companies must be aware of:
• Communication issues – The absence of personal, face-to-face communication can result to many communication problems. Chat, video conferencing through Skype, and other programs sometimes are not enough to get the message across.
• Unclear requirements – Ambiguity in client requirements and deliverables is a common offshoring risk. It can be due to lack of enough communication and failure to keep the other company updated on the progress (or lack thereof) of the project. It is essential to always keep communication lines open.
• Intellectual property protection – The risk of data theft as well as issues on intellectual property greatly increase when outsourcing work offshore. The crucial step to take to avoid this is to ensure that the service contract covers the details of how much information and technology can be shared with each other.
For companies that are thinking about transferring work offshore, it is wise to weigh the pros and cons first so they can come up with an informed decision.
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