Offshore outsourcing has emerged in recent decades as a way for businesses to save time and money by delegating tasks to overseas companies that can perform the work at lower cost and, often, greater efficiency. But, like most business decisions, the choice to move operations offshore is hardly that straightforward.
Early waves of offshore outsourcing were primarily fueled by the benefits derived from labor arbitrage, which enables businesses to offload work to countries that offer lower-cost professional services. Today, companies may opt for offshore outsourcing for any number of additional reasons, including 24/7 coverage, access to niche skills, greater efficiency, or even entry to new markets. Over the years, companies that have chosen this path have also discovered the challenges that come along with it, ranging from managing time zones and cultural differences to understanding the complexities of knowledge transfer.
Moving operations offshore can provide a valuable lever for companies hoping to stay competitive – particularly in global markets. But those considering offshore outsourcing today should consider the full scope of potential benefits and drawbacks, in order to make the best decision for their business and set up their offshoring arrangements for success.
Outsourcing vs. Offshore Outsourcing vs. Offshoring: What’s the Difference?
The difference between outsourcing and offshoring is often misunderstood, with the term "outsourcing" frequently used interchangeably – and erroneously – with "offshoring" or "offshore outsourcing." While related, these three approaches are shaped by distinct differences, described below.
Outsourcing
Outsourcing is the process of contracting out work to a third party, which may or may not be located overseas. It’s possible to outsource to a vendor without sending the work offshore. For example, a U.S. company might hire a stateside accounting firm to manage its bookkeeping functions or engage a call center to handle inbound customer service calls, instead of having its own staff members do the work in-house.
Offshore outsourcing
Offshore outsourcing, on the other hand, occurs when a company outsources a project or process to a vendor overseas, often to countries that can do the job less expensively or that have greater access to labor or resources.
Offshoring
Further adding to the confusion is the term “offshoring,” which denotes another approach that leverages lower labor costs or skills available from other countries. Though sometimes used incorrectly to describe an offshore outsourcing arrangement, offshoring specifically refers to a company setting up its own operations overseas, without engaging a third-party vendor. For example, a company may move its call centers to India to serve its North American customers. Typically, large companies possessing the necessary capital and management capabilities undertake this approach.
Like other types of outsourcing, offshore outsourcing can free up in-house resources for other priorities. By shifting some of the workload to an outside source, for instance, internal employees can focus on higher-level tasks, like strategizing and decision-making.
Potential Advantages of Offshore Outsourcing
Offshore outsourcing can deliver a number of advantages to companies, especially in the areas of cost and access to specific skills or markets. The value of offshore outsourcing may differ, based on the type of work a company is considering outsourcing offshore and the rationale for doing so. Some of the most common benefits of offshore outsourcing include:
- Lower labor costs: One of the biggest benefits of offshore outsourcing is the opportunity to save money. Vendors with overseas operations often charge less than domestic third parties to perform the same tasks, thanks to their lower labor costs.
- Access to specific skills or expertise: Finding a company that can perform tasks that are challenging or inefficient for a company to handle internally can benefit any type of outsourcing. However, as the offshore outsourcing marketplace has grown, many overseas vendors have also developed leading expertise in certain business processes and may offer access to niche skills not available elsewhere.
- 24/7 coverage: When outsourcing certain types of tasks – like call centers for customer service, for example, or IT support – working with companies in another time zone can be a boon since they can operate when your company might be offline. In addition, to be able to offer round-the-clock services, many overseas providers now have multiple locations around the globe.
- Enhanced knowledge of overseas markets: Companies already doing business in foreign markets or considering expanding their customer base globally may find working with an offshore outsourcer beneficial in other ways. Foreign employees may have a better understanding of regional trends, markets, business risks, and cultural norms in their country than domestic employees can offer.
- Tax and regulatory benefits: In some cases, there may be specific tax breaks or other financial incentives to doing business with an offshore outsourcing vendor.
- Ability to focus on higher-value tasks: Like other types of outsourcing, offshore outsourcing can free up in-house resources for other priorities. By shifting some of the workload to an outside source, for instance, internal employees can focus on higher-level tasks, like strategizing and decision-making.
- Greater efficiency: Many offshore outsourcing vendors have developed specific expertise and rigorous processes that enable them to perform certain tasks more quickly and efficiently than a company might be able to achieve by itself.
Potential Disadvantages of Offshore Outsourcing
Offshore outsourcing can offer distinct benefits, but it also comes with unique challenges. Businesses should weigh these issues carefully when considering offshore outsourcing. Some of the most significant disadvantages of offshore outsourcing include:
- Communication challenges and cultural differences: Effective communication with an offshore outsourcing partner is essential to a good working relationship. However, there is potential for communication challenges due not only to distance but also to possible language barriers and cultural differences. Even dissimilar business norms, working styles, and beliefs can create friction between corporate customers and their offshore outsourcing partners. These issues can then impact service delivery or quality.
- Regulatory and legal differences: There may be country-specific regulations and laws that are different from those that exist in a business’ own home country. Factors like labor laws, financial regulations, import and export laws, and politics should be well understood and addressed in any offshore outsourcing agreements.
- Time-zone variations: Time-zone differences may be a benefit for companies looking for after-hours support. However, working with offshore outsourcer’s team on the other side of the world may mean having to make calls at inconvenient times to align with the provider’s normal business hours.
- Exchange rates: The highs and lows of currency valuation can make a significant dent in overseas transactions and may offset savings from offshore outsourcing. Conversely, these shifts can sometimes lead to even greater savings. It is essential not only to understand the impact of swings in exchange rates, but to address them in your offshore outsourcing arrangement’s pricing structure.
- Security risks and intellectual property (IP) concerns: Entrusting any outside firm with sensitive or protected company data always increases security risks. This pertains to data breaches as well as the potential misuse or theft of high-value intellectual property. It’s important both to ensure robust cybersecurity measures and to understand the IP and data protection and privacy laws of the vendor’s country. Remember: Outsourcing work does not outsource responsibility for robust cybersecurity risk management and measures.
- Loss of control: Delegating responsibilities to an offsite vendor can free internal resources, but it can also hinder the ability to monitor operations and quality control, especially for tasks that were previously managed in-house.
- Lack of institutional knowledge: Sometimes, offshore outsourcing partners will lack specific domain knowledge crucial to certain tasks. Make sure the offshore outsourcing partner’s interests and expertise align with your company’s needs. Be sure to consider how any required in-house knowledge will be transferred to the third party.
Setting Up Your Offshore Outsourcing for Success
Despite the challenges, offshore outsourcing can offer benefits that outweigh the downsides. For businesses that decide the rationale for offshore outsourcing makes sense, there are some steps to take to prepare for a successful offshore outsourcing outcome.
A good starting point is to create a well-thought-out request for proposal (RFP). This document outlines your expectations and provides a blueprint for potential vendors. In the same vein, it’s important to perform a rigorous selection process. While there may be some urgency involved in establishing an offshore outsourcing relationship, taking the time to properly screen, assess, and select the right associate for the business can pay big dividends over the course of the interaction.
Due diligence doesn’t top at the selection process. When looking at partners in a specific country, it’s also helpful to become familiar with the location’s cultural norms, business etiquette, and even holidays. Doing so can go a long way toward preventing missteps or misunderstandings that could negatively impact deliverables.
Before ramping up service delivery, be sure to allocate time for knowledge transfer and onboarding. As the saying goes, sometimes you have to go slow before you go fast. This initial investment of time will likely pay off in the form of greater efficiency and quality as the relationship matures.
Of course, the work is not done once the ink is dry on the contract. That’s when the relationship truly begins. Putting in place and maintaining clear communications channels, encouraging transparency on both sides, and instituting mechanisms for review and constructive feedback will help ensure that the vendor can meet the business’ goals and objectives over time.
The Bottom Line
Thinking about outsourcing business tasks to overseas vendors? Offshore outsourcing has been widely used by large companies, enabling them to focus on their own core competencies and higher value priorities, such as strategy, innovation, and growth. However, small and midsize companies can also take advantage of the time- and cost-saving benefits offshore outsourcing vendors provide. It won’t be right for every company or every task; understanding and weighing the pros and cons of offshore outsourcing before making the decision to work with an overseas partner is essential. By doing their due diligence, though, business leaders can best address the specific challenges of outsourcing offshore and mitigate any inherent risks.
A version of this article was originally published on August 11, 2020.
Photo: Getty Images
