Offshore Outsourcing: Everything Your Need to Know
Offshore outsourcing refers to the act of hiring an outside company from a foreign country as a means of securing inexpensive labor and saving money.4 min read
Simply put, offshore outsourcing refers to the act of hiring an outside company from a foreign country as a means of securing inexpensive labor and saving money on various aspects of a business that may be causing overhead inflation.
What Is Offshore Outsourcing?
Often the center of controversy, offshore outsourcing is a duplicitous topic as while some praise it for the various benefits it provides, others condemn the practice for causing the demise of various jobs and sectors domestically. By paying expressively less for the same amount of work, offshore outsourcing provides a lot more value to the company. Moreover, offshore outsourcing also negatively affects employees of the company, as they're unable to compete with outsourced labor in terms of pricing.
Offshore outsourcing syndicates outsourcing as well as offshoring. A tactical practice in which a company hires a third-party source to execute various tasks (in foreign nations other than those they conduct the majorly conduct business in), offshore outsourcing has its share of pros and cons. Namely, the crux of offshore outsourcing is that the location of the sourced third-party vendor's operations is located far away from the hiring company's home nation, which can create various complications.
Nearshore and Onshore Outsourcing
There are a few types of outsourcing to take note of. Offshoring among small and medium enterprises (SMEs) is atypical, therefore SMEs typically offshore and outsource in an attempt to gain a cost saving. However, offshore outsourcing is best left to the non-core functions of businesses.
On the flip side, nearshore outsourcing refers to working with companies that are located in close proximity to the country of origin. Many companies favor nearshore outsourcing as it provides the price benefits of offshoring, without the disadvantages of working with a company on the other side of the globe.
Lastly, onshore outsourcing refers to contracting companies located within the same country. Onshoring tends to save companies significantly less than nearshoring or offshoring, however, you make up for it with better output.
Advantages of Outsourcing
- Reduces Capital Costs – Every department and every employee in your organization implies a capital cost. Therefore, by finding cheaper labor, you will be reducing overhead costs drastically.
- Makes Business More Manageable – Lessening the number of responsibilities a business has overall, outsourcing makes items such as maintaining workspace, equipment, as well as human capital, someone else's issue.
- Turns Fixed Costs into Variable Costs – Simply put, the term fixed costs refer to expenses you incur to keep your doors open. As the name implies, these expenses remain recurring regardless of how well business is going. Rent, water and electricity, and wages are all examples of fixed costs. On the flip side, if the work is completed in-house, you will have to front the costs of providing for staff, facilities, and equipment whether you are using them to their fullest capacity or not. In other words, outsourcing allows you the luxury of only paying for outputs. Therefore, when business is slower, you can reduce the cost of various products and/or services.
- Invests More in Revenue – Although Earning Activities Support functions are vital to the success of any business, they won't make you money. However, they do make it possible to make money. Therefore, the money you spend on support functions is not considered an investment, it's a regular expense. For this reason, support functions are a prime target for outsourcing. If it is possible to source them for less than the cost in-house, this method allows for more money to spend on the activities that generate revenue.
- Increases Efficiency – When activities fall outside your normal business practices, you or your employees may feel coerced into multitasking. This causes learning curves, which are notoriously known to be inefficient.
- Outsourcing Allows Access to Expertise – Since the task you pass on to them is the core business of the organizations to which you outsource, the companies you work with will always provide you with cutting-edge knowledge and services.
- Cuts Labor Costs – Furthermore, employing specialized staff is can be costly. By outsourcing, you get the benefit of cheap labor but are still able to ensure that your supply partner is using non-exploitative employment practices.
- Stick to What You Do Best – Outsourcing lets you focus on your strong suits by sticking to the core business.
- Be More Competitive – Outsourcing allows companies the added benefit of having dedicated departments without the overhead costs, which will make it easier for various departments to become experts in their fields.
- Risk Mitigation – For businesses that rely on technology, there's always a risk of becoming outdated. However, by outsourcing to a company that specializes in technology, they remain abreast of developments and changes, and thusly, will always know how to keep you ahead of the curve. This ultimately helps to mitigate the risks of going out of business.
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