Offshore Outsourcing Definition
The offshore outsourcing definition is something you need to be aware of if you are in the manufacturing industry.3 min read
The offshore outsourcing definition is something you need to be aware of if you are in the manufacturing industry. Although there are pros and cons associated with this type of structure, the main benefit is cost savings. If you have been striving to reduce your fixed costs, this is an avenue you may be interested in. Here is what you need to know about offshore outsourcing in regards to your company's current objectives.
Offshore Outsourcing: Introduction
When a business hires a third-party supplier to complete tasks outside of the company's home nation, this is known as offshore outsourcing. This means that unlike "nearshore outsourcing," offshore outsourcing refers to a vendor that is far from where the hiring business operates (in relation to their home base).
This is often a controversial topic, as offshore outsourcing leads to both pros and cons. The main benefit of offshore outsourcing is that it is profitable. In terms of monetary value, companies will pay significantly less for the same amount of work. However, this also takes jobs away from those within the enterprise's own nation. Home-based employees cannot compete with outsourced labor in regards to pricing.
As stated above, nearshore outsourcing means that you work with a company that is relatively close. Although you will not be working with a company on the other side of the world, you will still benefit from offshore pricing. In comparison, onshore outsourcing refers to companies that work with other companies (or individuals) who reside and operate in the same country.
Offshore Outsourcing Terminologies
To better understand the terminology surrounding offshore outsourcing, here are some terms for you to consider:
- Offshore fund — This is a fund that is located overseas and is often associated with "tax havens."
- Tax haven — This is a place where companies or individuals pay very little or even zero tax.
- Offshore company — A company that operates in a specific country, yet is registered to conduct business abroad.
- Offshore manufacturing — This is when a company moves its production facility abroad (i.e. an American company producing their products in China, which then imports those products back into the United States for sale).
- Offshore account — This refers to an account that is located in another country.
- Gig economy — A labor market that involves numerous short-term contracts or freelance work.
General Outsourcing: Reduce Capital Costs
There is a cost associated with every department and every employee within your enterprise. These costs are known as capital costs. To push product, you need a facility, staff, and equipment. Once you begin to outsource, these variables become someone else's reality. This typically results in a greater bottom line.
General Outsourcing: Turn Fixed Costs Into Variable Costs
When aiming to improve profits, you can first aim to increase your turnover rate. However, as all business owners know, that can be a challenging task. Aside from needing to find new clients, all while influencing previous clients to purchase more, an increased turnover implies an increase in your company's overall capacity.
Another approach is to better understand your costs so that you can reduce them. Fixed costs are an ideal place to start. These are the costs that ensure you remain in business, regardless of your sales. These include costs such as your rent, water, wages, and electricity. Once you outsource, however, you only pay for outputs.
Offshore Outsourcing: Benefits
Overall, some of the core benefits associated with offshore outsourcing include:
- If applicable, you may require skills that are lacking in the people at home. Offshore outsourcing allows you to find those skills abroad. In this case, you would not hire employees or recruit staff abroad. Instead, you would develop a contract between your company and an organization abroad. This organization would then complete the agreed upon business functions.
- Based on the cost of living around the world, labor is cheaper in certain areas. In many cases, although these individuals earn less than those in your home country, they are still often making more than those locally.
- Being able to offer 24-hour customer support for a fraction of the cost. In addition, by working with people from around the globe, they will be awake and alert while you sleep.
From IBM to Cisco, most of the world's largest corporations and businesses operate certain functions offshore. Although there are some drawbacks, including reduced real-time communication and possible tax implications, this is an area worth exploring.
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