In 2003, Alpha Corp., a well-known U.S.-based organization, offshored and outsourced several customer-retention processes. When the company found that some of its customers seemed likely to switch to rivals, it provided data on them to an outsourcing firm in India. The service provider called those customers and, on Alpha Corp.’s behalf, offered them fee waivers, upgrades, and free financial products as incentives to remain with Alpha Corp. There are several best practices that have evolved over the past two decades to mitigate risks and improve outcomes of projects that are offshored and outsourced. Sonatafyhas proudly served our customers by matching top talent with companies looking to increase growth and manage costs. We help our clients product and solution strategies by building teams that help them accelerate their software development efforts.
Interestingly, offshoring has led to a hybrid form of organization that allows companies to, in a sense, have their cake and eat it, too. In this hybrid organizational form, companies specify the quality of services they want and work closely alongside providers to get that quality. They manage providers carefully and monitor the agents’ work to ensure that things are done properly. Technology enables buyers and sellers of services to exchange information in real time and to embed themselves deeply in each other’s companies. Firms can thus move away from command-and-control structures to sense-and-respond forms of collaboration. Once a company has determined the operational and structural risks of outsourcing its processes, it can use this grid to choose the best locations and organizational forms for those tasks.
Every department and every employee in your organization implies a capital cost. You need facilities, equipment, and of course, the staff that occupies that space and uses that equipment. Outsourcing makes the provision of workspace, equipment, and human capital somebody else’s problem. Onshore Outsourcing – Contracting companies located in the same country. With onshoring, you tend to save significantly less than nearshoring or offshoring, but you make up for it with better output. Y increasing productivity and efficiency, a business can be more successful, better-prepared for market challenges and have a streamlined cash flow. When discussing the topic and benefits of Offshoring vs Outsourcing, the first thing that must be taken into consideration is that they represent two different means of conducting business.
Differences In Time Zones
Service providers can, and do, have incentives to behave in ways that reduce companies’ financial benefits from outsourcing. According to several studies, half the organizations that shift processes offshore fail to generate the expected financial benefits. The paper demonstrates that different governance modes and types of offshored function indeed provide different Follow-the-sun levels of access to different types of location-specific offshoring advantages. This difference may help to explain the ambiguity of offshoring initiatives performance results. The second con of offshoring has to do with cultural barriers and communication. Due to the difference in time zones, it could be extremely hard to communicate with the offshoring site.
While people often use offshoring and outsourcing synonymously, this isn’t strictly correct. Currently, the majority of outsourcing does take place in offshore destinations, but onshore and nearshore outsourcing also exist. Now that we’ve presented some common offshoring advantages and disadvantages, let’s quickly go over a list of things you’ll want to keep in mind before engaging a vendor. Agile can work well here if teams are experienced, self-organizing, and self-managing. However, even with the best possible conditions, offshore Agile requires detailed planning and the appropriate distribution of in-house and outsourced talent. Before engaging any outsourcing provider, regardless of shore, develop a plan for protecting your IP.
Most of the countries consider the English language as a common language, but the understanding and depth of knowledge differ. Accent issues also come to play, which makes understanding very difficult. Offshoring provides a lot of tax benefits, especially for these overseas companies. Cultural differences may weaken rapport and hinder effective cooperation.
You’re taking a process or function of your business, and then paying another entity to do that work for you. The only difference is that when you offshore something, the entity you are paying to do the work is overseas. The vendor’s employees must be empowered to make decisions about the project without guidance from your in-house team–otherwise, projects will stall. As to be expected, it’s generally a lot easier to offshore Waterfall projects than Agile, due to it’s easy-to-manage, sequential approach. That said, it is technically possible to outsource Agile projects offshore, but it’s hard to pull off. Avoid this issue by partnering with companies based in countries with a Free Trade Agreement. Better yet, work with companies headquartered in the US, as they’re legally required to follow US laws.
Your offshore team leader may argue that the hike that seems unreasonable to you is something they cannot do without if they have to get extra human resources for your project. Management processes of your offshore partners could be rigid enough to disallow any such mid-project scalability. However, with your offshore team working at the other end of the world, your control of the shared offshore resources will remain constrained. To ascertain structural risk , companies should look at how precise their quality metrics are, as well as the extent to which the execution of processes can be monitered. Limitations of the work include using only the offshoring strategy elements and only their limited variety as factors potentially influencing access to offshoring advantages.
This is only one example of the ways that benign differences that both parties hold in good faith can become challenging when doing offshore outsourcing. benefits of offshore software development The ability to cut costs by employing the growing skilled labor pools of developing nations has driven a massive shift towards offshore outsourcing.
Offshore Outsourcing Faqs
This, and the fact that many Nicaraguans have migrated back to their country, has improved the availability of English-speaking labour. However, political instability continues to stymie foreign investments that could potentially develop this sector in the country. This combined with South America’s constant economic crisis over the last decades, has made the labour market extremely competitive. This has not only improved labour skills, but has forced universities and other education facilities to invest in new and high quality programmes. Work is often outsourced to countries where laws are not as protective of workers and the environment as in the U.S. We ultimately pay for those oversights in human rights abuses and further damage to the planet. The “more sophisticated jobs” that U.S. workers are supposed to take on do not exist, and it is an affront to the U.S. worker trained for the “jobs of the future” to have their job outsourced by their American employer.
- Similar is the case with businesses who outsource their valuable business operations to an offshore location.
- With such constraints in place, it may be difficult or impossible for offshore outsourcing to provide the dynamism and flexibility that marks onshore IT services.
- We already know that the garment industry outsources much of its production to Asia, choosing to focus on design and marketing.
These pros and cons of outsourcing and offshoring enlighten you to choose your appropriate offshore service provider wisely. Whenever you prefer an offshore service provider make sure that they are well ordered and able to by-pass these barriers well enough to bring a win-win situation.
Foreign Regulations And Hidden Costs
It is a business practice where the client collaborates with a third-party company for a specific time period to harness their expertise and technology specialism. With an offshoring partner or service provider, your company can work around the clock, regardless of time zone differences. Since offshoring saves you money through lower labor costs and other financial incentives, you can invest the capital saved in critical business needs. For example, you can improve the core functions of your business or revamp your marketing programs.
Outsourcing was first popularized during the second half of the twentieth century when skills required to do work became more specialized. Companies began to contract some of their non-core activities to firms that were proficient in performing them.
These tax benefits and financial incentives make it easier for companies to relocate to an offshoring location in a foreign country. China, Vietnam, and many Asian countries are known for skilled manufacturing services. They would already have the necessary infrastructure required to develop and ship a product — making the process quicker. Most developing countries have lower labor costs than developed countries. You can also avoid social security taxes, healthcare insurance, and other compulsory employment costs in the United States.
The nine cells in this table show the optimal offshoring responses to different levels of risk. Most companies believe that they must either perform processes in-house or outsource them. Companies have some ability to measure the quality of execution and can codify most of the work. Still, only people who have formally mastered a body of knowledge, such as accountants and lawyers, can execute these tasks. It’s also inherently difficult to manage the quality of the work in real time. If firms can measure the quality of the end result, the risk of offshoring or outsourcing the processes becomes manageable.
Access To A Vast Labor Pool
Without much hassle, you can communicate and work with people from around the globe. We look at the topic – what it is, what it entails, and why so many companies are adopting offshore outsourcing as part of their business model. When considering offshoring some or all of your production operations overseas, it is important to consider all of the advantages and disadvantages that come with it. Then, you will be able to make an informed decision that is beneficial for your company. Production offshoring consists of physically relocating some or all of your manufacturing processes to another country. This became popular in the last few decades as labor costs in countries such as China, the Philippines, and India were cheaper than those in the United States.
Therefore, to develop a winning strategy, it’s essential to take the possible drawbacks of offshoring into account. Now that you know about the benefits and disadvantages of offshoring, it’s time to take action! Hopefully, this will help you make an informed choice as to whether offshoring is a good business model for you or your company. If you decide to give offshoring a shot, then hit us up to get free expert guidance and advice on how to move forward! We’ve got a ton of experience and awesome teams of skilled IT professionals in Cebu City, Philippines. You cannot constrain Outsourcing to just one domain or vertical or country or labor . Software development, cloud service providers, customer support, and research development are some of the most common services outsourced to an offshore company.
When working with outsourced offsite personnel, IP can become vulnerable to theft or unlawful distribution. No one wants their IP broadcast to the world without their consent or the legal headaches that ensue when a company has to hire a team of lawyers to protect patents and copyright. Dependable outsourcing vendors will always have their contractors sign airtight NDAs, but the strength of the legal systems upholding those NDAs and IP varies from country to country. All of these factors, when taken together, make onshore staff augmentation an increasingly attractive option for firms with precious IP to defend.
When shifting services to foreign countries, you may experience a lack of people with proper language skills in their region. This factor may significantly hinder understanding and decrease communication efficiency. By moving your business to a new country, you get access to new talents. This is especially the case with countries in Eastern Europe that are recognized offshoring leaders. This means that by transferring your activities to such countries, you get employees with proven expertise. Nowadays, people get easily tired of the small routine tasks, i.e. they want to see the results of their work and get career promotions. It’s not a surprise that your colleagues from abroad face similar concerns.