If you’re anywhere near a business’s operations, then you’ve probably heard the word offshoring. It’s one of those buzzwords we hear all the time, but don’t think much about it. Unlike ‘synergy’ and ‘innovation,’ offshoring is a term that can change the future of a business.
What exactly is offshoring, and what are the pros and cons? Well, we’re glad you asked.
What is Offshoring?
Offshoring is similar to outsourcing (many people mix up these two terms). Offshoring refers to moving either an entire business or some activities to a firm in another country. Outsourcing is moving a business function or project to a 3rd party firm, and that firm itself may or may not offshore some or all of it’s operations.
Pros of Offshoring
Now that you know what offshoring is, is it the right choice for your business? Let’s discuss the ways that offshoring can be beneficial.
Everybody loves saving money; arguably the best aspect of offshoring is the cost savings. By offshoring some of your operations, it’s possible to save money if done correctly with the right set of circumstances. It’s critical that the job has to be suitable for offshoring. Generally speaking, well defined, repetitive, lower skilled jobs and tasks are great candidates for offshoring.
Labor is the biggest cost savings when you offshore. America has the 9th highest average income at $65,760. Labor is usually the largest cost to an average business, with wages taking up around 70% of a company’s expenditure. By utilizing the lower pay scales of other countries, you’ll be able to use your savings elsewhere.
While we’re in the money-saving mood, let’s talk about taxes. Every April 15th businesses around the country cross their fingers and wait to see if they’ll be getting a return or a bill from the government. By offshoring, you can take advantage of tax havens. A Tax Haven is a country where there are little to no taxes for businesses and financial information is rarely shared with foreign tax authorities (such as the IRS). Luxembourg and the Cayman Islands are the two biggest Tax Havens. This tax break lowers a business’s cost and helps the developing country grow.
We spend ⅓ of our entire lives asleep. Imagine if you could be getting work done while your competitors are catching some Z’s. By utilizing an offshore team, your company will be able to work on projects around the clock.
Availability of Labor
If you only hire personnel at your headquarter location, your talent pool is miniscule compared to the rest of the world. Places like India, Ukraine, China, Mexico, and South America have a vast pool of labor that you can utilize. These offshore teams can complement your current staff, allowing you to grow your team (even if the talent pool in your town is dry).
Cons of Offshoring
If offshoring is so great, why doesn’t everyone do it? Well, we haven’t discussed the cons of offshoring. Here’s the reasons why offshoring might not be the best idea for you.
Social and Cultural Barriers
The biggest issue in offshoring is that every country is different. No matter where you go, there will be different languages and cultures. While most countries teach English, a difference in depth and understanding will cause friction in all communications. Deciphering intention is also an issue. Some cultures are straightforward and candid, while others are reserved. This societal difference may lead to tension and misunderstandings. A cultural workshop can help everyone understand their new coworker’s culture and social tendencies.
Time Zone Differences
We mentioned earlier that 24/7 operations are a plus, but there’s also some drawbacks thanks to time zones. Scheduling shift patterns and meetings can be impossible if the countries have a wide gap in time. This gap in communication affects decision-making and problem-solving since you might be unable to directly talk to one another. Keep time zones in mind when planning out projects, meetings, and schedules.
With the pandemic, most companies have transitioned to partially or entirely at-home operations. This move, while necessary, had made companies vulnerable to security breaches. With everyone on different networks and devices, it’s much harder to ensure that your employee and company data is secure.
The same goes for offshoring, but on a bigger scale. If you don’t actually manage the location or the network of an offshore group you won’t be able to control the level of security. IP laws are also different in other countries and what is safe contractually in the US may not be safe somewhere else. Data loss, leaks, or theft can be a big deal and requires a closer examination of your company’s policies and controls before taking the risk.
Effects on your Country and Company
Moving jobs overseas affected the labor force back home. By terminating local jobs, the unemployment rate rises and the economy worsens. Not to mention that the local employees remaining will have to deal with uncertain job security, which could lead to low morale and a damaged work culture. To combat this, you need to take care of your employees both mentally and physically.
Another point to consider is that that offshoring requires a completely different company structure than the one at home. In other words, you can’t replace one person in the US with one person in another country; usually the structure of your team will have to change.
Offshoring is not a cure all but does have its place. As a company it’s important to keep an open mind when thinking about whether it’s right for you.
Slingshot utilizes a hybrid on-shore/off-shore development team. Our product managers, senior developers, and designers are located in the US; we also supplement our team with QA analysts and developers from Ukraine. Our Ukraine team members are incredibly talented and passionate, just like our in-house team.
By combining the two, it’s easy for us to scale up and scale down projects, finding the right talent for each job. Offshoring works for us because we evaluate each project’s needs. Sometimes it can be hugely valuable, and other times it can be quite the opposite.
Tread carefully, but don’t be discouraged by the ‘one-size fits all’ positive and negative assessments of offshoring. Make your own judgement, and go forward with confidence.