Meaning of Offshoring
Offshoring refers to the process of relocating business operations from one country to another for taking benefit of cheap factors of production. It is one under which companies shift their operating bases from industrialized countries to less-developed nations in order to bring down their cost of operations. They shift their manufacturing activities and other supporting process like accounting to countries in which there is an availability of low-cost labor, favorable tax conditions, proximity to raw materials, ease of doing business and less stringent labor regulations.
All these facilities assist companies in raising their profit level by minimizing their cost of production and other supporting services. Offshoring has now become a common phenomenon where companies are increasingly relocating their business units. It not only enables them to be more economical but also helps in paying more attention on core activities of business. When companies offshore all its other activities then they have more time to deal with their core business.
Benefits of Offshoring
Various benefits provided by concept of offshoring are summarized in points given below: –
- Minimizes cost: Offshoring plays an efficient role in bring down the operating cost of business enterprises. Companies are able to do cost cutting by shifting their business to less developed countries where there is an availability of cheap labor and other resources. When they incur low expenses on carrying out their operation then ultimately the overall cost is minimized.
- Concentrate on key business: It enable companies in shifting all of its activities other than core business part to some other nations. Business are able to lay more focus on its key functions as they are not required to deal with another one. When they offshore their manufacturing activities and other supporting services to another locations, it is completely look after by vendors.
- Better control: Another important benefit provided by offshoring is that it enables organizations in better management of their activities. Companies are able to reduce their overall work load by offshoring business to some other parties. This way they are able to manage every part of their business in most efficient way possible.
- Raise productivity: The concept of offshoring facilitates business in enhancing its overall productivity. Companies outsource their business to such locations where it is possible to carry out the operations at lower cost. This total amount of cost savings is then utilized for improving the infrastructure, marketing and promotional program of organizations resulting in better productivity.
- Provides Cheap labor: Availability of cheap labor in several nations is one of the major advantages of offshoring process. It provides access to skilled and qualified labor at lower cost which provides better efficiency and bring down the overall expenses. Companies are able to acquire more competent staff from developing nations which may not be available in their domestic country.
- Risk Mitigation: Offshoring enables in mitigation of risk by relocating of business operations to several countries across the world. When there is a loss to business due to unfavorable conditions in one economy, it can be easily adjusted with profits earned from other countries. This way it reduces the overall chances of bankruptcy and failure to business organization.
- 24/7 operations: This is also one of the major benefits of offshoring of business activities. Companies are able to carry on their operations on 24/7 basis like customer support service. It is not possible in case if business operate only domestically in one country.
- Tax and other benefits: Developing countries provides many types of tax relaxations and other benefits in order to attract companies for foreign direct investment into their nations. Payment of lower taxes raises the overall profitability of business leading to its growth and development.
Types of Offshoring
Offshoring types may vary as per the company requirements in terms of their business activities, strategy and capital budgeting. These types are discussed as given below: –
- Production Offshoring: Production offshoring is one in which a company set up its production unit in a distinct country for availing benefits of cheap factors of production. It imports finished products from such country for selling them in their domestic country.
- Services Offshoring: When a company establish its service-related operations in some other country, it is termed as services offshoring. These services comprise of accounting, information technology, marketing, customer support, sales and many more.
- Innovation and Software Offshoring: It is an offshoring under which high-tech companies like those in Silicon Valley offshore their innovation work to nations such as Africa, Ukraine, Mexico, Colombia and Belarus. This enables companies in hiring competent human resource at cheap rate which bring down the overall cost and makes production cycle shorter.
- Reshoring: Reshoring simply refers to the opposite of offshoring and is also termed as inshoring, onshoring or backshoring. It involves bringing of manufacturing operations and other type of jobs that were offshored back to the company’s original country.
Disadvantages of Offshoring
Offshoring is a very challenging task for every business organization and may face distinct hurdles which are as discussed below: –
- Language Barrier: Language barrier is one of the major hindrances faced by companies when they relocated in some other nations. It becomes difficult for business to promote better understanding in some foreign land due to huge gap in between local language of area and its native language.
- Long Distance Locations: The production units are established by companies at far distant places in several nations. It becomes a quite difficult task for supervisors to monitor or regulate the operations of subsidiaries as they are not able to visit them easily.
- Ethical Issues: Another major challenge before any organization in relocating to other nations is ethical problems faced by them. When company is unable to provide better facilities or satisfactory renumeration to its offshore team, then it may create ethical issues and malign the brand image.
- Communication Issues: Companies may find difficulty in communicating effectively with its offshore team due to presence of language barriers and absence of proper understanding. When an organization is bot able to establish an effective communication network then it may fail to achieve better coordination and unity of actions.
- Socio-Cultural Problems: When organizations operate in distinct nations then it need to acquaint with social and cultural environment of that particular place. Proper understanding of social and cultural indifferences is must for business for avoiding any socio-cultural issues.
- Security and Safety Issues: Organizations running their offshore business units faces a threat of closure or lockout in case if the native of foreign nations find them harmful for their nation. Therefore, business while running their units need to consider the interest of the people residing in foreign countries.
- Increase in unemployment: The process of offshoring leads to large unemployment in domestic country when companies move their manufacturing units overseas to other nations. Local people may lose jobs due to decrease in work operations of brand in its home country.
Example of Offshoring
Globally renowned mobile manufacturing giants such as Apple and Samsung company have started offshoring their production units from U.S. and South Korea to different Asian countries.
China is on the top of list of offshoring countries to both these mobile giants as it is well known for cost-efficient hub of electronic manufacturing worldwide.