In recent years, globalization created a trend when large and medium-sized companies have begun to transfer some of their business processes to developing countries such as China, India, Ukraine, etc. to reduce their costs. They cannot miss the opportunity to attract cheaper labor to create software products. As a result, most companies cannot imagine their strategies without outsourcing and offshoring — assigning some production processes to third parties in countries with cheap resources.
Until recently, companies in developed countries considered offshoring only as a way to get rid of simple but time-consuming operations. However, today more and more companies from developing countries can offer not only low costs but also the highest quality of services, which is mostly due to special management solutions. Offshoring companies will soon be able to compete with their current customers.
In this post, we will review the offshoring pros and cons as well as its weak points. It will help you to make the right decision for your company.
What Is Offshoring?
In many ways, offshoring and outsourcing have the same meaning: assigning some work to third party workers. What is the core difference? While outsourcing means entering into contracts with an external third-party organization, offshoring means placing part of a business in another country.
Let’s say, your company works under US jurisdiction. The business successfully grows and you pay more taxes and higher salaries. To optimize your financial processes, you decided to move one of the departments to a country with a more attractive tax system and cheaper labor. Technically, it is still the same company but one of the departments works under the jurisdiction of another country, for example, Ukraine or India.
Offshoring strives to take full advantage of the low cost of labor, easier taxation and the range of other benefits that such a model can provide. Now, let’s look closer to the strong points of this approach.
Pros of Offshoring
Lower expenses for qualified work. Hiring competent specialists in certain areas can be very expensive while they are much more affordable in other countries. That is why it is better to hire foreign professionals to solve highly specialized tasks. In other words, if your company can pay an A employee $30 per hour and a B employee $10 per hour for the same job, whom will you invite? Most companies will choose a cheaper option, of course, provided that the quality of the work is the same. If you add the amount saved on wages to the money saved on other types of compensation payments, such as health insurance and pensions, the gap becomes even clearer.
Saving money resources. Optimization in human resources leads to a payroll reduction and moving the part of business processes to another country with a more progressive approach. This, in turn, reduces the cost of social contributions and tax payments.
Low or zero taxes in offshore areas. One of the most important and popular reasons to run your business processes in offshore locations is that there are no or reduced taxes in offshore locations. In most cases, they are poorer countries and do their best to attract foreign investments. With this purpose, they provide tax holidays or simplify tax reporting. This is why they are often called low-tax jurisdictions. This helps to optimize costs and reduce the tax burden of your business. However, nowadays, tax legislation is changing all over the world to ensure tax collection even if a company or an individual withdraws funds abroad.
An opportunity to open a currency account in any country. By setting up an offshore company, you do not have to open an account there. Your working account can be located in any country of the world, and you can accept payments in a currency that is convenient for you. This is very useful if you work in the international market.
Security of assets. Another advantage of offshore companies is that they help entrepreneurs protect their assets. If an entrepreneur is concerned that his assets can be confiscated, he can protect himself from creditors using an offshore company. Then in case of unfavorable legal or business development against him, he can be confident in the safety of his assets.
While offshoring is quite attractive for many businesses, there are some weak points and risks. Let’s look at them closer.
Cons of Offshoring
Differences in legislation. You can’t go offshore and work according to your national legislation. Each country and jurisdiction has its own specifics and its own legislation, which is suitable for certain business purposes. So, conduct in-depth analysis before offshoring some of your business processes.
Difficulties of interaction. Interaction is difficult, even when people live under one roof and speak the same language. And it can be so difficult when there is a language barrier, people are separated by several time zones, brought up in different cultures and have different worldviews. From the point of view of the simplicity of interaction, it is not so easy to move jobs over the sea as to hire specialists in your city. Companies that are not prepared for the differences in cultures, will have a difficult time.
Not every IT processes are reasonable to be offshored. You are able to provide technical support, manage the projects, and work with the clients almost everywhere, while software development, content creation, and research are not always easy to offshore. Remember that not every IT process is reasonable to be moved to another country.
Lack of control over the delegated business processes management. While the staff is located in another country, it is quite difficult to manage business processes transparently.
Local audit. Depending on the jurisdiction, sometimes it is necessary to use a local audit, for example, in Singapore or Hong Kong. This increases costs, so you need to be clear about whether you need auditors.
I briefly reviewed the strong and weak points of offshoring. Is it acceptable for your IT business? Make a deep analysis — I hope you make the right decision.