Some of the biggest businesses in the world use offshore outsourcing strategies to ensure their organisation stays ahead of the competition.
It is also common for global multinational organisations to use the offshoring method, where they have factories and offices in numerous locations worldwide.
Like many things in business, outsourcing and offshoring have similarities and key differences you must be aware of.
In this article, we focus on the vital business process of both strategies so that you can make a better-informed decision before deciding which route to take.
Differences Between Offshoring And Outsourcing
There are fundamental differences between offshoring and outsourcing your product or service.
Offshoring is when you relocate your business operations to another country to take advantage of lower workers’ costs and rent.
When you offshore your business for production or manufacturing reasons, it means you have a branch of your company within that country, and you have to abide by the laws of that country.
For example, workers with the right skills may be easier to access in countries like India, so setting up a factory there makes financial sense.
Outsourcing differs because you don’t set up a factory or branch in another country. However, you use a service provider to do designated duties such as website management, marketing, telesales or manufacturing.
You still save on hiring costs on the aspects of your company you outsource, but your headquarters are still based in Australia.
Benefits Of Outsourcing
Let’s look at three essential things you must consider before outsourcing.
1. Cost Savings
When companies outsource their product or service, it allows them to reduce the costs of their overall business operations.
Outsourcing to a third-party provider can drastically reduce the manufacturing costs of a company as opposed to hiring in-house staff. For example, labour costs are reduced because your company will be in a country like The Philippines, where workers are paid less.
When using a third-party provider, you pay them a fixed amount for their services, meaning they take care of the hiring process and ensure the remote workers are skilled and suitable.
When using outsourcing providers, you don’t have to worry about training costs, as the provider will handle this for you.
2. More Operational Flexibility
Another advantage of offshore outsourcing is that you can be more flexible due to the outsourced team working in a different time zone.
When companies outsource, their working hours can increase, which benefits your company and your customers. Multinational corporations and small businesses can take advantage of the different time zones by handing responsibility to the service provider outside your regular business hours.
When business operations are flexible, customers trust and recommend your services.
3. Boosted Productivity
When you outsource business practices such as software development, you can enhance your company’s productivity.
The labour costs you save by outsourcing can be spent on other business areas, such as marketing and lead generation.
When you can focus on boosting productivity, as long as the quality of service or product remains high, it allows you extra time to dedicate to other dollar-productive business activities.
Outsourcing also saves you money by not having the additional costs incurred by your in-house team and not worrying about your long-term business objectives suffering.
Downsides Of Outsourcing
You must be aware of these three main downsides to outsourcing.
1. Language Barriers
One of the main disadvantages of outsourcing work to different countries is the language differences. While most workers in developing countries speak good English, poor communication could harm your business.
Sometimes it is easy for things to get lost in translation, especially when the pressure is on, and deadlines need to be met.
Speaking English is one thing, but service providers must understand the correct terminology in your business industry; otherwise, problems will occur.
It is essential to have clearly defined business strategies to limit the chances of miscommunication, especially when the service provider speaks English as a second language.
2. Cultural Differences
When using a third-party provider, you must be aware of some problems due to cultural differences in how you do business.
For example, a service provider from the Philippines will perform business tasks formally and more introvertedly than their Australian or American counterparts.
When dealing with a company based in the Philippines or India, you must allow time for adjustment and understanding from both sides regarding cultural etiquette.
You must make allowances for religious beliefs, which must be considered when planning a project.
For example, suppose a service provider is from India or the Philippines. You need to know when their religious holidays are so that they don’t conflict with your understanding of their deeply rooted spiritual beliefs, the dates of which may conflict with your company’s operations.
3. Data Security
All business processes using data in Australia come under the 1988 Privacy Act 1988 and the Australian Privacy Principles (AAPs), which are contained within the Act.
However, not all countries take data laws so seriously, so you must protect all data business processes when using outsourcing companies in different countries.
You must ensure that all your data business needs are not compromised by mismanagement by your service provider. If this happens, your business will incur heavy fines.
Ensuring your company’s financial data and customer records are always securely protected needs excellent collaboration between your company and your service provider.
Benefits Of Offshoring
Here are three main advantages of offshoring that help your business grow.
1. Collaboration Across Sites
When a company sets up an offshore manufacturing factory in a different country while maintaining its headquarters in Australia, they get the best of both worlds.
Doing this allows them to use the expertise of their main manufacturing base to help train and develop staff in their overseas base without having to pay high training costs.
Close collaboration between both manufacturing bases allows the company to have more control over the overall manufacturing process, which results in a higher-quality product.
Most businesses prefer complete control over operations, one of the main reasons companies set up a physical base in another country, reducing the risk of project failure.
2. Scale Into New Markets
Offshore manufacturing allows companies to explore new markets to take advantage which had been closed off due to high distribution costs.
However, with their new factory abroad, they can efficiently distribute their product within that country, be it India or the Philippines, and capitalise on the growth opportunity.
As well as lower costs such as rent, and internet service, combining offshoring with existing in-house expertise allows you to maximise your profits by negotiating discounts for producing bulk orders within an agreed timescale.
Without an offshore base, your company will find it harder to break into new markets as you lack local knowledge or experience.
3. Government And Tax Incentives
One of the benefits of offshoring is that you can take advantage of cutting costs further by using tax incentives and government tariff relief schemes. When you set up a factory overseas, you qualify for tariff relief due to offering specialised skills and training within that country.
For example, some governments offer incentives to overseas companies that build offices or factories in their country, which helps to grow their economy and offer long-term stable employment to local workers.
Any tax exemptions your company can take advantage of all help you save money and add to your organisation’s overall profitability, making offshoring a more attractive proposition.
Downsides Of Offshoring
Here are two disadvantages to consider before committing to offshoring.
1. Lack Of Full Control
One of the main disadvantages of offshoring is that you need to have hands-on control of the day-to-day running of your factory or office based overseas. Your locally-sourced workforce will be immersed in their culture and working practices, but they will need to be fully on board with your company’s operations.
For example, when you choose to offshore, the time zone differences can harm your company because you can’t oversee production. Hence, you rely on your local manager in that country to do their job efficiently.
Also, failing to get enough qualified workers at peak periods is out of your control, which means your production levels will suffer and affect your business.
2. Cultural And Language Barriers
Often businesses need help managing the cultural and language barriers they encounter when they set up a base in a country like the Philippines. These problems are an issue when outsourcing and offshoring.
Often a lack of knowledge and understanding on both sides can lead to problems for your company due to poor communication levels as a direct result of translation issues.
Unfortunately, your and your client’s business will suffer if you don’t understand the cultural differences and practices of the country where you have chosen to setup a base.
Many businesses must get to grips with the working practices and diverse cultural differences and maximise the growth opportunity offshoring presents.
Let Us Help You With Your Outsourcing Needs
As you have learned, outsourcing and offshoring have advantages and disadvantages, with the main reason for using either method is to reduce costs for your business.
Your company’s size and operational budget will determine your decision. However, both strategies make your business more cost-effective while maintaining high standards.
If you decide to go down the outsourcing route but can’t face the prospect of dealing with the time-consuming hiring process, then don’t worry. Our team of experts are on hand to help.
Call us today to find out how we can source, hire, train and manage remote workers to suit your requirements.
