Outsource or Offshore?
In the business realm, most people are likely familiar with the terms outsourcing and offshoring. However, being able to make a clean distinction is crucial in order to make the right decision; should your business outsource or offshore?
Outsourcing is obtaining certain services or a product from a third-party (e.g. accounting, HR, manufacturing, etc.). The location of the outsourcing company is not important (when determining the definition) and therefore can be on the same street as your company, in a different city or in a different country. Outsourcing is done in order to save time and money, so instead of dealing with non-essential work in-house, companies redistribute tasks to a third-party so that they can focus on their core business issues.
Why Choose To Outsource?
Cut Down Costs
When the non-essential work is being outsourced, your company can realize a significant cost reduction. Some key cost-benefits include:
- Limit infrastructure to support a larger workforce and facilities (capital expenditures);
- Employees focus on core-efficiencies, improving productivity;
- Save on employee training;
- Eliminate the need for upgrading to more expensive software/hardware
You can outsource virtually any aspect of your business, whether it’s IT services, finance, logistics, or simply various administrative and back-office tasks. Finding the appropriate competitive partner to delegate such activities to can greatly improve any business’ economic health.
In many cases, companies do not have access to in-house experts for certain activities. Lets face it, hiring the right employee for a specific job is not always an easy task. However, outsourcing companies often feature a lot of highly educated and trained individuals who can achieve desired results at a higher level than any of your employees who may not have training and are required to multi-task. Paying full salaries for an in-house accounting team, for example, can quickly become expensive; requiring additional workspace, supplies, and more. If a sales expert is required to manage CRM on top of traveling, cold-calling, and maintaining relationships, their productivity and efficiency is being greatly reduced. On top of specialized employment, outsourcing labor is almost always cheaper than hiring locally.
Outsourcing provides flexibility for the buyer by ensuring them more directional and overall control of their company. Let your professional outsourcing partners handle managerial responsibilities over their tasks while you are overseeing the results. Gain productivity by delegating work; don’t lose time and energy focusing on the details, rather create the strategy and watch it provide results upon execution. Additionally, avoid the burden of employment contracts, employee benefits and other HR logistics when outsourcing often offers favorable conditions for change of employment or termination of contracts.
If you are outsourcing your work to a different country, where a branch office is established ‘offshore’ or the infrastructure of the company is moved to another country, you’re offshoring. For example, a business based in the US could offshore their work to a contractor in South-Eastern Europe (SEE), gaining access to international talent not available locally for lower costs, while also gaining access to favorable business environments.
Why Choose To Offshore?
Similarly to outsourcing, a main reason for offshoring includes the opportunity to produce a product or deliver a service from a different country, expanding your pool of specialized employees and benefiting from different economic, cultural and legal work environments. Depending on the requirement of high-vs-low quality employees for your business, a company can take advantage of competitive salary discrepancies to match their needs. No matter which labor force you target, if you offshore to a regions such as India and China or South-Eastern Europe, you will save on employment and overhead costs.
Tax & Tariff Benefits
In countries with more lenient or favorable tax laws, businesses can realize a great financial relief and gain the ability to obtain additional savings or tax returns. Various countries offer very favorable benefits to foreign investors, such as reimbursement on employment costs, extraordinary tax benefits, cheaper land acquisition and more.
“In October, Drucker reported that Google had saved $3.1 billion in taxes in the past three years by shifting the majority of its foreign profits into accounts in Ireland, the Netherlands and Bermuda using financial techniques called “the Dutch Sandwich” and “the Double Irish” arrangement. Basically, he says, Google credited its Irish office with the majority of its non-U.S. sales revenue — and then shuttled that money through various subsidiaries located in Ireland and other countries to save billions in taxes.”(www.npr.org)
Google’s example of large savings through outsourcing can be scaled to nearly any size and industry, so don’t be intimidated by daunting numbers! The offshoring model can be customized to your needs with proper planning.
Higher Level of Control
Offshoring may be an alternative for the businesses that wouldn’t like to give up control over the production process to a third party. For tasks which are time dependent, not delivering the work precisely on time could lead to major drawbacks to both the business and the agency doing the outsourcing work. Having your team on the ground abroad would allow your company direct access and the ability to monitor over the production or manufacturing process.
So, Outsource or Offshore?
When it comes to making a choice between outsourcing and offshoring, time is not an enemy: think twice before rushing into something which may cost you time and money. Therefore, consulting with experts in your field (e.g. business process and tax system management) will give you better insight to make a quality decision before taking your first steps. Whichever your final decision will be, it is crucial to manage either outsourcing and offshoring well.