What Is Offshoring? (With Benefits and Helpful Tips)

By Indeed Editorial Team

Published June 25, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Companies often offshore their operations to another country to expand their presence and increase efficiency. They may decide to monitor the processes in the foreign country directly or employ a third party to control the new operation. Understanding the importance of offshoring can help you transfer a company's operations to save costs and market their products efficiently. In this article, we answer the question "What is offshoring?", explain how businesses use it, provide the differences between offshoring and outsourcing, highlight the benefits, explain its limitations, and list tips for determining whether offshoring is a good investment.

What is offshoring?

The answer to the question "What is offshoring?" can help you discover a new business practice for maximizing production capabilities. Offshoring is a business process of transferring a company's services to a new country to improve profitability and gain other benefits, like reducing tax bills and increasing product marketability. When companies want to relocate, they typically choose countries where the cost of managing their operations is lower. This new system can help them save and reallocate funds to expand the company. For example, if a rice-producing company relocates to a country with high rice cultivation, it can reduce the cost of purchasing fertilizer to enhance its production.

How do businesses use offshoring?

When businesses use offshoring, they transfer a department to a new country with lower operating costs, while the original company departments continue their regular operations in their origin country. For example, a company can move its manufacturing department to another country with the sales and marketing staff continuing to operate in the origin country. During this process, the company may hire a new team of professionals to perform its domestic team's duties and responsibilities. The company chooses the best location to continue business operation and devises a strategy to start the new business practice. After creating a practical plan, it builds a team of local professionals to begin the business operation.

Offshoring vs. outsourcing

Outsourcing is a business practice of transferring a department of a company's operations to an external institution. When a company outsources, it delegates the work to companies specializing in specific fields. Unlike offshoring, outsourcing may occur within the same country. It may also be temporary or permanent, based on the terms of the agreement. Outsourcing is different because it involves the sale of a company's department to a third party, while offshoring only consists of a change in the geographical location without any sales. For example, a company can outsource its delivery department to an established logistics company.

Here are three main differences between the two business practices:

  • Geographical location: Geographical location is a distinct feature of these methods. When a company outsources a department, the staff may remain in the same country, while offshoring involves a total transfer of the company's department to a new country.

  • Motivation: Companies' incentives for offshoring and outsourcing are different. When businesses outsource, their reason is to hire an expert company to handle a specific department, while the motivation for offshoring is to improve their profitability.

  • Sales outcome: Companies use outsourcing to streamline their sales processes and improve their consumer experience. Offshoring allows businesses to enhance their productions by relocating to a new location that can make manufacturing more manageable.

Related: What Is Outsourcing at Work? (With Types and Advantages)

What are the benefits of offshoring?

Here are four benefits of offshoring:

Improves productivity

Companies can record an increase in productivity if they relocate a part of their operations to a new geographical location. When companies go offshore, they establish a new branch in a new time zone to fulfill the needs of consumers. They focus on improving consumer experiences, which can create an established community of loyal customers. For example, if a clothing store relocates its sales department to a country where it records the highest sales and loyal customers purchase the products, it operates more productively.

The cost savings from offshoring can also help companies divert their funds to other operations. For instance, instead of upgrading an old production site, the company can build a new facility for a lower price and divert the remaining funds to marketing.

Related: 7 Ways to Collaborate With Your Team to Improve Productivity

Reduces labour costs

When companies offshore their operations, they can pay lower prices for labour-intensive processes such as production, customer support, and information technology. By establishing a new factory in a new country, businesses can access labour costs lower than the average rates in the original location, depending on the company's chosen country for offshoring.

Related: How to Calculate Manufacturing Overhead (With 6 Steps)

Lowers tax bills

Countries may encourage offshoring to help foreign companies invest in their economies. When a business establishes its operations in these countries, its taxes are usually lower, which can help it invest its funds in other products or improve the company's facilities.

For companies to enjoy this benefit, they can transfer a department or register as a business in the new country. Some nations focus more on the exposure they can get rather than the tax rates. For example, a country with various farmers can reduce the tax rate for manufacturing companies, encouraging them to move their farming operations to their country.

Related: VAT Calculation: Definition, Importance, and Examples

Increases cash flow

When companies offshore, their operating expenses, tax bills, and team members' salaries usually reduce, allowing them to increase their cash flow. With the extra funds, companies can invest in other operations that can increase productivity, like research and development. If the business hires local team members who specialize in a specific field, it may also increase the value of the stocks, especially for publicly traded companies.

Related: Cash Flow vs. Revenue: What Are the Main Differences?

What are the limitations of offshoring?

While offshoring is a beneficial business practice, it has a few criticisms, such as:

Communication gap

Communication or language can influence effectiveness. Consider how to resolve potential language barriers in your new location to foster rapid productivity. Businesses can execute their projects successfully and maintain stable operations when they resolve communication differences.

Time zone differences

When there's a difference in the time zone of the company's original country and offshore locations, you can consider options to adjust work schedules. Ensure that you devise an accommodating calendar for team members in both places. For example, you can introduce split shifts or days that address different time zones.

Social expectations

Consider the cultural needs of the offshore team members to create a positive work environment that fosters productivity. Examine their culture and weather to initiate programs that can make them more satisfied in their position. For example, you can give team members a break during public holidays or festive periods.

Tips for determining if offshoring is a good decision

Consider these tips to discover if offshoring is a good decision for a business:

Consider the company's goals

Before determining the viability of offshoring, ensure it is a good choice for the company. Evaluate the business' goals and consider why you think offshoring can help the company achieve them. Make a list of the desired outcome to help evaluate the company's progress.

Related: What Are Business Goals? (With Definition and Examples)

Create an offshoring plan for the company

After deciding that offshoring is the right choice for a company, you can collaborate with team members to create an initial plan. To achieve optimum productivity from offshoring, consider a practical plan that includes essential details like the availability of local labour, geographical location, and funding requirements.

Evaluate potential business risks

Conduct a thorough business analysis of offshoring before making decisions. Potential risks you can evaluate are the availability of skilled labour, stable infrastructure in the offshore location, and the financial commitments you require to implement the plan. You can proceed if you're confident of the benefits to the company.

Related: 11 Types of Business Risk and Steps to Manage Them

Develop a plan to manage risks

Create a risk management plan to mitigate the business risks you may experience in your offshore location. Develop a strategy for each and test these measures effectively before including them. Establishing a plan can help prepare team members for unpredicted circumstances.

Related: Why Risk Management Is Important (With Strategies)

Collaborate with other professionals

Collaborate with team members to create a comprehensive strategy for successful offshoring. Incorporate their knowledge and experience by asking for their recommendations. It may be easier if a team member has participated in a previous offshoring program.

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