Offshoring is one of the terms that comes into Model due to the increasing globalization. According to definitionexplorer.com, the term offshoring comes from the English and means something like “relocation abroad”. Although the term has been on everyone’s lips for some time, many do not know what is meant by this type of outsourcing.
Offshoring to maintain international competitiveness
When a company is about offshoring, it relocates certain tasks abroad in order to maintain its international competitiveness. The companies outsource very certain services with the primary goal abroad in order to reduce costs. This is possible for one reason: Offshoring is primarily carried out in countries in which the wage costs are far below those of the home country, but the quality of the work by highly qualified workers is on par. In addition, offshoring also offers the advantage that your own workforce is relieved, and this also makes it possible to save costs and at the same time increase the quality of the services.
An important basic requirement for the offshoring process is that the entrepreneur finds a trustworthy partner abroad who can handle the relevant content more cheaply than his own in-house team.
For example, IT services are being outsourced to India, because the workforce there is just as well versed, but significantly cheaper in terms of wage costs. The company can thus save costs and has the option of entrusting its employees with other work content. But production processes are also outsourced, such as the manufacture of clothing or building materials, provided that these can be produced more cheaply in the neighboring country.
Offshoring is never a sure-fire success
The accounting is located in Prague, the software development in Bangalore and / or the call center in Istanbul – offshoring or the relocation of services to low-wage countries is popular. This is no wonder, because the consultations promise cost reductions of up to 50% – but everyone has to be clear that successful offshoring is not a sure-fire success.
This is exactly what the domestic relocations show. The results of a US study show that 78% of companies that have already had offshoring experience had to decide to abandon at least one or even several projects.
This raises the question of whether offshoring is actually a solution to the cost problems on the international market. In addition, it must be clarified which problems can arise when relocating the provision of services abroad and why the bill often does not work out with offshoring.
Why is the provision of services being relocated to low-wage countries?
“Cost reduction” is the most important reason, because in a company, for example, savings of 30% can be achieved through offshoring. However, the advantage of low costs can often only be realized if the appropriately qualified staff is available. As a result, companies from a wide variety of industries are looking for qualified specialists abroad and the motive “access to experts / know-how” takes second place.
Which activities are outsourced?
A clear trend towards more knowledge-intensive services such as software development can be seen here. Services associated with direct customer contact, such as call centers, are less likely to be offshored. Only rarely does it happen that complete business functions or projects are outsourced, rather only partial services are subjected to offshoring in the low-wage countries. In accounting, for example, an offshore center is commissioned to book the data entry, whereas the responsibility for the correctness of the data and the business know-how lies with the “local” company.
The offshoring business model
Offshoring is often viewed as a long-term strategic investment and thus a subsidiary (35%) or a joint venture (20%) is often founded. Only around 45% of companies opt for the “offshore outsourcing” business model!
What is the difference between offshoring and outsourcing?
With offshoring, only a geographical relocation of certain business functions is carried out in contrast to outsourcing , because here an organizational relocation is described. It is important to know that there is no compelling factual connection between offshoring and outsourcing. Because offshoring, i.e. the relocation of corporate functions abroad, can take place within the company – the so-called internal or captive offshoring – or the functions can be outsourced to an independent foreign company – the so-called offshore outsourcing. In addition to these two forms of offshoring, there are a number of intermediate forms, such as the joint venture, where you work with local partners abroad.
The downside of offshoring
Offshoring can lead to job cuts in one’s own country and increasing competitive pressure in the workforce and from partner companies. In addition, there is also an increased complexity in functions and processes, an increased communication effort as well as data protection risks, legal uncertainty and industrial espionage. All of these points lead to criticism of the offshoring.
As for the direct risks, apart from the criticisms related to offshoring, these can be both operational and strategic in nature. On the one hand, this can lead to communication problems. In addition, communication will very rarely, if ever, take place in person and meetings may have to be adapted due to the cultural or time difference. In addition, it can happen that the company can no longer react spontaneously and flexibly to any changes in the market due to offshoring.