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Offshoring and outsourcing - advantages and disadvantages

Gino Lisondra
04 October 2017 4 minute readShare
outsourcing and offshoring advantages and disadvantages

Looking to expand your business without the added costs? Offshoring and outsourcing might be the best for you, but be sure to weigh up the pros and cons before deciding on which one (if any) best suits your business needs.

The terms “offshoring” and “outsourcing” have been, more often than not, used interchangeably in recent years. This is because some of the aspects of each of these processes are present in the other and vice-versa. Let’s identify one of the processes from the other before proceeding with their risks and benefits.

Offshoring happens when you relocate work—the production of products and/or services—to a different country. Outsourcing, on the other hand, may or may not involve an overseas location, but simply contracting work out to an external organisation.

Benefits of offshoring

Businesses that choose to go into offshoring will definitely reap both short-term and long-term benefits. Offshoring allows business owners to focus on strategising business growth as it takes off tasks like accounting and marketing from their hands without worrying about the possibility of a decline in the quality of work. 

Disadvantages of offshoring

Offshoring also has its disadvantages, with the most prominent one being exposing the business to the risk of a data breach or a cyber attack. Choosing the right kind of outsourcing agency is also very important since failing to do so could cause the business to fall trap to hidden costs and even a drop in customer engagement. 

Some of the benefits to offshoring and outsourcing work processes include the following:

Some of their challenges include:

  • The risk of exposing confidential data and/or information
  • Calibration and synchronisation
  • Covert costs
  • The lack of customer focus and engagement

Lower costs

Latest statistics reveal companies save around 30 to 50 per cent compared to the cost of Australian-based employees for substantially the same level of performance and skills.

There is also a greater availability of skilled and experienced employees for different roles and positions abroad. You can also save on employee salaries and other labour-related expenses since the cost of living in countries where you outsource or offshore tend to be much lower.

In certain circumstances, offshoring and outsourcing eliminate recruitment costs altogether. Your third party service provider already has the necessary expertise and experience to get the job done.

It will also be responsible for its own cost of operations. On the other hand, you will need to invest in both the hiring process and infrastructure when you decide to start an in-house department from scratch. Your third party vendor won’t need to ask additional training expenses from you, too.

Focus on business development

Outsourcing and offshoring enable you to free up your allotted labour fund and reinvest it instead into your business. This will allow you to expand your services and offerings. Simply, you’re now growing your business, instead of just spending for it.

The ideals of globalisation and the free trade have given rise to both the offshoring and outsourcing processes. Companies say that both processes make sense—when a product or service can be produced at a much lower cost elsewhere, it does make sense to offshore or outsource said product or service than produce it locally or within your company.

Attain flexibility and business expansion

It is now possible for you to have your business managed 16, even up to 24 hours. Time zone differentials make way for greater flexibility, thanks to offshoring and outsourcing.

And since these processes reduce, if not terminate, hiring costs, you enable your company to quickly expand and contract staff elsewhere, depending on your business needs.

Lower risks

Your teams across multiple locations not only provide your company specialised services, but also enable you to reduce the risks of work lags, insufficient customer engagement and communication, and similar challenges.

Adjusted work shifts ensure that your business needs are attended to every hour of the day, every day, by the most suitable employees available.

Exercise more control

Offshoring and outsourcing also strengthen and expand your control on operations and production by allowing you to form a dedicated core group of staff to work and focus on your company only.

Contrary to the belief that they take away your control of your business, offshoring and outsourcing actually enable you to sophisticate your processes, by establishing your control on all aspects of every business particulars. As the sole source of direction, you train your staff and see to it that everything is done and rolled out the way you want it.

This leads to more productivity and sense of accountability from each member of your core group of staff, all while you’re certain that your other business needs are attended to by select teams of the highest calibre. Read more on offshoring benefits here.

However, before you finally decide on outsourcing and offshoring, you also need to account for the risks and challenges they may pose.

The risk of exposing confidential data and/or information

When work is outsourced or offshored, especially HR (human resource) and related services, there is always the risk of exposing confidential and sensitive information to a third party service provider, besides the already obvious disadvantages of outsourcing payroll and HR.

Be sure to only contract with a trusted third party firm and be certain about the extent of the company information you are willing to share.

Calibration and synchronisation

Ensuring you select the most trustworthy and competent outsourcing and/or offshoring partner cannot be overemphasised.

This is because when your third party service provider doesn’t deliver, you may encounter delivery lags or stretched delivery time schedules, sub-standard quality output, and inappropriate responsibility categorisation, which may prove more costly in the end.

Covert costs

Lower cost is certainly one of the biggest reasons why companies outsource and offshore. It will then defeat the purpose of deciding on these processes if your contract involves hidden costs you are unaware of.

Thus, it is important to seek professional advice from your accountant and/or lawyer, to ante up your preparation before signing that contract and writing that check.

The lack of customer focus and engagement

Your outsourcing and offshoring partner may also be catering to several organisations at a time. This means you are not the only business it services.

When this happens, be clear with what you want from them, including the specifics of how each product and/or service is to be produced and delivered. You can do due diligence here, too.

Before entering into a contract, make sure you have done the necessary research and investigation into the trustworthiness and competence of your third party vendor.

Offshoring and outsourcing - advantages and disadvantages
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Gino Lisondra

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