The Types & Benefits of Offshore Outsourcing

Offshore outsourcing is growing at a rapid pace.

If we talk about global IT outsourcing, it’s expected to reach $425.19 billion by 2026, growing at a CAGR of 4.5 percent.

Now imagine the growth across all industries.

So rest assured you are not alone if you have been thinking about outsourcing any of your business processes to a third-party solution provider in another country (offshore).

But yes, you must proceed with caution and learn everything about offshore outsourcing before you jump on the bandwagon.

Here, in this post, we’ll talk about types, benefits, cons, and some successful examples of offshore outsourcing.

We’ll further look at some procedures that you should use to evaluate third-party suppliers before outsourcing and some top destinations for the job at hand.

Let’s start right away.

1. Services

Services, in offshore outsourcing, can be defined as the delivery of an intangible product.

Here, our focus is on service operations in a business and IT-enabled services.

For an easy understanding, we’ve divided the services segment into back-office processes and front office processes.

Let’s check them out.

Here’s the list of various back-office processes that you can consider for offshore outsourcing.

4. HR & recruitment

Now there are two approaches to HR & recruitment when it comes to offshore outsourcing.

First, you can build teams of experts for various business processes with the help of an in-house HR team.

For example, if you want to hire a web developer for website maintenance and a digital marketer for PPC advertising, your HR team can look offshore for eligible candidates.

This is perfect for small businesses that want to hire the best talents but keep costs as low as possible.

Second, you can outsource complete HR & recruitment operations to an offshore company.

For example, if you want to set up a team of customer support executives in India, you can recruit an offshore HR company that’ll hire on your behalf.

This is ideal for businesses that have established offshore workplaces and want to hire local talent for business operations.

Here we’ll talk about the front-office jobs for which you can hire the best offshore talent.

2. Production (Manufacturing)

Offshore outsourcing in manufacturing is on the boom right now.

The global engineering services outsourcing market size is projected to reach $1.5 trillion by 2025, mostly driven by sectors like automotive, telecom, and computer electronics.

Nowadays, the original equipment manufacturers (OEMs) prefer outsourcing production to offshore engineering service providers (ESPs) because they get better technical expertise at a fraction of the cost.

The offshore manufacturers take responsibility for the end-to-end production cycle comprising design, prototyping, testing, product lifecycle management, and technology advancement.

Although manufacturing can be outsourced to an offshore company, you need to take charge of the operations that ensure successful product development, launch, and commercialization.

This includes ideation, research, planning, sourcing, costing, marketing, sales, feedback, and improvisation.

Hence, if you want to run a successful business, you need to walk hand-in-hand with the offshore manufacturing company.

Here’s a list of production services you can outsource to offshore manufacturing hubs across the globe. Check them out.

Laptops, RAMs, hard drives, chipsets, motherboards, printers, projectors, smartphones, tablets, televisions, cameras, earphones, speakers, etc.

Kitchen appliances, power appliances, home appliances, motors, pumps, HVAC systems, switchboards, transformers, circuits, etc.

Knits like t-shirts, dresses, leggings, jackets, sweatshirts, etc. Wovens like button-up shirts, trousers, jeans, denim jackets, etc. Accessories like footwear, jewelry, sunglasses, purse, wallets, belts, socks, watches, ties, etc.

Packaged food and dairy products, hair and body care products, glassware and paper products, pharmaceuticals, plastic products, household products, etc.

Hardware products, parts and components, hand tools & machinery, heavy-duty tools & machinery, nuts and bolts, structural and building metals, tanks and containers, etc.

3. Innovation

Did you know Skype, a communication tool that Microsoft acquired for $8.5 billion in 2011, was founded by Swedish and Danish entrepreneurs but developed in Estonia by Estonian developers?

Skype is a classic case of outsourcing in innovation & development. And there are many more success stories built on the foundation of outsourced innovation.

So if you have an idea and want to take it to the next level, you have an option to look out for offshore R&D companies that are willing to bring your idea to life.

The best part is that you’ll be the owner of the intellectual property. Besides, you’ll be able to harness the potential of the best human minds to develop something beneficial and revolutionary.

You can implement offshore outsourcing in innovation across the following domains to decrease costs and risks by 60 to 90 percent and increase impact by hundreds of times:

Research and development in electronic hardware and software may include the schematic design, PCB layout, prototyping and assembly, writing firmware, doing kernel-level programming and developing drivers, and so on.

Innovation may range across banking solutions, domestic and cross-border payment solutions, general ledger systems, and much more. Offshore R&D can help in market research, competitor analysis, product development strategy, proof of concept, product architecture and design, and more.

Blockchain is disrupting every industry including banking, healthcare, manufacturing, IT, agriculture, logistics, education, travel, real estate, and others. You can deploy an offshore blockchain research company to develop solutions for payments, creating & transferring digital assets, identity authorization, and more.

Innovation in SaaS is the trend right now. It’s not just about cloud computing anymore. By incorporating AI, ML, NLP, and other technologies, innovators are expanding the capabilities of SaaS for solving multiple problems.

Autonomous vehicles, warehouse automation, centralized management using the Internet of Things, prediction & analysis using AI, last-mile delivery using drones, and much more – these are some advancements taking place in logistics. Offshore start-ups are doing exceptionally well in supply chain management. eCommerce businesses should look into these.

Automation and prediction & analysis are the two main applications of AI and ML. Companies are investing heavily in streamlining their processes, developing cutting-edge products & services, and ensuring a top-notch customer experience. You can save costs and decrease lead times by collaborating with offshore innovation companies working in the field of AI and ML.

Every innovation begins with a set of data. And big data aims at facilitating innovation by providing a massive amount of processed data to the researchers. Big data forms the core of AI and ML. Therefore, if you are planning to invest in AI and ML, you are also investing in big data.

4. Benefits

If you’ll look at the screenshot below, you’ll notice that 8 out of the top 10 leading countries for offshore business services are Asian countries.

It indicates how prominent offshore outsourcing is for companies that want to do serious business.

But, what makes it so attractive?

Let us look at the benefits of offshore outsourcing that can help you make wiser decisions.

Most business outsourcing companies, whether in services or manufacturing, run operations 24/7.

They are capable of operating continuously because they have a large pool of skilled labor.

Moreover, reducing lead time is one of their top priorities.

Round-the-clock uptime is beneficial if you are seeking 24/7 customer support for your business or want a continuous supply of products that are in high demand.

Offshore outsourcing companies ensure their workforce is well-educated, highly-skilled, and experienced.

It’s important to meet this criterion if they have to deliver as per quality guidelines.

So whether you are seeking a web developer or an accounting team or a manufacturing facility, chances are you’ll have access to skilled expertise.

As mentioned earlier, lower lead time is one of the main advantages of offshore outsourcing.

Since competition is tough amongst offshore companies, the service provider ensures minimum lead time and maximum productivity, resulting in high speed and efficiency.

Further, if the workforce has been trained well as per your company standards, you can expect excellent output every time.

Let us understand this with an example.

Suppose your business revolves around jute textiles. You can set up a manufacturing unit inshore but raw material supply is not regular.

As the shortage will affect production, it makes sense to outsource manufacturing to an offshore company in a country where raw material is not an issue, Bangladesh, for example.

Also, you get skilled labor at affordable costs, and quality control measures are also in place.

Hence, you’ll get regular supplies as per demand, without any obstruction.

This is how you can overcome obstacles by adopting offshore outsourcing.

You don’t have to be a juggler managing all tasks by yourself. You can outsource operations to experts and focus on tasks that need your direct involvement.

For example, if you are good at online marketing, you can generate leads for website design and development, and outsource the job to offshore experts working out of India or somewhere else.

This way you’ll experience exponential growth in your business without any compromise in quality standards.

According to a study, one hour per day per employee is wasted on meetings. It adds up to around 24 hours a month, considering leaves.

At the same time, if you have an offshore company manage business operations, you would not only save time but also witness an increase in productivity as you can accomplish two tasks simultaneously.

That’s how outsourcing works; operations running in parallel, not requiring your supervision all the time.

So when your productivity is high, as discussed in the previous point, you can accomplish more in a defined time interval.

For example, in addition to web design and development, you can generate leads for app design and development.

All you need to do is outsource the job to an offshore company specializing in app development.

As you can see, scaling business with offshore outsourcing is easy and practical.

While looking for an offshore company, you should check out foreign policy benefits offered by the country where you’ll outsource operations.

For example, the Indian government offers tax benefits to IT companies for the export of services. Therefore, if you want to outsource IT operations to India, you’ll save a lot of money because a vendor will quote reasonable prices as they are benefiting from the tax policy.

Similarly, whatever the nature of business, read the foreign policy for offshore outsourcing before delegating work to a service provider. You might benefit significantly.

5. Cons

You may follow all precautions, abide by rules and regulations, and enter into agreements. But the truth is that you are outsourcing to a third-party service provider.

Therefore, you’ll have to adjust slightly, if not completely, when it comes to running offshore operations.

To mitigate challenges like missed deadlines and failed quality standards, you can deploy your in-house staff at the offshore location. But, before taking a step, get familiar with the rules and regulations of the land.

When a company plans to outsource operations to an offshore service provider, certain sections in the society develop a negative opinion about the company, like they aren’t patriotic or have robbed citizens of their jobs.

However, contrary to the popular belief, offshore outsourcing doesn’t decrease a country’s income. Instead, there’s a rise in net income.

But yes, maybe your public image is at risk if you outsource. Therefore, you should have a reputation correction plan in place before you make the move.

From 2017, U.S. companies were required to pay one-off charges for profits they made overseas in the last 30 years if they were offshore.

This is one of the incidents directly or indirectly related to offshore outsourcing.

Similarly, government rules and regulations in different countries may harm your business if you indulge in offshore outsourcing.

Hence, before proceeding, check out rules and regulations related to taxation and other obligations on offshore outsourcing.

This is an aspect that makes offshore outsourcing most vulnerable. Nobody prefers risk to data and security.

But then, a security risk is present whether you outsource or have an in-house team.

Security breaches happen because of outdated systems and software, unfamiliarity with the latest threats, not enough security measures in place, and other flawed practices.

Now you can ensure stringent security if you can beef up security measures like taking regular backups, monitor attacks and threats, and so on.

Further, only consider outsourcing to credible and highly-rated offshore companies that have proper security mechanisms for overall safety.

This is a serious problem because different time zones affect meetings, demos, appointments, communication, and other business processes.

For example, if you are based in the U.S. and the offshore company is in India, then the time difference would be 9 hours and 30 minutes if you are in Washington, DC, and 12 hours 30 minutes if you are based in Los Angeles.

Thus, it’s difficult to communicate and work in collaboration. It may be not in manufacturing, but it is in services.

However, there are offshore companies that operate during client’s work hours. For example, in India, people work night shifts so that they can connect with their counterparts in the U.S.

When you are outsourcing to an offshore company, you have to abide by the regulations of the foreign land.

You should be aware of various aspects like taxation, legal systems, dispute settlement, local laws, and so on.

In case you fail to acknowledge or abide by rules and regulations, you may land in trouble.

Therefore, take your time to get familiar with every law and regulation, whether it takes weeks, months, or years. It will safeguard you against any damage or losses.

This is one of the most common disadvantages of offshore outsourcing.

Language difference makes communication hard and that, in turn, hampers production as you are not able to communicate your requirements clearly.

For example, if a U.S. company outsources manufacturing to China, there are high chances of the language barrier as English speakers comprise only 0.9 percent of the total population.

To mitigate this problem, you should consider hiring an experienced translator.

6. Some successful examples of offshore outsourcing

To understand why offshore outsourcing is such a rage nowadays, let us look at some of the famous examples where offshore outsourcing had a major role to play.

Amazon does a commendable job when it comes to customer support. This is due to its stellar customer support setup across the world.

Most of Amazon’s customer service centers are based in India, the Philippines, and South Africa.

Not only does this offshore setup give them access to skilled talent, but it also helps them save a lot of money that would, otherwise, have been spent on an in-house team of support executives in the U.S.

Nike’s aggressive approach to offshore manufacturing is well-known. As of 2017, Nike employs around 1.02 million workers in contracted factories established across 42 countries.

In fact, when Nike was launched, it used to outsource shoes from Japan. Today, most of its products come from manufacturing units based in China, Vietnam, Thailand, Taiwan, India, Malaysia, and South Korea.

Google has always embraced offshore outsourcing with open arms for its various operations.

For example, it already has an established network of customer support representatives across 60 countries that provide phone and email support for AdWords.

Google’s also known to outsource IT work to Cognizant India, following the footsteps of Apple.

Apple, one of the world’s largest companies, outsources its manufacturing as well as IT operations to countries like China, Vietnam, and India.

Foxconn, Apple’s manufacturing partner, has plants in countries like China and Taiwan. Besides Apple, Foxconn also manufactures for Huawei, Microsoft, Blackberry, and other brands.

Now Apple is diversifying by outsourcing manufacturing to India and Vietnam.

7. Evaluate (Test) before offshoring

A non-disclosure agreement (NDA) is important to maintain the confidentiality of data and protection of intellectual property (IP).

While preparing an NDA, assess the proprietary laws of the offshore country. It’s important because when the need arises, you should know what law applies.

Besides, the credibility of an offshore company also plays a major role. If they have worked with companies in the past, successfully completing contracts, it means they are trustworthy.

Also, vendor contracts should mention everything in detail – expectations, breaches, termination, right to property, etc.

Evaluate all these factors related to NDA before proceeding with offshore outsourcing.

Reference simply refers to peer-to-peer recommendations. If you are new to offshore outsourcing or had bad experiences in the past, you can always ask for references.

When asking for references or conducting research, you should be aware of what you are seeking.

You should know about the business process and how it’s supposed to be done.

It’s because you’ll have to explain everything in detail when asking for references in your circle.

This can be a part of the vendor contract or non-compete agreement.

The purpose is to deny service provider an opportunity to engage with your customers.

Barring front-office operations, all other operations don’t require customer interaction, unless the company thinks so.

Hence, while signing the contract, you should clearly emphasize the non-customer facing clause.

You don’t need to hand over complete operations right after the first meeting with the offshore company’s representative.

If you are not sure about the competency or want to assess different vendors, you can evaluate by assigning a small task.

It’ll also help you in analyzing other aspects like communication, lead time, and work quality.

Once you are satisfied with the work, you can proceed with the remaining selection procedure.

While preparing a list of vendors, verify profiles diligently. Some of the aspects that you should consider while shortlisting vendors are:

Certifications

Service providers should have necessary certifications and degrees that affirm their expertise in an area of work.

Accreditations

Most of the IT firms are accredited by Clutch, Good Firms, and other reputed organizations. Similarly, you can look out for prestigious accreditations in your industry.

Web presence

A credible offshore company will have an established web presence in the form of thought leadership content, reviews, testimonials, published research and surveys, etc.

8. Top Destinations for offshore outsourcing

There are numerous destinations for offshore outsourcing. But the best is the one that fits your requirements.

A top destination for manufacturing may not be the best destination for web development.

Hence, we have created a list of top offshore outsourcing countries and have also mentioned what they are best for.

India is the first preference for those who want to outsource technical operations that require highly skilled labor. Mostly, IT companies prefer setting up their offshore units or hire an outsourcing firm in India.

If you look up to the survey conducted at Statista, you’ll notice India attains the top position owing to its financial attractiveness and people’s skills and availability.

Companies like Apple, Microsoft, Dell, IBM, Ford, General Electric, Google, and others outsource their IT and manufacturing operations to India.

Besides, small businesses also prefer India for web development, app development, digital marketing, and other front-end and back-end services.

Ukraine is a top destination for software development. Start-ups like PetCube, Gitlab, People.ai, Earth.ai, and others have their roots in Ukraine.

In 2017, Global Sourcing Association named Ukraine United Kingdom’s Offshoring Destination of the Year. Besides, Ukraine holds several mentions in other surveys conducted by independent organizations.

Some of the reasons why companies prefer outsourcing to Ukraine are its strategic location in Eastern Europe, proficiency in science & technology, affordable services, and adherence to international security requirements like PCI, ISO, HIPAA, and others.

Philippines’ outsourcing journey began in 1992 when Accenture opened its BPO to provide management consulting across the globe.

In almost 30 years, the Philippines have established itself as one of the top destinations for BPO, especially inbound customer support.

The low costs, easy availability of skilled labor, high proficiency in English, ease of doing business, and cultural adaptability are some of the major reasons that make the Philippines a major offshore outsourcing hub.

When it comes to innovation, it’s difficult to beat China. It’s known for its innovation output in industrial design applications, utility models, and creative products manufacturing and export.

It’s surprising yet a proud feeling that being a middle-class nation, China ranks 14th in the Global Innovation Index 2020 released by UN’s World Intellectual Property Organization (WIPO).

No doubt the world’s best tech companies like Apple, Microsoft, Samsung, Sony, and others outsource their manufacturing operations to China.

Highly skilled labor, low costs, exceptional technical expertise, favorable government policies, and capacity to produce at a large scale are some of the factors that make China a top outsourcing destination.

Once not in the picture, Malaysia has emerged as an attractive offshore destination for business process outsourcing (BPO) and knowledge process outsourcing (KPO).

It’s investing heavily in technologies like AI, ML, big data, cloud computing, and others. Further, the creation of the Digital Free Trade Zone (DFTZ) by Alibaba is the world’s first electronic world trade platform built outside China.

Moreover, government policies favor a suitable environment for the growth of offshore outsourcing. This is the reason why Malaysia ranked 12th in the Ease of Doing Business Index 2019.

Vietnam has emerged as the top destination for offshore outsourcing across all verticals, whether it’s IT services, manufacturing, or innovation.

Japan is one of the countries that are heavily investing in Vietnam for its technical prowess, low cost of production, highly skilled labor, and favorable government policies.

Vietnam has become a stiff competitor to China and India when it comes to offshore outsourcing. And it has achieved this mark in a short interval of time.

Do you know Pakistan is the world’s third-largest English-speaking country in the world, after U.S. and India, with around 49 percent of the population fluent in English?

This reason, along with many others, makes Pakistan one of the top destinations for offshore outsourcing in the Asia region.

If you want services like software development, customer support, digital marketing, and other front-end and back-end services, you can consider Pakistan as an offshore option.

Brazil is an exception in the group of Asian countries for offshore outsourcing.

It’s more like a nearshore destination rather than offshore for countries like U.S. and Canada.

Brazil’s major advantages as an offshore destination are lesser culture differences, almost similar time zones, reduced traveling, and a rich pool of talent ready to work at affordable prices.

Further, an improved business environment, a thriving banking industry, and other political factors also make Brazil one of the best offshore destinations.

Romania is no longer only known as the place of origin of Dracula. Since the past decade, it has evolved as a major hub for offshore outsourcing of IT services.

Factors like proximity to Western Europe, multilingual professionals proficient in English, Spanish, French, Italian, and German, technical expertise across multiple domains, flourishing outsourcing market, and trust of foreign investors have made Romania a hotspot for offshore outsourcing.

The presence of companies like Microsoft, IBM, HP, P&G, Intel, Amazon, Ubisoft, Oracle, and others is proof that Romania is a technology hub.