With the economy driving towards globalization, oodles of businesses are hard bound to achieve a competitive advantage by reducing their costs, augmenting efficiency, and offering a great customer service. But the bottom of the matter is, how do you go about doing that in a limited period?
If you are looking for a one-word solution, then offshore development or outsourcing is your gateway to victory. As per The National Association of Software & Service Companies (NASSCOM), almost half of Fortune 500 companies choose to outsource software development projects to Indian outsourcing firms. As per another study, 43% of the IT sector is outsourced, 26% of distribution is taken care offshore, 12% of call center jobs are done overseas, and 38% of research and development (R&D) is taken care of by workers located outside the country.
Outsourcing and offshoring services have revolutionized the success rate of many companies worldwide. With globalization driving loads of companies to constantly improve their competitive edge, outsourcing will help reduce internal costs as well as allow the company to focus on core competencies. Because in the fast-paced technological world, it is highly unlikely that your company would be able to provide a whole spectrum of technical services. Here outsourcing comes into scene, to fulfill a strategic business approach. However, these two terms are world apart from each other figuratively.
Confused? Don’t worry, let’s start with understanding the two terms independently.
What is outsourcing?
Outsourcing means getting certain aspects of your work done by a third party. Businesses across the globe outsource wide range of projects, tasks and processes such as software and product development, application development, application quality assurance, web content management, etc. This enables their own staff to focus on other important projects.
What is offshoring?
When a company plans to outsources services, it can get it within the country or internationally. Offshoring involves outsourcing work to a country other than where your business is based.
Let’s say, a business which is based in United States could outsource work to a third party within the country. This is Outsourcing. While if the company outsources work from another third party located in India, China or Philippines, etc. it would be offshoring.
Benefits offered by Outsourcing and offshoring
There are more than a few benefits that can be derived from outsourcing certain aspects of your business to other third part.
- Costs are arguably the main motivation behind outsourcing enabling you to invest less for hiring in-house professionals. And availability of cheap labor market lets you maintain the same quality of work at reduced cost.
- Often it is seen that companies don’t have expertise to offer the quality of work for certain activities. Outsourcing comes to rescue in such cases.
- Companies don’t have to bother about hiring or firing because no long-term contract is required. You get the liberty to sign contract for a specific project.
- It offers the flexibility to change your partner till you find the right one and you don’t even need to relocate for the same.
- You can share the risks with your outsourcing partner. As you are outsourcing, you also put the responsibility in their hand which is a good thing for your investment.
- You can increase your focus on the core activities of your business as outsourcing peripherals tasks will provide you the necessary time required to improve the core business or parts which might not be working smoothly.
Simply put, offshoring is the child of outsourcing. Because offshoring provides many of the benefits which outsourcing already offers. Nevertheless, advantages of offshoring are not negligible.
- Whether we’re talking about manufacturing costs, research and development costs, labor market, cost of living or anything else the cost is low.
- Time-zone advantage: companies who are offshoring services can take advantage of the time zone and receive round the clock support.
- Global talent pool: Numerous numbers of talented/skilled professionals can do the work of same standards as in Western countries that to at cheaper rates.
- Tax and Tariffs: Tax and tariff relief in certain countries is accounted as one of the main reason for selecting offshoring. Due to many loopholes in tariff regimes of various countries, companies take advantage to generate savings and revenue.
- You can take advantage of skilled professionals who can do the work with the same quality standards as in western countries, but for lower costs.
Risks you might want to evaluate when considering outsourcing/offshoring
Although outsourcing/offshoring has proved to be a great management tool, they bring certain risks along with them which needs to be managed and studied beforehand.
- Hidden costs: Albeit outsourcing has proved to be one of the economical solution for companies looking to develop certain projects, you can’t ignore all the hidden costs involved than initially budgeted.
- Absence of deadlines synchronization: Managing deadlines with an in-house team is far easier compared to partner who is away.
- Confidentiality: Before passing on the information to outsourcing partner you need to discuss an NDA that will prevent them from revealing any sensitive information.
As we earlier saw, the benefits of outsourcing and offshoring largely overlap, they do not face the same risks.
- Language barrier: Every so often, it is observed that poor communication has proved to be a liability in the process of building relationship between partners. Fortunately, with variety of tools available, you can easily kill this problem considering you address it in an organized and planned way from the beginning.
- Cultural difference and work habits: Maximum number of time, your partners will make the effort of adjusting their schedule as per yours, but you too will need to make some changes that might not be as simple as you think.
- Long Distance: Visiting partners often, for better understanding is not easy when offshoring is considered owing to high costs and time spent during traveling.
- Political conflict: Offshoring has always been a controversial subject spurring fiery and heated debates among economists and politicians, over who wins and who loses when companies offshore projects and processes. Political opponents of offshoring every so often argue that jobs in developed countries lost are being replaced by jobs that are lower in quality and pay. And that’s why companies selecting to offshore to a significant extent are exposed to the public relations aspects of this ongoing debate.
Best Practice for risk management
Outsourcing/offshoring process played a ground-breaking role creating a cost advantage during the earlier years. But now due to economic and digital trends has become mainstream. However, the offshoring client's maturity level may influence the management of these risk areas. Against this backdrop we propose few best practices to be incorporated to distinguish and mitigate risks.
There are quite a few best practices that have progressed over the past two decades to mitigate risks and improve results of projects that are offshored and outsourced. Many of these practices are related to business processes. Process maturity models like CMMi and Six-sigma measure not only the quality of methods that outsourcing vendors employ, but also how well companies monitor their procedures, measure key metrics and how they repeatedly improve these processes.
Moreover, you can consider following points as well for smooth execution of outsourcing processes. Creation of a high level of clarity and communication from leadership concerning the impact that outsourcing and offshoring will have on employees at all levels. Acknowledge and respond proactively to the ambiguity and possible tensions that outsourcing and offshoring involve. Recognize the impact culture, time and distance will have on all stages of the outsourcing partnership and operation of the offshore location. Understanding the different expectations of vendor and offshore employees and consciously develop systems and structures to address the differences.
Overall, both outsourcing and offshoring are on the rise. The worldwide economic recession has enforced companies across the globe to explore all options to increase proficiencies and cut costs. Companies have got comfortable outsourcing (as well as offshoring) larger aspects of their businesses as they realize they are not core.
One more trend - especially in information technology (IT services) outsourcing - is industry consolidation. Political backlash has also been growing with unemployment rising in the developed world.