Offshoring

Description Offshoring is the relocation of some of a company’s operations to another country. Typically, the new location offers markedly lower labor costs, but more recently other factors have influenced companies’ decisions to move offshore. For example, proximity to large, emerging end markets and access to growing pools of highly skilled talent may also lure companies overseas. Offshoring presents a public relations risk, because it eliminates jobs in a company’s home country. Firms must carefully weigh all the risks in Offshoring: the offshore location’s political climate and infrastructure; the stability of its currency; its capital controls; its trade barriers; and the need to safeguard intellectual property. There are two types of Offshoring: Captive Offshoring occurs when a company maintains a function or process in-house, and just moves it to a company facility in a different country. (If the country is on the same continent, this can be referred to as "Near-shoring.") Offshore Outsourcing, by contrast, occurs when a company outsources a function or process to another country through a third-party vendor. Both are part of a spectrum of strategic sourcing options companies can pursue, including Domestic Outsourcing and Insourcing.Methodology A company that pursues Offshoring should:
Quantify the costs and benefits of moving process steps offshore—especially business processes that are standard, routine and mature. Concentrate Offshoring analyses on functions that are major cost centers but not core competencies;
Determine which processes should be conducted internally at offshore locations and which processes should be outsourced to more efficient partners by considering not only the all-in costs of each process but also the quality of performance improvements that need to be made;
Create a short list of locations to be considered for Offshoring, considering financial implications but also political stability, security and intellectual property enforcement;
Research characteristics of the labor force in each country being considered for Offshoring, including information technology skills, educational levels, language skills and the willingness of workers to work flexible hours;
Consider transportation and other supply chain costs. In extreme cases, a lack of necessary infrastructure (roads, rails, Internet service) could disqualify an otherwise excellent location;
Conduct final negotiations and select preferred locations and partners;
Prepare migration and contingency plans;
Work to address any issues around cultural and infrastructure dissimilarity between the company’s country of origin and the countries that are selected for Offshoring. Common uses Companies use Offshoring to:
Gain access to human capital—not just low-cost labor but also highly skilled technical talent;
Gain entry to customers in emerging, high-growth regional markets;
Secure a global presence;
Shorten the time to market by distributing workloads globally and enabling operations to continue 24 hours a day;
Create low-cost offerings to meet the needs of low-end markets;
Achieve quality and performance improvements.