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Offshoring, which involves moving your company’s operations to a country with lower costs of labor, has been increasingly common in the business world over the past decade or so. Many businesses view this process as a way to reduce operational costs and increase their profits, while simultaneously expanding their client base and product offerings. If you’re considering outsourcing any business activities and you’re looking for inspiration, here are 10 reasons why companies go offshore with their businesses.
1. Lower costs
Costs are often a driving factor for companies to offshore their businesses. With an increase in labor costs and reduced financial support, companies can offshore their production to other countries where labor is cheaper. Some factories in Asia, for example, produce goods at a price of 1/5th what it would cost in the US.
With offshore outsourcing on the rise, many American and European companies are realizing that it’s not only cost-effective to go overseas with some of their operations, but that they’re also capable of producing higher quality products than competitors because manufacturing processes allow them to tailor production much more precisely than before.
2. Access to tech talent, cheaper labor, more abundant engineering graduates
Tech giants like Google, Facebook, and Microsoft have offices in countries like India, South Africa, and Kenya because they know that engineering talent is cheaper overseas. In addition to being cheaper to hire than their North American counterparts, the supply of engineers abroad is more abundant. Nearly 250 universities in China produce 4 times as many computer science graduates per year as North America does. This means companies can fill open positions faster by going to Asia or Africa and also more quickly ramp up their workforce during periods of high demand. As a result of this dynamic labor market which matches supply with demand at all times, hourly wages for computer programming jobs in Bangalore are 5% of what they are in San Francisco, and it takes half the time to find an appropriate job candidate.
The most important thing to also consider with regard to talent and the laborers is the ethical evolution of offshoring.
Why is the ethics evolution of offshoring important?
The ethics of offshoring are frequently correlated with concerns about quality. The quality of software developed by engineers in nations like India and the Philippines continues to raise doubts in the minds of some businesses. But the truth is completely different. India is the only country in the world that annually produces more than 1.5 million engineers. This makes it much simpler to identify talented, committed, and motivated engineers. They only offer the greatest software because of their can-do attitude, superior training, and grasping skills.
Secondly, cheap labor may worry some business owners as they may think it translates to inferior products. However, taking India as an example still, the cost of living is much cheaper than, say, the UK. Consumer prices in the UK are well over 219% higher than in India. Therefore, your business need not worry about hiring cheaper labor and compromising quality.
To have a better understanding of the ethics evolution of offshoring, consider engaging counsel from our experts.
3. Global financial markets
Making your business global is a fantastic way to save money on overheads. Outsourcing can allow companies to do just that, taking their manufacturing or other commercial services elsewhere in the world where the rates are cheaper. Imagine how much of a difference it would make if you could get help with finance and accounting in India, instead of paying full market rates for those same tasks in the US or Europe? It makes sense!
4. Better business climate and friendly tax regime
Another reason why companies offshore their businesses is the cost of taxes in their home country. Many nations use tax holidays to totally or partially exempt a business from paying corporate income taxes. This is in return for starting a new business or growing their existing one.
The tax advantages include
- tax holidays,
- reduced business taxes,
- temporary tax and
- duty-free importing.
The numerous tax incentives enhance revenue, reduce costs, and preserve financial resources just like an Anti DDoS solution would. Additionally, these savings help the firms in the nations where they are based develop and flourish over time.
5. Geographical diversification
Geographical diversification allows companies to distribute production assets across borders so that disruptions in one area will have a minimal impact on the entire organization. With manufacturing moving at an ever-increasing pace, it is becoming more difficult for one location to provide all of the necessary resources (laborers, land, facilities) that a company may need. A company’s supply chain may be more geographically diverse and more responsive to changing conditions than if it were concentrated in one location.
6. Marketing synergies across geographical borders
In October 2011, Unilever launched a new cold and flu product in China as part of its O2 line of medicines. After finding success with this brand extension, the company then looked to extend the line of O2 products and introduced products under the Beijing Tong Ren Tang name to increase their marketing synergies with this particular Chinese brand. The introduction of these two brands into different countries is another example of why companies are going offshore for marketing purposes.
7. Lower business transaction costs and regulatory risks
One of the major reasons for an offshore move is to escape from strict business regulations and costs. Business transaction costs and regulatory risks are lower overseas and there is also less bureaucracy that goes into starting a company, as well as licensing fees. In China, for example, one must obtain licenses for 31 occupations, but only 4 in America. There are a wide variety of places where company owners can go offshore to establish their business in this regard – Hong Kong, Singapore, Costa Rica, Thailand – the list goes on.
8. Competitive rivalry in the global marketplace
Competitive rivalry in the global marketplace is not just limited to competition within one country’s borders. In today’s environment, companies are vying for customers in international markets as well. This global marketplace poses significant challenges as companies must contend with diversity in legal systems, regulatory environments, and languages. But these difficulties can be compounded by offshoring and hiring the necessary skills. Also, by competing across borders, businesses can increase their exposure to new customers and new products or services which may not be available domestically.
9. Lower cost of capital resources
Working capital is crucial for any business in order to operate efficiently and economically. The cost of working capital can be significantly less when based overseas. If your firm could borrow funds from offshore at 7% and pay local interest at 10%, then the offshore market should give you a competitive advantage over those firms that require high-interest rates domestically.
10. Ownership motivation
Companies may consider going offshore for ownership motivation. This includes when an operation is acquired or partnered with a company in the host country. The company owners may see such a deal as an easier way to bring their operation to the next level, providing more access to local markets and production. Plus, having a subsidiary abroad reduces some of the risks involved with doing business internationally.
Sharon is an avid writer who has a concentration on nonfiction content. She has been treading the writers’ field for more than ten years and hopes to broaden her experience by delving further into book publishing. In her spare time, she enjoys a good read or movie that takes her back in time.
