Why is Outsourcing Good for Americans
Outsourcing and offshoring: is there a clear winner?
While many think that outsourcing and offshoring are just two words that describe the outsourcing of business processes, this couldn't be further from reality. The growing demand for skilled workers such as programmers and software engineers in the West - combined with an enormous increase in talented young people in Asia - has made outsourcing and offshoring important growth potentials for companies.
The lines can blur, and while both are remotely working, outsourcing and offshoring are two completely different business models. In this post, we not only look at the differences between the two models, but also look at the advantages and disadvantages of each model in specific business areas.
If you have ever thought about expanding your team with employees abroad, then read on. This article will help you figure out whether outsourcing or offshoring is best for your business.
The development of outsourcing and offshoring
The industrial revolution has fundamentally changed the way companies work. Thanks to highly productive machines and breakthrough technologies, companies have been able to grow at an unprecedented rate. In the mid-19th century, many companies were thinking outside the box and looking for ways to increase profits and increase their market share.
Technology was now so powerful that by simply expanding operations, companies could take advantage of massive economies of scale to increase their profit margins while undercutting smaller competitors. Unfortunately, this scaling usually led to a bloated and complex management structure and thus to a complete lack of agility and flexibility.
However, many companies struggled to meet the increased demand and therefore decided to focus on their core business and outsource various support functions. This step made it easier for companies that were not self-sufficient or had no internal competence to outsource to third-party providers on a contractual basis, which form the basis for so-called outsourcing.
In the 1990s, outsourcing as a cost-cutting measure became as popular as ever. Contracts were signed, schedules were set and the smooth and efficient provision of services was established.
The '90s outsourcing model worked amazingly well, and companies were more than happy with their results. However, their expectations were starting to rise and they wanted more. The only thing outsourcing couldn't bring them was a sense of ownership as they wanted to be in charge of the entire business. Thus began the search for a business model that was cost-effective, scalable, and gave business owners complete control over the process and the skilled workers.
At the turn of the century, so-called offshoring saw the light of day. By implementing an offshoring business model, companies were now able to assemble their team from a scalable talent pool in a different geographic location under the same leadership.
What makes outsourcing and offshoring so popular today?
Before we get into the advantages and disadvantages of each business model, it is essential to examine the main reasons why companies - large and small - are now relying on outsourcing and offshoring more than ever. Here are some of the most important:
- Acute skills shortage - A 2013 study on the associated shortage of skilled workers found that around 40% of US employers have difficulties in filling jobs in technology and IT. This huge shortage of skilled workers means that companies have to look elsewhere to find suitable workers.
- Globalization - Over the past decade, more and more companies have built a global presence. The establishment of remote teams sets new trends in the business world at an international level. Globalization therefore facilitates economic growth and the competitiveness of companies worldwide. Offshoring or outsourcing is a logical conclusion.
- The need for innovation - The rapidly changing market and the need to develop innovative products and services have made outsourcing and offshoring widespread. When Procter & Gamble began to outsource research and development activities, the management level succeeded in combining the innovation and implementation process, increasing productivity by well over 60% and generating sales of more than ten billion dollars.
- They jumped the frame - While internal corporate functions seemed to work well, the operation of such an organization was often rigid and frail with so much work to be done. Manufacturing and distribution became a tedious process with little to no change. Companies realized that outsourcing and offshoring were a way to break away from traditional business models and potentially generate significant returns for the company.
The main advantages of both business models
An outstanding advantage of outsourcing is the flexibility that comes with it. Let's say a company is building an offshore finance team. This team is permanent, and even if there isn't any real work to be done, you are still paying to have your say. Outsourcing, on the other hand, can be done after a few hours or days. Work is done whenever it occurs and is only paid then. This flexibility is a great advantage, especially for companies with sporadic work.
Outsourcing is a business model that is typically low-cost and therefore enables significant savings. For example, costs of maintaining infrastructure and administration are almost completely eliminated, which usually results in a very affordable budget. According to a 2016 study by Deloitte, outsourcing functions to an external partner reduce total costs by almost 45%.
Every company has a myriad of business functions, many of which are non-core; those that do not offer a clear advantage over competitors. These non-core functions can prevent key team members from focusing on their main tasks and wasting resources. By outsourcing to third parties, you can concentrate fully on your core competencies - a real boon for the company!
In contrast to outsourcing, the company in the offshore business model retains full control over its core business. The job of recruiting, leading and training a great offshore team is entirely in their hands.
A key benefit of doing business offshore is access to a huge pool of skilled workers. There is tremendous pressure in developed countries to find and recruit workers with the right skills, especially in software development and production.
Countries like India and the Philippines attach great importance to the education and training of their compatriots. The result is a large number of highly-skilled, well-educated, English-speaking talent just waiting to be hired. This is the quality that the offshoring model with the right partner offers you.
Reducing costs is undoubtedly a decisive factor in motivating companies to give the offshoring model a chance. Offshore teams in countries like India are incredibly talented and passionate about their work. Due to the lower cost of living compared to the west, offshoring gives companies access to exceptional skilled workers for significantly less money.
Offshoring and scalability go hand in hand. By successfully building offshore teams, companies are able to set up development centers in different parts of the world. This provides great marketing opportunities for a company to scale their business and serve customers whenever and wherever they need it.
Government and Tax Policy
Loopholes in tax, tariff, and government policies can make it easier for companies to make significant savings while building a team overseas. The tax relief in some countries allows products to be manufactured relatively cheaply and imported for use.
The risks of both business models
Loss of control
When a company outsources to an outside service provider, it inevitably loses control over the execution of the work. This can lead to poor communication and visibility between the company and the service provider and thus affect the success of the entire project.
Although contract outsourcing always seems inexpensive, companies should be prepared for hidden costs that the service provider can bill for at a later date. Companies often pay above their original agreement because the work done is “out of scope”.
Too much focus on reducing costs can result in hiring people without the skills required for the job, which can later lead to significant deterioration in the quality of products or services.
Lack of customer orientation
Outsourcing service providers will usually serve several companies with their services or products at the same time. Hence, it is impossible to expect 100% focus and attention on your business from them. You therefore risk receiving products or services that do not quite meet your quality requirements.
If communication with an offshore team in a different geographic location is not set up professionally, this can quickly become complicated and opaque. This can lead to delivery delays and poor quality of finished products and services. It is therefore of the utmost importance to have a fantastic communication process. It is therefore best to use a service provider who already has experience in setting up offshore teams and synchronizing them with existing teams.
Intellectual property protection
It goes without saying that companies share confidential information and business ideas with their offshore team. Problems can arise in countries where there is little or no regulation of a company's intellectual property rights. The consequences of this can be the passage of proprietary information and the unlawful patenting of intermediates.
Different communication styles, approaches to solutions, attitudes towards conflicts and decision-making styles can be cited as primary cultural factors that can lead to differences of opinion between workers. Therefore, make sure that your offshoring service provider understands both your culture and the culture of the outsourced professionals.
Which is the better business model?
Finding the right balance between the distribution of core and non-core competencies in a company is not always easy. Outsourcing and offshoring both have their advantages and disadvantages.
For short-term projects that last no more than a few months, quality outsourcing is usually the strongest option.
However, if you run a business that wants to improve your operations by putting together a team chosen from a large pool of trained professionals - while maintaining complete control of the process - offshoring is the way to go.
There are some challenges you may have to overcome, but the end result is that you can work with a team that you can call your "own". By working directly with your offshore team, an efficient workflow can be created without compromising the output quality.
However, quality offshoring requires the support and guidance of experts in the field. Seasoned technology experts who can help you build a passionate and dedicated offshore team. If you'd like to learn more about how offshoring can be used to grow your business, contact one of our experts to schedule a free consultation.
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