What is Offshoring?
Offshoring is a process that involves shifting production and delegation of tasks to foreign specialists and then delivering those services to them. This process is somewhat complex and implies that many companies employ employees overseas, usually in developing countries where wages are very low. A major advantage of offshoring is that it facilitates manufacturing, IT, marketing, sales, and customer service processes. Offshoring has existed since the first factories were opened abroad. Since then, it has taken on new forms.
There are many people who think they know what offshoring is, but they misunderstand this term as a synonym for outsourcing. Let's clear up any confusion and explain what's going on.
As part of offshoring, employees working overseas are considered employees of the company. They can work independently, in a large office, or as a team. In most cases, offshored specialists are a part of the company's brand. An offshore operation usually refers to foreign office management, a R&D center, or a dedicated development team that resides abroad and manages its activities there. To date, offshoring has remained the most popular method of reducing company's costs and increasing its profitability. However, offshoring is not only associated with pros. It has its cons as well.
As part of this blog post, BitsOrchestra team will discuss offshoring thoroughly. In the course of this blog post we will try to prove why offshore net developers can bring a lot of benefits for your company. Also, we will attempt to identify potential problems that can arise for companies that outsource their personnel.
Benefits of Offshoring
The offshoring model is known for its cost-effectiveness. Offshoring offers many benefits for companies who relocate their business operations overseas.The following benefits of offshoring software development are listed.
Lower Labor Cost
For American companies, it is more affordable to retain foreign employees because their salaries are lower than those inside their home countries. Essentially, offshoring will make good financial sense for business owners if offshore employees are able to perform the same type of work as their American counterparts, given the much lower labor costs. For manufacturing and service businesses, reducing labor expenses can have a significant impact on overall profitability, decreasing operations costs, increasing revenues, and maximizing revenues and earnings.
Employing lower-paid employees can seem like an attractive solution for businesses looking to cut expenses. Due to this, developing countries, like Ukraine, offer an excellent market for IT professionals (with salaries as low as 70% less than in developed countries).
For companies that would like to offshore to a developing nation, numerous incentive programs are available. As part of their frameworks, certain states may provide tax incentives for foreign investment. It is a huge deal on its own!
In addition to salaries, offshore countries offer much lower compensation and benefits than the United States. Additionally, employers can reduce their workers compensation premiums by hiring U.S. employees. Also, employers can reduce payroll taxes, medical insurance, workers' compensation, and other expenses associated with U.S. employees.
It is cost-effective and can increase business growth to offshore IT services. By reducing labor costs and taxes, companies can expand services and improve products. Paying less for specific operations allows more opportunities for strategic reinvestment.
Returning earnings back to the U.S.
Tax benefits, financial incentives, and other cost savings from offshoring will enable an organization to earn more income and maximize profits.
Alternatively, companies can hire offshore service providers that provide 24/7 operations to cover time zones that are not covered by their operations. Business process offshoring allows the U.S. team to turn over unfinished tasks to the offshore team so there is continuous work on a project until it is complete.
Availability of skilled labor
Ukrainian, Philippine and Indian offshoring locations have an abundance of skilled labor from which U.S. companies can recruit employees for their offshoring operations. These countries have a rich pool of English-speaking talent, college degree-earners, and skilled workers.
Types of Offshoring
We have already discussed the concept of offshoring, but some companies may opt for a modified form of offshoring. Offshore outsourcing, onshoring, and nearshoring are the three types. A company located outside of your country performs your activities as part of the offshore outsourcing model. It refers to enlisting the help of foreign companies, agencies, or freelancers with specialized skills.
Limitations/Disadvantages of Offshoring
Offshoring IT services is quite different from in-house management in all respects. Find out if your business can benefit from this and explore the possible limitations.
Language and communication barriers
Foreign government and business transactions are often conducted in English in offshoring countries. In general, offshore workers possess a better understanding of English than their foreign counterparts, but there are differences in their depth of understanding. It can also be problematic to have offshore employees with strong local accents speak with foreigners with strong accents.
Cultural and social issues
Companies based offshore face cultural and social differences not found in their origination countries. The American executive, for example, maybe candid, outspoken, while his Ukrainian employees are more reserved and unaccustomed to this style of communication. This can lead to misunderstandings when both parties do not communicate what they intend to say to each other.
Quality control problems
Under the manufacturing arrangement at the offshore location, it may be challenging to ensure that a product is strictly built to the parent company's standards. It is still possible for quality to be affected by country-specific differences in working cultures, languages, logistics, and supply chains, even if the parent company provides quality guidelines for its factory.
Effect on jobs in the home country
If a company offshores its jobs to overseas subsidiaries or hires offshore service providers, it might have to terminate the employment of its local workers. There can be a significant increase in unemployment in the communities where the laid-off workers reside and this can affect the economy of that area. It is also important to consider the impact on remaining jobs at the factories or offices where many employees were laid off. Employee productivity could be affected by stagnant wages, uncertainty about job security, and low morale. Business operations could be affected by low productivity as a result. Similarly, the company's public image can be damaged if the media is filled with negative stories about local jobs being lost to other countries.
Time zone adjustments
Offshoring manufacturing and services can be complicated by time zone differences between the country of origin and the country of offshoring. Management in both countries can find it difficult to organize shift patterns that are not disruptive. Both sides may have trouble finding an appropriate time to speak. Communication gaps can also affect the decision-making process. As an example, when the offshore country must make a crucial decision, it must consult the home country as a first step. Waiting and getting a decision may affect urgent tasks that are time-sensitive and deadline-driven.
Limited control over offshore teams
If you collaborate with third-parties (such as offshore teams), you cannot control certain decision-making processes. A new offshore delivery manager might need to be established every time your delivery manager switches projects.
A lack of coordination and control over daily activities
Occasionally, you may feel that your project moves more slowly than expected. Identifying what exactly went wrong may be difficult since partners often behave inconsistently. This may make accepting explanations difficult for you. Timely offshoring operations are crucial for avoiding delivery delays.
Pricing is not transparent
You run the risk of falling prey to a shady offshore agency if you outsource parts of your company. It may seem unreasonable to you that your colleagues abroad are pressuring you to take action that requires additional funds or manpower. A vague pricing policy leads to overcharging. Based on this point, choose your partners carefully.
Risks and Challenges of Offshoring
Despite the benefits of outsourcing IT services, there are still challenges to consider. We can minimize the risks if we understand what they may be.
Retention of Employees
The modern workforce wants results, i.e. they want to be promoted and are easily bored with small, routine tasks. It's not surprising that your colleagues abroad have the same concerns. Because of remoteness, HR professionals may find it even more difficult to manage internal employee issues. For this to not occur, it is important to implement a direct engagement model (so that they feel like a part of the organization).
Risk of Data Leakage
Considering expanding internationally, be aware of the differences in laws and security between countries. In order to ensure the security of your data, you should speak to a local attorney or qualified consultant.
In addition, offshore countries have their own laws that must be followed. Offshoring requires understanding the terms and conditions in detail before establishing an overseas team.
Offshoring to Ukraine
Ukraine is well-known for its ability to outsource IT, consistently ranked among the top outsourcing countries. The following are three reasons why your company might benefit from the Ukrainian IT market.
Skilled Software Developers
Ukraine has over 200 educational institutions that train IT specialists. There are more than 16000 graduates each year entering the job market, increasing competition and stimulating talent development. The Ukrainian software developers have been praised by those who have worked with them.
Working Knowledge of English
Insufficient language skills have been identified as a barrier to effective communication. However, this shouldn't be a problem for Ukrainian developers. Over 80% of local IT specialists speak English at an intermediate or advanced level. So if you go offshore to Ukraine, there shouldn't be any misunderstandings.
Quality to Price Ratio
Ukrainian rates and wages are several times lower than those in the U.S. or Europe, yet the quality of service is not compromised. Ukrainian specialists may also share helpful advice if they see a better solution to save time and money. With fierce competition, providing quality service is a crucial condition for success.
No matter if you want to find a list of companies to find a solution to your business problem, the process is basically the same for CTOs, PMs or procurement managers.
Offshoring is a great way to boost your business without spending too much. Consider all the pros and cons of offshoring before you decide. Identify what your company needs and find the best solution.
This article has hopefully explained what offshoring is and how it can benefit your business. In case you are interested, .net development service BitsOrchestra may be able to help.
As we provide you with the assistance you need with routine tasks and back office support, you can reap the advantages of offshore business and its cost-effectiveness associated with choosing this manner of conducting your business operations. Entrust your Offshore .NET Development project to Bitsorchestra and benefit from an entire ecosystem of digital solutions. Get the most out of your business in a short time.
It's time to act now that you know the advantages and disadvantages of offshoring! Hopefully, this will help you make an informed decision regarding whether offshoring is a good business model for your company. We can provide free expert guidance and advice on how to move forward if you decide to give offshoring a shot! We have a ton of experience and excellent teams of IT professionals in Lviv, Ukraine.
Our offshore team is capable of fulfilling tasks in software and web development, graphics design, illustration, and search engine optimization. Find out how our offshoring services can help your business expand and grow!