What Is Offshoring? Definition, Pros + Cons

Offshoring is the process of relocating business operations, functions, or services to a different country.

Businesses that practice offshoring typically want to access lower labor costs, tap into specific skill sets or talent pools, or establish a presence in a new market. Offshoring can result in greater efficiencies, standardization, and scale, allowing businesses to improve service delivery and increase profitability.

Offshoring example

For example, a company in the U.S. decides to move its customer support division to India, where labor costs better meet their needs. The company maintains its day-to-day functions from its original location in the U.S. but is offshoring some of its operations by hiring employees in India to perform its customer support needs.

Why companies adopt offshoring practices

There are various reasons why companies decide to adopt offshoring practices. Some key reasons a business may implement an offshoring project include the following:

Talent access. Businesses that offshore often seek to leverage lower labor costs or gain access to specialized skills more readily available in specific locations.
Global strategy. Companies establishing operations in different countries want to capitalize on particular advantages each location offers as they grow their global operations.
Cost consideration. Labor cost differentials and increased profitability often drive a company to offshore its operations.

Industries and functions most suitable for offshoring

While offshoring practices depend on a business's specific needs and goals, several industries and job roles are frequently associated with offshoring due to cost advantages, access to specialized skills, and the nature of the tasks.

These industries and job functions include:

Information Technology (IT)
Customer support and service
Business Process Outsourcing (BPO)
Human Resources (HR)
Manufacturing
Healthcare
Digital marketing
Engineering services
Research and analytics
Telecommunications
E-commerce and retail

Offshoring vs. outsourcing

While offshoring involves relocating business processes to foreign countries to capitalize on specific advantages, outsourcing involves contracting out specific internal business processes to an external service provider.

Businesses may outsource tasks to specialized third-party providers to leverage specific skills, resources, and expertise. Outsourcing can be domestic or international and often includes customer support, human resources, accounting, and IT services.

Overall, outsourcing is a broader concept that encompasses the delegation of tasks to external service providers.

Similarities between offshoring and outsourcing

Businesses may use a combination of both offshoring and outsourcing strategies to advance and improve their operations based on their need and goals.

Some similarities between offshoring and outsourcing that benefit businesses include the following:

Delegation. A company entrusts an external entity to manage specific tasks or functions.
Strategy. Offshoring and outsourcing are strategic decisions to improve efficiency, reduce costs, and access specialized expertise.
Risk mitigation. Businesses mitigate and decrease potential risks by relying on external partners with cost advantages or technical skills.

Advantages of offshoring

Offshoring offers businesses many benefits, including the following:

Greater availability

Offshoring allows companies to offer greater availability for their customers. With services available in additional locations and time zones at a lower cost, companies ensure there’s always someone available to assist customers.

Increased distribution and control

Offshoring also enables businesses to spread their operations closer to customers, suppliers, or clients for faster turnaround, speed to market, and increased distribution capabilities. Offshored processes can remain internal, so companies continue to retain control and influence decision-making in overseas operations.

Cost savings

Labor costs are often less expensive in offshore locations, especially for labor-intensive processes for manufacturing, customer support, and IT. Offshoring also allows companies to leverage cheaper in-country resources and reduce operating expenses.

These cost savings improve cash flow, increase profitability, and open opportunities for the company to reinvest in research, development, and growth.

Incentives

Companies utilizing offshoring practices may also receive incentives from local governments by establishing their operations in the country and hiring local employees. Countries often attract companies to offshore to their location with lower tax rates and more lenient laws and regulations.

Access to talent

Companies may require employees with skills or knowledge that are not easily accessible or available in their location headquarters. With offshoring, companies can access a wider talent pool with the specialized skills or market insights they need to perform specific business functions.

Global expansion

Offshoring allows businesses to establish a presence in a foreign country and grow their operations as part of their global expansion strategy. Offshoring enables companies to broaden their reach, expand their customer base, and gain insights into new markets.

Disadvantages of offshoring

Despite the advantages, offshoring also presents several risks. Some potential disadvantages of offshoring include the following:

Cultural and communication barriers

Offshore teams in multiple locations may experience differences in language, culture, and communication styles, leading to communication challenges and misunderstandings. Communication difficulties and frustrations may reduce collaboration between onshore and offshore teams.

These barriers can also increase operation errors, delays, and supply chain complexities, making it difficult to maintain consistent quality control and standards across different locations.

Time zone differences

Similarly, operating in different time zones can delay communication and project timelines. Scheduling meetings, coordinating tasks, and resolving issues effectively between distributed teams may present challenges.

Data security and privacy concerns

Offshoring may involve sharing sensitive data with external partners, increasing potential data security and privacy concerns. Companies must protect intellectual property (IP) and ensure effective privacy measures or risk issues with unauthorized use, disclosure, or infringement of proprietary information.

Compliance

Labor laws and commercial regulations vary from country to country, and navigating the differences is complex and time-consuming. However, failure to comply with local laws may result in severe legal and financial consequences, so businesses must ensure compliance with all applicable regulations and requirements when offshoring in foreign countries.

Hidden costs

Despite the cost savings often associated with offshoring, companies may face unexpected costs as they pursue operations in new locations. Hidden costs such as setup, employee training, travel, and unforeseen challenges can negatively impact a company’s overall offshoring budget.

Simplify global expansion with an EOR

Offshoring provides growing companies many benefits, and a global workforce management partner can help you mitigate and lower the risks of international expansion.

Whether you’re hiring high-value talent, creating a new revenue stream, or finding a low-risk path to a new market, Velocity Global provides a global workforce infrastructure as you expand internationally.

Velocity Global’s Employer of Record (EOR) solution enables you to test new markets without entity establishment. Through strategic guidance from tenured HR and legal experts, Velocity Global ensures compliance with foreign regulations, manages employee onboarding and payroll, and provides ongoing support for your distributed workforce.

Learn how Velocity Global can help you quickly and easily unlock untapped value in new markets. Contact us today.

Disclaimer: The intent of this document is solely to provide general and preliminary information for private use. Do not rely on it as an alternative to legal, financial, taxation, or accountancy advice from an appropriately qualified professional. © 2024 Velocity Global, LLC. All rights reserved.