Offshoring Definition
Offshoring can be defined as a practice of processing business operations from one country to another country usually from developed industrialized countries to less-developed/developing countries with the motive of cutting down the cost of doing business, enjoying tax benefits, and complying with less stringent regulations.
Explanation
- The process of business outsourcing in the overseas market for expanding the business and reducing the cost of business operations as in the case of developing countries, usually there are lenient environmental regulations low labor cost, more proximity to raw materials, favorable tax conditions.
- There are various offshore financial centers, such as Bermuda, Cayman Islands, Switzerland. Different financial centers have different levels of transparency and regulatory standards.
- OFC’s improve the flow of capital and business transactionsBusiness TransactionsA business transaction is the exchange of goods or services for cash with third parties (such as customers, vendors, etc.). The goods involved have monetary and tangible economic value, which may be recorded and presented in the company's financial statements.read more. For some, it is a means of reducing tax liabilities. Offshore business generally takes place among foreign banks, deposits, investments, and corporations, etc.
Offshoring Examples
- There are individual banks that offshore their back-office functions to other countries that provide an efficient and cheap workforce.
- Manufacturer offshore the first stage of production of goods in another country where the raw material and labor cost is cheap and keeps finished products in its own country.
- Labor services of staffing agencies offshore to other countries.
- Goods are imported from foreign markets to domestic markets by the retailers.
- Import Inputs and raw materials from cheaper markets.
Evolution
- First offshoring dates back to the 1960s when in the developed world jobs in the manufacturing sector moved out of the country to the overseas market than in the 1970s; the service sector jobs were outsourced to different countries.
- Primarily factories got transferred from developed to developing countries, which caused a structural change in the world from industrial to post-industrial society.
- Reduced cost of transportation and communication during the 20th century with a higher difference in pay rates made offshoring an easy option. Then with the growth of the internet, fiber optics and world wide web offshoring became a usual practice.
Causes
- To stay away from protectionism and making full utilization of free trade areasFree Trade AreasFree Trade Area are trade agreements undertaken on a regional basis or as trading blocs. There is no barrier to import and export defined goods and services in a defined area among the member countries. Among the famous examples of free trade is the North American Free Trade Agreement (NAFTA).read more in the overseas market.
- To reap the benefits of cheap labor cost as it is low in offshore markets.
- To make full utilization of resources available.
- To supply goods and services in international markets for the targeted audience.
- To get skilled and efficient workforce supply.
Importance
- Companies that offshore their businesses may offer their services and products at lower rates, but still, they earn huge profits as the cost of production gets cheaper.
- The resources that are not available in the internal market can be accessed easily in the international market with the help of offshoring.
- Processes that are offshored like customer service, information technology, software development, etc. will be handled by experts; hence the problem of talent shortage and a specific skill can be dealt with.
- Focus on main business activity can be maintained as the back-office task can be offshored. This leads the company head to focus on core business and improve productivity and output quality.
- New technologies can be embraced to speed up the process of business, which helps in making the best use of investment with the least interruption.
- With this help of business risk management can be easily done at the time of technical crisis, natural calamities, or market fluctuations. The other part of the company will have things in a proper place to respond rapidly to any uninvited situation.
- Consumers also get benefited when offshoring a business due to affordability as they can save more money, which in turn will increase the value of the company in the economy.
- This globally also provides a wider talent base that leads to the utilization of new skills, innovative strategies, and new capabilities.
Offshoring Advantages
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- Increased Availability – When offshoring a business, different time zones, and workforce with 24*7 working capacity, the availability of business increases. It provides a wider opportunity for the businesses to support their clients as and when needed.
- Reduced Risk – Multiple teams work in different countries to help in the reduction of risk. At the time of natural calamity or any uninvited danger, the data and products at multiple sites help in supporting the business.
- Control – This helps in having a dedicated staff working only for an individual company that leads to internal accountability of the business as from direction to training, the staff is done as the company head wants.
- Staff Access – Highly skilled and university staff is available in foreign markets, which becomes advantageous for the business looking for specific talent.
- Business Growth – Cost of production is reduced due to cheap labor and high tax savings that lead to a higher profit marginProfit MarginProfit Margin is a metric that the management, financial analysts, & investors use to measure the profitability of a business relative to its sales. It is determined as the ratio of Generated Profit Amount to the Generated Revenue Amount. read more of the business.
Offshoring Disadvantages
- Communication is one of the biggest hindrances in carrying out operations overseas as the languages and time zones are different.
- The exchange rate in different countries is ever-changing and different.
- Implications for Corporate social responsibility
- Companies have to incur additional cost of time and travel.
- Risk of quality and longer supply time.
- Legal and tax-related complications
Conclusion
- This is the strategic move for the financial advantage of the business new strategies, and new skill sets are provided by offshoring a business.
- The burden of a company head is reduced as a wide range of professionals are involved with a huge knowledge base, which helps in the expansion of business and, in turn, leads to higher profits buy reaping benefits of cheaper cost, expertise solutions, focus on core business activities, etc.
- Also, it has certain advantages as communication issues, additional cost, time travel, legal compliance, etc. Overall it is advantageous for large business organizations.
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