The risks and returns of offshoring

| January 27, 2018

Over my last two articles ‘Outsourcing v Offshoring. Let’s clear up the confusion’ and ‘The pros and cons of Outsourcing’ I discussed the differences between Outsourcing and Offshoring and the advantages disadvantages and criticisms of Outsourcing.

This article I’ll discuss the advantages and disadvantages of Offshoring, but firstly to recap a little by redefining the two terms. Outsourcing is the transfer of the management responsibility a part of a business’ operation that occurs internally to an external third party. Offshoring is the transfer of part of a business’ activity to a different country. To make this slightly more confusing a lot of businesses combine the two and outsource an activity to a location in a different country.

So, what are the advantages and disadvantages of Offshoring?

Advantages

Cost
Labour and infrastructure costs are lower in many developing nations. With technological advances it has become easier to locate operations in another country, lowering costs which can translate into lower cost of consumer goods. It may also make the difference between a business being profitable or not.

Access to favourable business environments
By shifting operations offshore, a business may lower the tax rate if the new host country has a lower company tax regime. The business might also receive certain tax or tariff concessions from the new host country. Labour policies might also be more ‘business-friendly’. This is not just developing countries either. Destinations like Singapore and Dubai offer business friendly regulations.

Control
A business may choose to offshore, as opposed to outsource, so it does not lose control to a third party.

Skills
Yes, while we might not like to think so, many countries have a greater pool of the skills required than can be found in Australia. The Philippines is a popular country to offshore to and it has a large pool of English-speaking, university educated people. They even have pools of post-qualification educated people such as accountants with Australian CPA or CA qualifications.

International talent

Sometimes the skills needed for a particular role cannot be found in Australia. Offshoring widens the pool for talent.

What would they do?
Pretty much anything. One thing every business should do, and not just those looking to offshore, is to develop systems or processes for your business. Systemising tasks within your business allows others to replicate that task.

Think about a musician recording a song in a studio. They are ‘systemising’ that song so it can be played anywhere in the world, by anyone, and it will always sound exactly the same. Make a record of a task and anyone, anywhere should be able to replicate it.

Disadvantages

Taking jobs from Australia
Yes and no. Yes, jobs are going offshore however a business does this so it can grow, access talent, be more profitable etc.. It then can spend more money on other goods and services in Australia or can employ more people in core business roles in Australia, and in turn pay more tax in Australia. It does not have to be a win/lose scenario – it can be a win/win scenario.

Exploiting overseas workers
Critics contend that moving jobs to a third world or developing country is exploiting workers that do not have the same conditions as they would have in Australia. If managed correctly this is not the case. Reputable offshoring companies go to great lengths to ensure that the overseas workers are part of the local team.

When finding an overseas worker, they begin with testing the employer to determine their personality, management style etc. so the hired worker is a good fit. They stress that the offshore worker is not a third-party contractor but one of your team.

Multinational companies are always moving their staff around different geographical locations and when they do they pay them more like local staff. If an Australian bank was to transfer an Australian worker to London they would pay that worker in pounds and more akin to a British worker.

Good offshoring to a developing country may mean paying local rates which are lower than in Australia however they might also be more than an equivalent local job and come with better workplace conditions such as hours, leave entitlements, or staff benefits.

Managing offshore staff is difficult

I recall hearing Dale Beaumont of Business Blueprint talk about his offshoring experience and he quoted someone saying, “you can make money or excuses, but you can’t make both”. People only have problem managing offshore staff when they don’t have the right tools, or the communication is poor, but that is the same with staff sitting in the same office location as you – it’s not unique to offshoring.

The bottom line

In addition to these benefits and drawbacks, if offshoring is combined with outsourcing then some of the advantages and disadvantages of outsourcing get combined. The bottom line is, like all business decisions, you need to decide what is right for you and your business. If you’re not comfortable don’t do it.

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Stephen Barnes

Stephen Barnes is the principal of management consultancy Byronvale Advisors and the author of ‘Run Your Business Better’. He has spent over 20 years advising clients from start-ups to publicly listed companies and prides himself on understanding their issues and producing pragmatic solutions.

One Comment

  1. Scott McGratg

    January 27, 2018 at 11:35 am

    Good intro to some of the factors and differences