Offshoring – Definition, advantages & disadvantages explained

The rapid globalisation throughout the last few decades has also brought offshoring increasingly into focus. Increasing cost pressure in order to remain competitive, as well as the opportunities offered by digitalisation, drive this trend even further in some cases. This strategy can provide internationally operating companies with many advantages from which they can profit in the long term. However, offshoring involves risks that you as a company should definitely take into account.

In this article we will explain to you what exactly offshoring is and what advantages and disadvantages it can provide. Afterwards, you will be well informed to be able to work towards a well-founded, initial decision.

What does offshoring mean?

In German, offshoring stands for the relocation of certain business areas, functions, or processes abroad. A classic case in recent decades, for example, was to move call centers abroad through offshoring. Customers from Germany are still able to call a local number, but are then forwarded to the call center abroad. The customer is not aware of this, because everything happens in the background.

The term offshoring is often confused with outsourcing. Whereas with offshoring everything remains in the hands of the company, with outsourcing these functions are transferred to an external service provider, which can also be located abroad. So if a company moves an area abroad but continues to manage it directly, this is called offshoring. This usually happens through a subsidiary in the target country.

How does offshoring work?

This is often a year-long undertaking that needs to be well planned by the company. After all, a considerable part of the business usually has to be relocated. The first step is to identify the appropriate area that is suitable for offshoring. Often these are services such as the previously mentioned call centre, or software development and IT services.

Responsibility for these offshoring areas often remains at headquarters. As mentioned above, a subsidiary is a suitable form of business, but joint ventures are also a popular option in order to reduce risk. With this option the choice of partner is a decisive factor in achieving a sustainable and successful result.

What are the reasons for offshoring?

The internationalization of the business world is one of the main drivers for offshoring. Companies from China or India pay only a fraction of the labour costs, which consequently makes it increasingly difficult for DACH companies to remain competitive in the long run in terms of costs. So most companies initially pursue a reduction in costs with offshoring. But there are other reasons that can play a role in this decision.

One of these is the opening up of new markets, both for additional sales and on the procurement side. The company can benefit directly from local growth opportunities. It may also be possible to circumvent trade barriers and reduce export costs. 

Finally, there are also tax reasons that make this strategy particularly attractive. Taxes are often lower and special economic zones lure companies with subsidies and tax breaks. Especially companies from the DACH region can benefit thanks to offshoring in Europe or Asia. As a long-standing and reliable experts, we advise you comprehensively on the background, facts and all necessary steps

What are the advantages and disadvantages?

There are numerous advantages that can help companies strengthen their competitiveness in the long term. Possible disadvantages should always be kept in mind.

Advantages of relocating abroad

– Reduction of costs

– Access to many skilled workers

– Realisation of growth

– Improvement of the supply chain

– Government support

Reduction of costs

As mentioned multiple times above, one of the most important advantages of offshoring is the reduction of costs of all kinds. This is exactly why many companies move their services, development or production abroad to benefit from the favourable mix of labour pool, market and capital.

Access to many skilled workers

The shortage of skilled labour in our country is currently one of the biggest challenges to remaining competitive and achieving a maintainable growth. In contrast, there are millions of skilled workers available in Eastern Europe or Asia, most of whom are also excellently trained. India, for example, shines with excellent software developers who, moreover, have historically been fully proficient in English. 

Realizing growth

Relocation abroad is often the first step towards building up further business in the target country. After all, the subsidiary or joint venture already has local representation. Unlike in western countries, typical offshoring locations shine with high economic growth and many opportunities. You can gain an early foothold through offshoring to benefit from these growth opportunities.

Improve logistics

Additionally, you also simplify the logistical effort, especially if you want to produce, procure or sell in the target country. Often there are strict import and export regulations that can be dealt with more quickly and in a more targeted manner through local representation. Local employees are more familiar with them and can deal directly with the authorities without the need for translators, for example, or misunderstandings paralyzing the processes.

State support

It is not unusual for classic offshoring countries to want to attract companies to boost their own economies. As a means of doing so, they sometimes give attractive tax rebates or subsidies, for example, to set up an office, a factory, or a branch. In many countries there are separate economic zones that make it easier for international companies to implement their business activities in a more targeted manner.

Disadvantages due to relocation abroad

– Negative perception

– Higher communication costs

– Legal and organisational challenges

Negative perception

Offshoring is often accompanied by negative (public) perception. The relocation of jobs abroad is always a sensitive issue that requires good PR to reduce the negative effects. Therefore, even during the planning of offshoring projects, seeking the help of experts who have a lot of experience in communicating such topics should be prioritized.

Higher communication costs

The office or the new production facility abroad is often located in a different time zone and local employees are not all fluent in German/English. In practice, this can lead to communication difficulties, misunderstandings and longer lead times. Therefore, it is essential to streamline and standardize communication channels.

Legal and organisational challenges

While the laws in offshore countries are mostly favorable for employers, there are also many local peculiarities in labor law to consider. In addition, the legal situation as well as legal certainty is not always entirely transparent for companies. Other aspects, for example in organization, data security and the protection of intellectual property could also present problems. This possibility of reduced planning security, especially compared to the DACH countries, must always be kept in mind and ideally advised on by specialists who are well acquainted with the destination. 

Offshoring vs. outsourcing, farshoring, nearshoring and onshoring: these are the differences

Whereas in offshoring the company itself provides the service, for example through a subsidiary or a joint venture, in outsourcing it passes on the provision of the service to an external service provider. This service provider is usually located abroad, but this is not a necessary condition.

Farshoring and nearshoring both belong to offshoring by definition but specify the geographical region more precisely. A DACH company seeking to relocate to Eastern Europe is nearshoring. Asia, on the other hand, would be classified as farshoring. Onshoring also involves relocation, but to a more favorable location within the country in which the company has its headquarters, for example.

How to make offshoring a success

Offshoring is a complex topic that brings with it many advantages but also risks. If a company wants to reduce its costs in the long term, offshoring is usually the ideal way to do so. Proper planning is one of the most essential conditions for success right from the start. 

Usually, the first step is to identify the right area for offshoring. Depending on which area it is, it is then necessary to find the right target country. A detailed consultation with an experienced company can help you to overcome this and all other challenges. For example, a professional interim management company knows all the framework conditions, or the way to communicate efficiently, and can advise you on local legal regulations and specifics.

Conclusion

Offshoring, nowadays, is an important instrument to reduce costs, find skilled labor and benefit from other aspects of globalization. It allows companies to build sustainable and cost-effective structures that are usually not possible in form and scale domestically. However, it is also necessary to master all challenges to profit from these sustainable advantages.

With the right partner at your side, successful offshoring is much easier, faster and minimizes risk. Our experienced interim managers will help you take your first step, for example, to Asia. You can benefit directly from our local interim managers with many years of expertise – in the region. 

Contact us now and benefit from our many years of expertise in precisely these areas.