Offshore outsourcing is an outsourcing model to access skilled talent from other countries at lower costs. In contrast to outsourcing, where the tasks can be outsourced to any third party irrespective of nationality, offshore outsourcing focuses particularly on external service providers from foreign countries.

The tasks outsourced to other countries include business process outsourcing or BPO, customer support, IT support and accounting which are mostly routine in nature. However, lately even some specialized business verticals like market research, data analysis, syndicated reporting, research and development, which were earlier being performed inhouse, are now being outsourced from offshore locations under a new outsourcing model called KPO (Knowledge Process Outsourcing).

Offshore outsourcing definition

In simple terms, offshore outsourcing is relocating businesses or parts of businesses activities to a foreign location. It often involves hiring external companies from other countries for manufacturing and providing non-core business processes at lower costs.

Let’s take an example to understand this better. Imagine Ford Motors spends USD 1000 to manufacture one car in the USA. On top of that it has to spend another USD 100 per car for providing after sale customer service. It sells the car for USD 1500 and makes a profit of USD 400 after deducting its manufacturing and customs service costs. For simplification, let’s assume there are no other costs involved.

But soon Ford Motors decides to relocate its manufacturing unit to India. This step helps the company to lower its labor cost and ultimately it spends only USD 700 to manufacture the same car. On top of that, it has to spend only USD 30 on providing after sale customer service. A simple calaculation here shows that Ford Motors can save almost USD 350 extra which translates to a profit of USD 750. 

The two entities or parties involved in offshore outsourcing often bind themselves in a mutually agreeable contract outlining the period of contract terms, payment specifications and quality of deliverables. 

Development of offshore outsourcing

The concept of offshore outsourcing emerged in recent years as globalization got fuel. This is when countries, particularly in Asia Pacific, chose to open their borders for other (particularly western) countries to conduct businesses. The western countries soon discovered the advantages of labor arbitrage (difference in labor costs for similar tasks in two different countries/regions).

The labor costs in western countries are higher as compared to countries in Asia or Latin America. Moreover, the labor laws are also more stringent in western countries. Therefore multinational companies, or MNCs soon took advantage of labor arbitrage to save billions by moving business operations to other countries where skilled labor was available at discounted rates as high as 80-90%. 

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However, instead of hiring the talents directly under their payroll, MNCs partnered with local companies to conduct a part of their businesses. These business processes were often non-core in nature like back office operations, customer support service, accounting and bookkeeping, payroll management, tele calling and IT support and maintenance.

Parallely, many MNCs moved their manufacturing to countries like China, South Korea, Taiwan and Vietnam to reduce manufacturing costs in their native countries. While the MNCs retained their exclusive rights over design and patent, they licensed independent contractors for manufacturing.

Offshore outsourcing vs. Offshoring

People often use the two terms; offshore outsourcing and offshoring, interchangeably albeit wrongly. While both terms are related to moving business to foreign countries to avail skilled labor at lower costs, there are some stark differences between offshore outsourcing and offshoring.

Offshore outsourcing means contracting a third party from a foreign country. The contract outlines the scope of work and what part of the business the external entity to handle. The ultimate objective is to reduce expenses. The external company works independently and it can do similar business processes for multiple companies simultaneously.

On the other hand, offshoring is setting up business operations and manufacturing in a foreign country (mostly to a developing country) to leverage labor cost arbitrage. Rather than contracting to an independent contractor, the parent company sets up its own offices, manufacturing facilities and other business processes. This helps the company to reap the benefits of lower labor costs and lower living costs in the destination country.

Advantages of offshore outsourcing

Access to a high skill workforce at lower cost is probably the most important advantage of offshore outsourcing. But it’s not limited to cost alone. Tax benefits, regulatory benefits, and ease of business expansion are some other benefits that offshore outsourcing offers.

Let’s discuss major benefits that offshore outsourcing offers to companies.

Lower labor costs

This is, by far, the biggest advantage why companies choose to outsource from offshore countries like India, China, Taiwan, Vietnam and Bangladesh. The third party in these countries charge less for the same service that their counterparts in the west. This becomes possible because the living costs in these countries are far cheaper than western countries.

Access to specific skills or expertise

Companies need specialized skills to cater to their business needs. Sometimes fulfilling such needs internally becomes challenging. Even if they get access, the cost becomes too high compared to developing countries. 

Ever since the outsourcing marketplace has grown substantially, several companies have evolved with expertise in niche skills. For example, several companies have evolved into being top providers of bespoke market research, data analysis, and market intelligence services. Hiring such a company gives businesses the immediate access to all such skills needed to expand businesses and make them more profitable.

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24/7 coverage

Call centers for customer service, for example, or IT support – working with companies in another time zone can be a boon since they can operate when your company might be offline. In addition, to be able to offer round-the-clock services, many overseas providers now have multiple locations around the globe.

Enhanced knowledge of overseas markets

Companies already doing business in foreign markets or considering expanding their customer base globally may find working with an offshore outsourcer beneficial in other ways. Foreign employees may have a better understanding of regional trends, markets, business risks, and cultural norms in their country than domestic employees can offer.

Tax and regulatory benefits

The governments in developing nations often provide tax breaks and other financial incentives to attract foreign companies to do business with an offshoring partner in their jurisdiction. This helps the foreign countries to generate employment while helping foreign companies to cut down expenses.

Ability to focus on higher-value tasks

Like other types of outsourcing, offshore outsourcing can free up in-house resources for other priorities. By shifting some of the workload to an outside source, for instance, internal employees can focus on higher-level tasks, like strategizing and decision-making.

Greater efficiency

Many offshore outsourcing vendors have developed specific expertise and rigorous processes that enable them to perform certain tasks more quickly and efficiently than a company might be able to achieve by itself.

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