Offshore Basics: Definitions, Benefits and Challenges
We hear a lot these days about “outsourcing” and “offshoring.” But what do these terms mean, and why are we hearing so much about them?
First of all, let’s be clear on the terminology:
“Outsourcing” refers to the transfer of non-core operations from internal employees to an external organization. This transfer of non-core operations allows the company that outsources the work to focus on its core business. The organization that the work is outsourced to will typically have expertise in a given area, allowing it to add value and provide cost savings. For instance, many companies outsource payroll to one of the many available payroll vendors. The payroll vendors are able to add value in the area of payroll in a way that internal payroll departments can’t achieve. Another example is human resources departments that outsource background checks to vendors specializing in this area rather than driving to courthouses and checking criminal records themselves.
The term “offshore” refers to where the work is being performed geographically. In other words, if a task is “offshored,” then the task is being performed in another country.
“Offshore outsourcing” means that work is being performed by an external company in another country overseas. Many people simply refer to this as “offshoring.” Offshoring is taking place all over the world. The more common locations are Viet Nam, India, China, Philippines, Eastern Europe and South America. A derivative of offshore is “near shore” where work from the U.S. is performed in Canada or Mexico.
A trend that is here to stay
The current offshore outsourcing trend started in the 1970s when large multinational companies like General Electric began sending manufacturing overseas. White collar jobs such as programming came next and then companies began outsourcing their call centers to overseas vendors. Offshoring has become much easier to do and as we shall see, now even small companies hire offshore staff in order to achieve their business goals.
A variety of jobs are offshored, including some that many people never could have imagined going overseas. Not only are jobs in finance, information technology, human resources, scientific fields, and graphic design commonly offshored, but now lawyers are doing research and doctors are reading x-rays remotely. The variety is staggering. It seems that any position that can be offshored is being offshored.
Why are companies offshoring and what are the benefits?
There are numerous benefits to firms that engage in offshoring:
Access to talent
For certain occupations there is a greater availability of highly skilled and experienced employees overseas. Offshore outsourcing provides another way for companies to get the job done.
Companies can save 30-50% compared to the cost of a Australia.-based employee for the same level of performance, and oftentimes the offshore employees are more committed, grateful for the work.
Speed (ie, filling open positions quickly)
If you are recruiting a Australia employee, it can take a month or more to fill certain positions. However, given the availability of offshore employees, open positions can typically be filled more quickly.
Elimination of recruiting costs
Many companies pay recruiting fees to help find the most qualified employee. These fees are eliminated if you are using an offshore vendor to fulfill a certain function.
By using an offshore employee, you eliminate the time you would normally spend on searching job boards, recruiting, interviewing, orientation, managing vacation time and absenteeism, career coaching, and managing employee morale and motivation.
Reduction of legal exposure
Employee issues can be time-consuming and can escalate into legal liabilities. Using offshore staff eliminates certain legal exposure to employment liabilities.
Unlike traditional employee relationships, offshoring eliminates hiring and termination costs, allowing companies to quickly expand and contract their overseas staff in accordance with business needs.
Retention and loyalty
Many times companies are rewarded with higher levels of retention and loyalty from offshore staff because overseas employees typically consider working for foreign company to be prestigious.