Offshoring remains a powerful business strategy used by companies around the globe to enhance efficiency, reduce costs, and access a global talent pool.
Initially popularized for manufacturing, the offshoring model has expanded to a wide range of industries, including IT services, customer support, finance, and more.
As businesses continuously strive to stay competitive, understanding the key benefits and challenges of offshoring is essential.
While offshoring to popular destinations like India and the Philippines has been widely discussed, Vietnam is quickly becoming a top choice due to its growing economy, skilled labor force, and strategic location.
In this article, we explore the pros and cons of offshoring, with a special focus on why Vietnam should be at the forefront of your outsourcing decisions.
What is Offshoring?
Offshoring refers to the practice of relocating specific business functions to another country, typically to take advantage of lower costs, specialized skill sets, or operational efficiencies.
This can include manufacturing, customer support, IT services, and other core business processes. Offshoring can take various forms, from setting up a subsidiary in a foreign country to partnering with an offshore service provider.
As companies look to scale and remain competitive, the right offshoring partner becomes key. Vietnam has increasingly positioned itself as an attractive offshoring destination, especially for companies seeking cost efficiency, innovation, and a skilled workforce.
The Pros of Offshoring and How to Take Advantage of It
1. Reduce Operational Expenses for more Cost Efficiency
One of the most compelling reasons to go offshore is the cost savings.
While wage disparities are a significant factor, Vietnam stands out not just for its low labor costs but also for the overall economic efficiency it offers. For example, software developers in Vietnam typically earn significantly lower salaries compared to those in Western countries or even other Asian markets like India.
A developer in Vietnam might earn an average annual salary of $9,000 - $17,000, compared to $100,000 - $170,000 for a similar role in the U.S.
These cost savings don't just apply to salaries but extend to office space, utilities, and business infrastructure, all of which are significantly cheaper in Vietnam compared to Western countries.
For companies looking to optimize their budget without sacrificing quality, offshoring to Vietnam offers undeniable financial advantages.
2. Access to a Highly Skilled Workforce
Many developed countries, particularly those with aging populations, are experiencing significant talent shortages, especially in the tech sector.
The rapid digital transformation is increasing demand for highly skilled workers, but the supply is not keeping pace. In countries like Japan, Germany, and many in Europe, the aging workforce is contributing to a shrinking pool of young professionals in fields like software engineering, artificial intelligence, and data science.
In contrast, countries with younger populations, such as Vietnam, offer great potential. Vietnam, with a median age of just 31 years, has an expanding, dynamic labor force eager to embrace modern technologies.
The country has significantly increased the number of STEM graduates, with 30% of Vietnamese students graduating in these fields in recent years, well over the USA (20%) and France (26%).
3. Discover new Strategic Locations for Global Business
Offshoring is not only a strategy for reducing costs or accessing specialized talent; it is also a gateway to discovering new countries and markets.
Establishing a presence in an offshore location can provide valuable insights into local business practices, consumer behavior, and cultural nuances, which are essential for future market expansion.
Companies that successfully integrate offshore operations often find that their understanding of the new country’s economy, infrastructure, and consumer needs gives them a competitive edge when it comes to launching or scaling their products and services.
In this context, Vietnam is a particularly attractive option.
Positioned strategically in Southeast Asia, it lies at the heart of one of the world’s most dynamic economic regions.
Over the past few decades, ASEAN countries, particularly those in the Indo-Pacific area, have experienced some of the highest economic growth rates globally.
Vietnam, in particular, stands out due to its rapid development, low labor costs, and strong trade relationships with global giants like China, Japan, South Korea, and the U.S.
Its geographical location provides easy access to the broader ASEAN market and other key economies in Asia, making it an ideal springboard for businesses aiming to tap into the region's growth potential.
This advantage is complemented by Vietnam's robust digital and logistical infrastructure, which has significantly improved in recent years, enhancing its role as a regional hub for trade, technology, and talent.
4. Take Advantage of Different Time Zones for 24/7 Operations
Outsourcing is a powerful strategy for businesses looking to extend their operational hours and provide continuous services across different time zones.
By partnering with teams in regions with differing working hours, companies can ensure that their operations never stop. This approach, often referred to as a "follow-the-sun" model, allows businesses to maintain a 24/7 cycle of activity, ensuring that projects are always progressing, customer service inquiries are handled promptly, and technical support is available at all times.
This is particularly beneficial for industries like IT development, customer support, and customer relationship management, where real-time solutions and fast response times are critical.
In this regard, Vietnam offers an excellent complement to companies based in the U.S. and Europe.
For example, with on average a 12-hour time difference, when teams in the U.S. finish their workday, teams in Vietnam can pick up where they left off, allowing for continuous development and support.
This strategic time zone positioning maximizes productivity by creating seamless handovers between regions, ultimately accelerating project timelines and improving customer service through quicker response times.
5. Evolve in More Favorable Business Environments
Countries facing political or economic instability often face challenges such as inflation, frequent protests, and shifting regulatory environments, which can create significant risks for businesses.
In such cases, outsourcing to more stable countries can provide a safer and more predictable business environment. This is where Vietnam also stands out as a surprisingly attractive option!
Vietnam offers a very stable political environment with a one-party system, which has contributed to long-term continuity in policies and governance.
The government has been consistently supportive of foreign investment, especially in the technology, manufacturing, and outsourcing sectors.
In particular, Vietnam has implemented several favorable measures, such as tax breaks, subsidies, and investment incentives, to encourage foreign companies to set up operations. The country’s participation in international trade agreements like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the EU-Vietnam Free Trade Agreement (EVFTA) further enhances its appeal. These agreements provide access to global markets while ensuring a stable and reliable trading environment.
In parallel, Vietnam’s infrastructure has been rapidly improving, particularly in the major cities of Hanoi and Ho Chi Minh City. With modern office spaces, fast internet, reliable transportation networks, and advanced communication technologies, Vietnam provides a robust environment for businesses to operate smoothly.
Furthermore, Vietnam’s increasing investment in digital technologies and innovation hubs, particularly in the tech sector, ensures that businesses offshoring to Vietnam have access to the latest tools, technologies, and facilities to drive success.
The Cons of Offshoring and What to Do About It
1. Cultural Differences and Communication Barriers
Many companies report that cultural nuances and language barriers slow down collaboration. Miscommunications can lead to delays or misunderstandings that impact project timelines.
For example, in high-context cultures like Japan, indirect communication is common, which can lead to misunderstandings with Western partners used to more direct communication.
Although English is widely taught in Vietnam, nuances in communication styles can still pose challenges, particularly in rural regions or when collaborating with less internationally experienced teams.
Remote Resources Advice:
- Collaborate with outsourcing companies with western management.
- Conduct cultural sensitivity and communication workshops.
- Foster a culture of asking clarifying questions to ensure mutual understanding.
2. Legal and Regulatory Complexities
Navigating legal requirements in a foreign country can be challenging, particularly when it comes to labor laws, data privacy, and intellectual property (IP) protection. Countries with stricter or unfamiliar regulatory environments may add complexity to offshoring projects.
For example, India ranks 63rd out of 190 countries on the Ease of Doing Business Index (2020), with specific challenges in enforcing contracts and protecting minority investors.
The Indian IP framework, while developing, can be less aligned with Western standards, requiring careful compliance to safeguard proprietary information and manage data protection policies effectively.
Vietnam, which ranks 70th on the same index, has made significant strides to improve its business environment for foreign companies, particularly with streamlined processes for starting a business.
However, navigating tax regulations and IP protections in Vietnam can still pose challenges. For instance, contract enforcement and certain legal procedures may not be as robust as in Western jurisdictions, and IP laws, though improving, may not provide the same level of protection as in Western markets.
While Vietnam and India may appear below the global average, it’s important to note that they actually outperform several Western countries.
For instance, countries like Luxembourg (72nd), Greece (79th), and Malta (88th) rank lower. Furthermore, Vietnam and India are not far behind major economies such as Italy (58th) and Mexico (60th).
This context underscores that while there are challenges, such countries offer relatively favorable environments for business compared to many developed economies.
Remote Resources Advice:
- Make sure your contract is in several languages
- Engage local legal experts for compliance and regulatory advice.
- Use secure systems and protocols for IP protection.
- Keep regular updates on policy changes and adapt accordingly.
3. Quality Control and Consistency Issues
Quality control and consistency can be a significant challenge when offshoring, especially when working with new locations and different service standards.
For example, outsourcing to China has historically been associated with inconsistent product quality, despite improvements over time.
Outsourcing customer service can be particularly sensitive to quality issues, as businesses risk variability in how customers are treated.
In a Deloitte survey, 78% of business owners reported feeling positive about their outsourcing partnerships, indicating that the majority are satisfied with the outcomes.
However, this also means that 22% of businesses are not fully satisfied, which highlights that outsourcing partners can sometimes become a liability if the right partner is not selected carefully.
While the majority of companies benefit from outsourcing, there remains a significant minority that faces issues like inconsistent service or quality problems.
Remote Resources Advice
- Check your potential outsourcing partner’s references, case studies and testimonials.
- Implement robust quality control processes and regular auditing.
- Define detailed quality standards and metrics for each stage of production.
- Offer targeted training to local teams to ensure quality expectations are met.
4. Currency Instability and Inflation Risks
In some countries, currency instability and high inflation rates can create significant challenges for long-term outsourcing contracts.
For instance, in recent years, Turkey and Ukraine have experienced substantial inflation, with local currencies fluctuating dramatically against the euro and U.S. dollar (Turkey's inflation surged from 19.6% in 2021 to 72.3% in 2022 and stood at 53.9% in 2023.)
This volatility can lead to unexpected cost increases for clients or require frequent contract renegotiations, creating operational unpredictability. For companies outsourcing to these regions, managing financial exposure and forecasting costs becomes complex, especially for long-term projects.
Vietnam, by contrast, maintained more stable inflation, ranging between 1.8% and 3.5% from 2019 to 2023. It had relatively stable currency performance against the euro and U.S. dollar in recent years, with fluctuations that are minor and generally predictable.
The Vietnamese dong’s stability, combined with moderate inflation, provides a more reliable financial environment for companies outsourcing IT services.
This stability helps minimize the need for renegotiating contracts due to currency risks, making Vietnam an attractive destination for companies looking for consistent and manageable operating costs.
Remote Resources Advice
- Add clauses in contracts to address potential currency fluctuations or inflation impacts.
- Negotiate options to make payments in stable currencies like the U.S. dollar or euro, which can help offset any inflation-related risk in the offshore location.
- Perform quarterly financial reviews with offshore partners to assess the impact of any currency changes and make small adjustments before they become significant issues.
5. Employee Morale and Public Perception
Outsourcing is often perceived negatively, especially in Western economies where there is a fear of job losses and rising unemployment.
Employees in home countries, particularly in industries like IT, may worry that offshoring jobs will lead to redundancies or wage stagnation. This can result in a drop in morale and productivity, especially in the face of recent massive layoffs in tech companies globally.
Public perception can also be affected, as customers may view outsourcing as a way to reduce costs at the expense of quality.
Lately, businesses in the U.S. have started outsourcing cashier roles to the Philippines via videoconferencing—another example where customers may feel a disconnect with remote staff, reducing the overall customer experience.
The trend of moving customer support or IT services offshore to countries like India often raises concerns about a lack of personal touch, responsiveness, or cultural understanding. For example, India, a longstanding outsourcing hub, has faced criticism for providing “impersonal” customer support.
Remote Resources Advice
- Explain the strategic reasons behind outsourcing, such as cost savings that allow reinvestment into R&D or customer experience improvements.
- Keep some level of local customer support to complement offshore teams, ensuring personalized service.
- Offer customers a way to provide feedback on offshore services, and use this data to improve quality continuously.
Conclusion
Offshoring offers businesses significant advantages, including cost savings, access to a highly skilled labor pool, and a stable business environment.
In this context, Vietnam's rapid economic growth, strategic location in Southeast Asia, and government support make it an increasingly attractive destination for companies looking to outsource IT services, customer support, and other critical business functions.
However, to fully capitalize on these benefits and mitigate the risks associated with offshoring, it is essential to partner with a trusted outsourcing provider.
This is where Remote Resources can help.
As a leading provider of offshore resources, Remote Resources offers a deep understanding of the local market dynamics, high-quality talent, and efficient business solutions tailored to meet your unique needs.
Partner with us and access Vietnam's benefits while minimizing the challenges associated with quality control, cultural differences, legal complexities, and currency risks.
