What is Offshoring?

Offshoring is a business strategy where a company moves part of its operations to another country, mainly to take advantage of lower labor costs. Unlike outsourcing, which involves hiring external organizations to perform tasks, offshoring may still entail the company managing its offshore operations.

Offshoring vs. Outsourcing

While often used interchangeably, offshoring and outsourcing are distinct concepts. Offshoring refers to the relocation of business operations to a different country, regardless of whether those operations are managed in-house or by a third party. Outsourcing, on the other hand, involves contracting work out to an external organization, which could be located domestically or overseas. The key difference lies in who manages the operations – the company itself or an external provider.

Advantages of Offshoring

Offshoring offers several compelling benefits for businesses looking to improve their bottom line:

Cost Savings: The primary driver of offshoring is the potential for significant cost reductions, particularly in labor, manufacturing, and operational expenses.

Scalability: Offshoring allows businesses to scale their operations more flexibly and efficiently, adapting to market demands without the constraints of their domestic market.

Talent Acquisition: Companies can tap into a wider talent pool, benefiting from skills and expertise that may be scarce or more expensive at home.

Disadvantages of Offshoring

Despite its advantages, offshoring is not without its challenges and potential drawbacks:

Cultural and Language Barriers: Differences in language and culture can lead to misunderstandings and inefficiencies in business operations.

Quality Control Issues: Maintaining consistent quality standards across geographically dispersed operations can be difficult and costly.

Political and Economic Risks: Offshoring exposes companies to the political and economic stability of the host country, which can impact operations unexpectedly.

When to Use Offshoring?

Offshoring works for a broad set of activities where economies of scale are. It offers higher cost-saving potentials compared to nearshoring, but the complexity to manage is higher as well. Therefore, we recommend offshoring to far away countries only for larger teams. For more details, you can read our Nearshoring vs Offshoring blog post.

Modern approaches to Offshoring using EOR

Previously, offshoring was mainly used by large enterprises that could afford the effort of establishing and maintaining an additional presence in another country with lower labor costs like India. There was a certain scale needed – meaning large teams abroad – before they could benefit from cost savings. That is the reason why many SMEs did not use offshoring in the past. The team size a typical SME would have hired abroad would have been too small. The potential cost savings would have been diminished by the additional effort of establishing and maintaining an additional legal entity. Especially in such complex countries like India.

However, this has changed. We have several clients that use FMC Group as an EOR provider to establish their own offshore team. We call the service Offshoring by Employee Leasing. The approach is very simple. FMC Group hires employees in the offshore country on behalf of the client. The client takes over the functional management of the employee while we take over the administrative part (paying salary, payroll tax, social security, etc.). For some clients, we take over additional tasks like recruitment, providing office space, purchasing notebooks and mobile phones, etc. This works for all company sizes and many different use cases, as there is no minimum team size – we have clients that start with one employee abroad.

Do not hesitate to contact us if you are interested in this topic.