Business Process Offshoring (BPO)

What is the definition of Business Process Offshoring?

Business Process Offshoring is the process of relocating Business Operations to a different country. This is usually done in order to take advantage of cheap labor or resources that are available in the new location.

Business Process Offshoring can be a cost-reduction technique, and it often leads to increased efficiency for the organization. The benefits of offshoring depend on the specific situation, but typically it leads to cost reductions and increased efficiency.

What are the Different Types of Business Process Offshoring?

Offshoring seems quite straightforward, but it can be divided into other categories. Its two main categories are:

  • Farshoring – Farshoring is when a company offshores to distant countries, usually those in another continent. This means that there will be time zone differences, as well as cultural differences and possibly language and communication barriers. Long-distance transportation may also be required to transport items to the offshore location. Farshoring can be very beneficial, as costs can be greatly minimized especially in offshore locations like those in Asia. In order to reap the most benefits while minimizing common barriers when farshoring, it’s important to choose an established and experienced offshoring company. Such companies will have flexible working hours to adapt to your preferred work times; use stable communication mediums and practices, and have security measures in place. Farshoring is often viewed as synonymous to offshoring, but this is not the only type of offshoring.
  • Nearshoring – Nearshoring is when a company outsources its business processes to companies in nearby countries, often sharing a border with the country where they are currently operating. You might wonder why a company would opt to nearshore if the target location is just close by. Companies opt for nearshoring for the same reasons most companies would opt for offshoring: to reduce costs and maximize business efficiency. American companies, for instance, would often nearshore to Mexico in order to lower operating costs. And with nearshoring, companies often don’t have to concern themselves with different time zones, cultural differences, language barriers, and other issues that may come up with farshoring. Nearshoring, however, is not applicable to all industries and for all countries. Since nearshoring happens with two nearby countries, the difference in cost-savings may only be minimal, and may not be enough to outweigh the cost and effort needed to nearshore.

Offshoring can also be categorized according to what is being offshored:

  • Production Offshoring – This is when a company offshores its manufacturing unit, importing the finished products from the offshore location to sell in the domestic market. Apple, as we’ve already mentioned, is a good example of this. The electronics company manufactures most of its products in China, where labor and raw materials are cheaper, and imports the final electronic products to the US and around the world.
  • Services Offshoring – This is when a company sets up units in other countries to perform service-related operations. Some common examples of this are offshore software development, customer service, accounting, and marketing. Services Offshoring: Unlike production offshoring, services offshoring often does not require companies to regularly travel to offshore locations or have items shipped. Offshore outsourcing companies can source, screen, supervise, and fully equip offshore skilled workers for them. This makes services offshoring a very viable option, especially for small to medium businesses seeking to get an edge over their competitors and grow their business without having to spend too much money.[1]

What are the advantages of offshoring?

1. Greater availability

Time differences across the globe make offshoring an invaluable tool in enabling 24x7 operations. For example, when it is nighttime in the US, it is daytime in India. Perhaps the biggest beneficiary of this is the customer service function in a business because it can operate 24x7x365.

2. Lower tax obligations

Offshoring to a country with lower taxes or booking profits in such a country can provide tax benefits to a business.

3. Decreased labor costs

Offshoring can decrease labor costs by reducing the cost of labor, while also increasing corporate profits. This is motivated by reducing manufacturing costs but has been more prevalent in Europe than in the United States due to different policies and cultural barriers. Offshoring can save companies money on labor costs and also offer access to cheaper specialized labor, easier introduction to new markets, and lower taxes and tariffs.

4. Greater cash flow

Offshoring can have advantages for businesses including reducing operating expenses, freeing up cash for other purposes, and improving profitability.

5. Reduced overhead costs

Reducing overhead costs can be an advantage of offshoring. For example, less office space is needed with fewer employees. The cost of employee benefits such as health insurance is also lowered when offshoring.

6. Greater flexibility

Offshoring can allow for a more flexible and speedy production process, as well as fewer production restrictions, making it easier to meet deadlines. However, because you're delegating work to another company, you have less control over the execution, which can cause discrepancies in how goals are reached.

7. Reduced risk

Reducing risk can be an advantage of offshoring because it can reduce costs and increase efficiency. By decreasing the risk of bankruptcy, offshoring can help businesses to protect their assets and continue operating.

8. Reduced time to market

Offshoring can reduce time to market and other advantages by reducing operating expenses, increasing availability, and reducing risk. Having a dedicated staff working for only one company can lead to increased profitability due to reduced costs associated with production.

9. Reduced risk of litigation

Reducing the risk of litigation can be an advantage of offshoring. By outsourcing work to another country, companies can reduce the likelihood of being sued. This can be beneficial for companies who are worried about the potential costs and damages that could result from litigation.

10. Reduced risk of intellectual property theft

Offshoring can reduce the risk of intellectual property theft by providing a secure location for work and by exporting valuable information and training to the offshore site. Documentation and valuation of such exports can be difficult but should be considered when offshoring sensitive information. Outsourcing can also reduce the risk of intellectual property theft by sharing sensitive business information with a third-party provider. Before outsourcing, it is important to do a due diligence check of the potential contractor and sign a non-disclosure agreement.

What are the disadvantages of offshoring?

1. Decreased quality

When a company outsources its production, they lose the ability to monitor and manage processes which can lead to a subpar final product. It is important to create iron-clad guarantees, clear guidelines, service-level agreements, and well-thought-through governance processes to ensure the acceptable quality of the final product.

2. Decreased customer service

When a company outsources content, it may experience decreased customer service. This can happen when the company outsources to another country and the time difference makes it difficult to offer 24/7 customer service. Additionally, the company may not have as much control over the quality of products produced by the third-party supplier.

3. Increased security risks

Offshoring to another country can lead to security risks because of insecure facilities, unreliable hiring practices for local staff, and lax local laws. It is important to identify and mitigate this risk.

4. Higher development costs

The disadvantages of offshoring include the potential for lower productivity in the home country due to the increased skill required for R&D, as well as decreased efficiency and a loss of jobs. Additionally, offshoring can lead to a loss of cultural knowledge and experience.

5. Increased time to market

Offshoring can increase the time to market because of lack of process integration, delays due to time differences, higher transportation times because of distance and location of production facilities, etc.

6. Increased cost of quality control

The increased cost of quality control can be a disadvantage of offshoring. Quality control costs can increase due to the need to monitor the production process more closely, as well as the need to ship products back and forth for inspection. In addition, offshoring can lead to communication difficulties, which can make it difficult to resolve quality issues in a timely manner.

7. Increased cost of turnaround

Offshoring can be difficult due to communication difficulties between offshore and onshore teams. The exchange rate is constantly changing, which can lead to expensive fluctuations in costs. In addition, offshoring has its own set of risks, such as legal and tax complications, that may not be considered when making the decision to offshore. Cultural differences can also create problems in communication and teamwork. As a result, offshoring can increase the cost of a turnaround for your business.

8. Increased cost of mistakes

Distance and culture can lead to unintended consequences such as a lack of process integration, communication, and control. This can result in mistakes that would be extra costly because of these same factors.

9. Increased cost of training

For offshoring, it is imperative that only stable practices, processes, tools, and equipment be offshored. The offshored employees must be trained in all of the above. However, this cost of training can go up substantially because of the separation of organizational boundaries and the resulting lack of constant interaction, communication, and control. Local factors such as language, culture, quality, and education of employees can add an additional burden on training.

See Also