Offshoring describes the transference of responsibilities and processes to internal or external resources abroad.

Offshoring as a business strategy has been in existence since the 1960s. At first, it was mainly used by the producing industry to obtain material and pre-products and to relocate the production of products abroad. To outsource services abroad, however, is a much more current strategy. This can be put down to the acceleration of globalization and the development of new information and communication technologies, which practically dissolved geographic borders.

On principal, one can speak of Offshoring, when tasks are relocated across geographical borders. This can regard entrepreneurial responsibilities as well as business processes, like the relocation of a company’s own production to a foreign country. A company, which is considering Offshoring is presented with two choices: to either outsource in-house, which means to establish a branch office in the respective country, or to assign the responsibility to an external service provider.

A fundamental difference between Offshoring and Outsourcing is that Offshoring does not necessarily imply external procurement. Assignments, which were processed in-house, can still be handled by a company’s own personnel abroad. Offshoring therefore merely describes geographical relocation.

Nearshoring

One type of Offshoring is the so-called Nearshoring. While Offshoring usually implies the relocation to a country outside of one’s own continent, Nearshoring describes the relocation to a country on the same continent.

Most companies designate cost reduction the primary goal of Offshoring. To a certain extend, a deterioration of quality and friction losses are budgeted, as a higher focus is on the cost advantage rather than the value performance. Costs can particularly be saved in the area of personnel expenditures, as in most countries, especially in Eastern Europe and Asia, the cost of labour is significantly lower. A software engineer in India, for example, costs 80 % less than a colleague in the USA. Other main motives for Offshoring are the gain of new customer groups and the opening up of new markets.

Possibilities and Risks of Offshoring

Apart from the many possibilities of Offshoring, one also has to consider the risks.

An overview of the Opportunities and Risks of Offshoring

Opportunities	Risks
Cost reduction • Transparency of costs • Reduction of labor costs	Increase of costs • Especially transaction costs
Performance and quality optimization • Increase of flexibility • Increase of efficiency • Accessing new know-how through competence of service provider (only with Offshore Outsourcing)	Performance and quality deficits • Loss due to standardization • Deficient…
Concentration on core business • Focus on core competencies • Relief of management • Legal and tax obstacles can be circumvented in the Offshoring country	Dependency (only with Offshore Outsourcing) • Relying on service provider • Loss of know-how • Security issues • Communication
Large pool of competent, skilled workers	Problems of communication • Language • Culture • Time difference

The most important advantage of Offshoring is the possibility to save costs of up to 80 %. This reduction of costs is mainly due to the significant wage fluctuation in countries in Asia and Eastern Europe. Another reason to practice Offshoring is the substantial pool of competent, skilled workers in successful Offshoring countries like India, which means that labour costs can be lowered significantly. Furthermore, a company has the possibility to avoid problems, with which it is confronted at its current location. This particularly concerns legal and tax issues, which could be circumvented in the chosen Offshoring country. The risk of having to depend on a service provider, which is the problem with Outsourcing, can be avoided with Offshoring. The company remains process owner and stays entirely in control.

However, one should not underestimate the risks of Offshoring. In addition to the risks of Outsourcing, which can almost all be transferred to Offshoring, one has to pay heed to additional factors when it comes to Offshoring.

Problematic circumstances in the new location can present a risk when it comes to internal transference as well as outsourcing to an external service provider. The loss of control is a further possibility as well as doubt as to the trustworthiness of information, which is communicated from far away. Additionally, one needs to consider the problems of a foreign language and cultural barriers, which are usually difficult to dissolve, particularly when it comes to an entirely new language and culture.

A company should only decide whether Offshoring is the right strategy after careful consideration of all the pros and cons.