There comes a point in the lifespan of any company when a business owner must make a critical decision about how to develop further. Most companies competing in this global economy must eventually choose whether or not to use offshoring solutions if they want to continue to grow or scale.
It’s a tough decision during these uncertain economic times. With a recession on the horizon, the strategic implementation of offshoring solutions to lower costs for processes could mean the difference between survival and bankruptcy for many businesses.
The Difference Between Outsourcing and Offshoring
Let’s first distinguish between offshoring and outsourcing, as the two are often confused. Outsourcing is when a company contracts with a specialized third party to perform a part of its business process. This usually means no direct management and supervision of the third party’s employees.
On the other hand, offshoring is when a company moves or sends in-house jobs overseas. This means they maintain management and supervision over the employees and how the process is done.
When Should You Not Offshore?
On paper, there are a lot of benefits when you expand through offshoring. However, a bit of nuance is needed to fully understand the right timing for offshoring. Let’s look at some instances when it’s a bad idea.
You Need Frequent Communication with Target Customers
If you’re a startup that’s just taking off and still in the middle of developing your product, you need to be in constant direct contact with your customers. Offshoring customer care services to a third-party provider will have more disadvantages than advantages as you build and adapt your product to your client’s needs.
Trade-off decisions on critical features need to be weighed with frequent communication and feedback from target customers. It’s simpler when done with an in-person team but becomes more difficult with a remote team with no firsthand knowledge of your product and KPIs that may not be aligned with what you want to achieve.
Multiple Teams Working on a Complex Project
Offshoring also becomes more of a hindrance than an advantage when multiple teams work on a complex project. When several companies and subcontractors with different core competencies need to be in sync, adding another layer to the communication channel doesn’t make sense.
Projects That Need Core Competencies
Third, projects that require your company’s core competencies should not be offshored. For example, a firm that provides accounting services for clients and businesses should keep its central team in its headquarters. In this scenario, the company’s software development team providing the accounting team’s tools for their services would be a better candidate for offshoring.
This lets you keep the core accounting knowledge and skills in your company. At the same time, a remote team creates the tools to deliver those services better.
Projects That Are Rushed and Require IPs
Fourth, speaking of knowledge, it’s generally a bad idea to offshore a process that involves a core intellectual property. IPs are notoriously more brutal to protect when they’re offshored. While many offshore companies claim that their countries have stringent laws on intellectual properties and contracts that come with a lot of safeguards, it’s simply safer to assume that it can be stolen and there will be little you can do about it when it does happen.
Offshoring for Short Term Gains
Lastly, offshoring to gain immediate savings on cost and to help recover a project that’s been running late generally comes with more headaches than they help with. Your business gets the best returns from offshoring when it’s done with a long-term strategy in mind instead of as a reaction to bad business practices.
When Should You Offshore?
With all that in mind, let’s discuss when you should consider offshoring to further grow or scale your business.
Your Business Has Matured
The best time to offshore is when your company has matured, and your finances tell you that you’ll save way more in taxes with the move. Check your numbers. Nomad Capitalist argues that the best time to start considering offshoring is when your business makes over $100,000 in annual profits.
You’ll start feeling the pinch from taxes around those profit levels. And not doing anything about it hurts more than putting in the time and effort to offshore some of your processes.
For Maintenance and Support
The second is when your business has already begun to settle with fully developed products and services. For software development companies, it’s when all you need is maintenance, support, and extension of legacy code. At this time, the only IP your business needs to share with the offshoring provider is the knowledge of product deployment and not the code itself.
Non-Mission Critical Projects
Finally, offshoring also works particularly well when doing non-mission critical, non-IP-based ancillary projects with well-defined objectives. This lets you use offshoring’s most important benefit, i.e., cost savings, while minimizing risk.
Offshoring Will Not Solve All Your Problems
It’s best to view offshoring as an option when you’ve finally established your business on stable foundations instead of being a band-aid solution for rushed and unplanned projects.
It can be hard to decide when it is most appropriate to be deployed, but one thing is for sure, it requires a lot of consideration and number-crunching to realize its full benefits. Most companies mistakenly join the frenzied demand to offshore without mapping out and verifying if it’s really needed.
But when it does make complete sense, the benefits of offshoring are astounding and can propel your business into the global market.