Offshore Outsourcing: Definition, Benefits, and Trends
- March 29, 2022
- 13 min read
- By Kirti Goyal
TABLE OF CONTENTS
The term business process outsourcing (BPO) dates back to the 1970s and has an interesting history. What began as a mechanism for businesses to efficiently manage their call operations is now a multibillion industry that spans IT, manufacturing, and back-office functions like human resources, payroll, and accounting, among others.
Madhavan Narayanan had stirred a little Twitter debate with this cheeky tweet on the history of offshore outsourcing in the US, but the general consensus remains that it began towards the end of the twentieth century.
It was the time when manufacturing companies began hiring external firms to handle non-core business operations and bring efficiency to their processes.
The BPO market today has a net worth of over $232.32 billion and is expected to grow at a compound annual growth rate of 8.5% in the near future. The financial impact of the COVID-19 pandemic is definitely one reason behind the prediction, as companies will continue to offshore non-essential tasks to cut down overhead.
But it alone doesn’t account for the changing stance of business owners towards outsourcing and virtual assistant services.
BPO is no longer a mere tactic to drive organizational efficiency. Instead, it’s a “competitive, strategic marketplace tool” that allows companies to boost their response times and develop new products and services quickly.
Mostly linked to the cost benefits of hiring remote workers from developing countries earlier, it is now emerging as an alliance wherein the BPO provider helps its client achieve targets that were impossible earlier.
This post brings you an in-depth analysis of offshore outsourcing. It prepares you to outsource non-core tasks to focus on your competitive advantage by highlighting the benefits and risks associated with offshore BPO.
Get ready to dive into the world of outsourcing to make an informed choice about your business operations.
Before that, here are the key takeaways:
- Offshore outsourcing is a business model in which a company entrusts its operations to a third-party vendor with centers in another country due to lower tax rates, lenient environmental regulations, lax labor laws, and easy availability of resources.
- Companies outsource to reduce operating costs, optimize resources, and achieve efficiency. They delegate back-office tasks to virtual assistants to focus on the strategic planning side of the business and cement a solid brand image in the domestic and foreign markets.
- The rise of automation and change in consumer behavior in recent years are two factors shifting the BPO economy. They will push more US-based businesses to explore the outsourcing market in developing countries to support their functions and keep customers happy.
What is offshore outsourcing
It refers to the practice of delegating operational or supporting processes like manufacturing and accounting by a company to an external service provider to reduce costs and time to market. Offshore outsourcing allows you to access the expertise of a global talent pool and focus on the core aspects and strategic side of your business.
Offshoring is often used interchangeably with outsourcing, but they are not mutually inclusive. While the former is about physical relocation and setting up a unit in another country like China, outsourcing refers to hiring a third-party vendor that may or may not be located in the home country.
In an article for Forbes, Jonathan Webb described outsourcing this way:
Image Source: Forbes
Combined together, offshore outsourcing is an arrangement where you hire a vendor that operates from an overseas location. For example, Office Beacon is a US-based company that has offices in India, Uruguay, and the Philippines and provides virtual assistants to SMB owners in the US. There are four types of offshore outsourcing:
- Information technology outsourcing (ITO)
- Business process outsourcing (BPO)
- Offshore software development
- Knowledge process outsourcing (KPO)
The distinction between offshoring, outsourcing, and offshore outsourcing is an important one. And you need to be aware of the pros and cons of each to make the best decision.
Let us look at the benefits of offshore outsourcing for businesses in detail below.
Benefits of offshore outsourcing
Many wrongly think tax breaks to be the top reason why firms prefer offshore outsourcing and hire virtual assistants from overseas. It is true that US corporate income tax is one of the highest in the world. And companies indeed benefit financially from collaborating with the offshore staff.
But there are no roundabout methods that businesses can use to bypass the US law or avail definite tax breaks for outsourcing. Instead, companies hire BPOs to:
- Cut expenses: You can decrease operational costs for keeping a full-time staff and physical office. A lower-cost labor market like India or the Philippines enables you to work with a global talent pool using variable-cost models like fee-for-service plans instead of fixed-cost models when working with local employees.
- Boost speed and efficiency: Virtual assistant services help companies finish their tasks in less time and accurately. You save resources and optimize your performance. For example, a real estate VA can easily handle complex databases that allows realtors to focus on inventory issues and manage sales pipelines.
- Attain flexibility: Virtual assistants are skilled at tasks that kill productivity and efficiency. They perform tiresome chores that frees up your time to devise strategies for releasing new services, drive business growth, and mitigate risks.
- Go global: Businesses have access to a talented workforce from around the globe when they outsource to a BPO provider with many delivery centers. Virtual assistants working as part of these companies can serve customers in multiple languages and cut expenses on the rarely used divisions.
- Solidify core competencies: Virtual assistant services allow SMB owners and entrepreneurs to hone their competitive advantage. They can focus on finding their business differentiators and reiterate upon them to position themselves in the market firmly.
- Improve non-core offerings: Top-notch BPO providers offer excellent services to their clients in non-essential business areas. They regularly invest in the latest processes and tech stack that deliver remarkable breakthroughs to help companies better their side products.
The next section discusses the factors you must consider before hiring virtual staff from overseas.
Factors to consider before offshore outsourcing
Begin by assessing the nature of the job you could delegate. Does it involve IT development, manufacturing, or back-office support functions like accounting? Clarity on what needs outsourcing will help you pick a BPO provider that has operating centers in the right offshore locations.
While China became a favorite destination for production offshoring after its entry into the World Trade Organization in 2001, India won the US software industry and companies that wanted to outsource back-office tasks after the drastic technological progress in telecommunications.
Apart from having a pretty high wage difference between the US and offshore countries and scope for remote work, the following factors are key to making a sound decision about offshore outsourcing:
- Infrastructure: Physical location of the BPO provider trumps any other consideration for most firms, but the infrastructure is equally crucial. If the vendor operates out of a makeshift office with no proper facilities, their staff may face productivity or efficiency issues.
Does the service provider have well-maintained and equipped delivery centers and invest in the latest technology to support its clients are therefore good questions to ask before settling on an agreement.
- Experience: The BPO provider should have significant industry experience serving clients of your business size and type. An excellent way to judge that is by looking at their portfolio and workflow processes.
Go to their website and spend some time on the ‘About Us’ page. The testimonial reviews should also offer a clue to their processes and attest to the quality of work they deliver.
An industry leader would have an esteemed clientele and standard operating procedures to cater to divergent needs, be it for an SMB owner or enterprise company.
- Expertise: There are niche segments like travel, knowledge process outsourcing, legal process outsourcing, human resources, and information technology-enabled services in the BPO industry. Check if the vendor specializes in a particular area and measure that against your requirements.
Does your business operations call for an expert or a general BPO service? Choose a vendor to support your functions accordingly.
Not thinking through the above questions can lead to huge financial losses and risks.
Risks of offshore outsourcing
Offshore outsourcing is infamous for giving business owners a hard time because of the time zone differences. Unless you find a service provider who works the same shifts, collaborating with offshore teams can become challenging. Below is a funny take on this side of the BPO industry, but most executives find it hard to adjust their schedules to accommodate updates from overseas workers.
The second reason why companies fail to make the most of the partnership with a third-party vendor is that they rush headlong into offshore outsourcing without carefully weighing its cons. These include:
- Linguistic and cultural roadblocks: The culture gap is a major barrier to seamless coordination with remote staff. Every country has a distinct culture and language preferences, and you must know how people there conduct business to communicate with them effectively.
- Hidden costs: Running fees in contract renegotiation, infrastructural upgrades, currency fluctuations, vendor selection, layoffs, and internal transitions are not explicit at the outset. If you do not factor them in at the initial stages, they can skyrocket your budget for hiring virtual assistant services.
- Brand damage: Cultural flubs, missed deadlines, and quality issues stemming from working with an amateur can dent your image and make recovery difficult. Though some of it might be within your control, links to a provider that underpays its staff or offers poor working conditions will be hard to defend.
- Below average quality: The workforce in developing nations like India faces enormous work demands and earns low wages, making it difficult for the staff to invest in your business deeply.
This can cause the product and services quality to take a backseat.
It is why checking out the ‘About Us’ page on the vendor’s website and its employee turnover and retention rate can speak volumes ahead of the actual negotiation.
Make sure the lower cost doesn’t let you compromise with quality and miss out on working with an industry expert.
Ravi Aron and Jitendra Singh, in their article “Getting Offshoring Right” for Harvard Business Review, discussed three reasons behind an unsuccessful partnership between a firm and BPO vendor:
- Lack of strategic division: Companies prioritize the physical location of the vendor over a standard method to determine the processes they should keep in-house and outsource. The right overseas destination is undoubtedly crucial, but after separating the core tasks from non-essential ones.
- Inaccurate risk analysis: Firms do not register the full import of sending their processes overseas. Most professionals run a simple cost/benefit audit that does not account for the leverage the BPO provider gets when companies hire them to tackle their operations.
- Inadequate information: Most businesses don’t realize that BPO is no longer an all-in or out option. They can now choose between buying services from dedicated virtual assistants, getting into joint ventures, or establishing their own captive centers overseas rather than using models that are ill-fitting for their purposes.
Apart from the above challenges posed by offshore outsourcing due to poor planning, there are risks specific to IT-related services. When you delegate tasks like software development to an external provider, it gets difficult to check the quality of the code without a local engineer, not to mention the threats of potential data breaches and vulnerability disclosures.
Dylan Rosario, Chief Innovation Officer at Rowzzy, put forward these concerns in his comment on a LinkedIn post. The below image highlights why businesses in the US are hesitant to hire foreign developers, but these issues become invalid when you work with a BPO provider like Office Beacon that has a proven track record of delivering excellence.
Image Source: LinkedIn
Here’s what you can do to get off on the right foot and collaborate efficiently with the service provider.
6 tips to ace business process outsourcing
Begin by undertaking extensive research and background check on the available options. Review all the crucial details and screen out anyone who doesn’t fit or align with your business goals. Look for a partner that has significant industry experience and a solid portfolio to back it up.
Once that’s sorted, implement the following tips:
- Specify needs: Consider how you can get the key stakeholders on the same page about your needs for offshore outsourcing. Consult with them to define expectations, objectives, potential risks, and scope for sending operations overseas.
And use this collective input to shortlist a few candidates from your prior research.
- Ask for a proposal: Go through the collected input and settle upon the qualities you would need in the BPO provider. Measure it against your audit on the current requirements, decide the service management model, and request a proposal from the shortlisted companies.
- Select the vendor: Take time to judge the quality of the received proposals. The effort put into creating them can hold the clues for assessing whether the service provider is the right fit. Understand the primary business process outsourcing solutions they offer and what quality check systems and metrics they use to measure their performance.
- Negotiate the deal: Contact the selected firm on the contract schedule. It’s pretty standard to decide the service parameters, but the agreement can get a bit tricky with the schedule. Ensure it carries both and has easy-to-follow clauses on the hidden costs.
- Assign the work: Set up a common collab channel internally as well as with the service provider to make it easier for everyone to keep a tab on the delegated work and updates. Create a plan for the work transition and send out the tasks to the vendor.
- Nurture the relationship: Do not think your work over after hiring the vendor. Invest in proactive virtual meetings, track performance, and offer regular feedback to forge a successful partnership. Be on the lookout for proper governance during the contract period and send inputs to fix the course if things go off track.
A few additional pointers to include in your checklist while searching for the correct vendor:
- Assess if the potential hire offers valuable insights into the tasks you should keep in-house and outsource. A credible firm will never try persuading you to outsource your core competencies.
- Check if the vendor offers ideal working conditions and work-life balance to its employees. It will help you to judge its productivity as a business unit and predict work quality well ahead of time.
- Gauze whether the BPO provider is only interested in the money or wants to act as a strategic partner genuinely interested in seeing your business scale. An experienced org has definite workflows and processes to deliver quality work and collect feedback from their clients.
The financial impact of the pandemic, the rapid shift in consumer interaction with digital media, and the demand for multichannel communication in the US are leading businesses to embrace offshore outsourcing increasingly.
India and the Philippines are current favorite offshoring destinations, but oversaturation is pushing the way for Uruguay, Romania, Egypt, and Mexico to enter the BPO market.
The steady progress in technologies across automation and artificial intelligence is another emerging factor for businesses sending their operations overseas.
As the BPO market size is predicted to surpass $400 billion by 2028, here are some key predictions:
#1 Training will help overcome skill shortage
The lack of experts to manage high-end services for US companies made imparting skills to their staff a must for vendors in India and the Philippines. Business leaders and governments in the two countries will continue investing in training their BPO workforce to avoid losing valuable clients.
#2 Startups will become dedicated BPO customers
Business process outsourcing is pivotal to achieving long-term ROI goals. Startups experienced this in a big way during the pandemic years and will continue harnessing its power in the future.
#3 There will be higher transparency
The entry of small businesses into the arena has made it imperative for BPOs to be more transparent with their clients. Unlike the 2000s, when only big names outsourced processes, new entrants will push the service providers to be open about their SoPs, tech stack, challenge areas, and pricing.
#4 Politics will have little to no influence on BPO
The Trump era had raised concerns over the future of the BPO industry due to the changes in tax, trade, and visas policies. But the experts do not believe the shifting political orders in the US will have any significant impact on the BPO.
The industry needs people with diverse skillsets and expertise, and that will make the market less prone to disruption due to individual country politics.
#5 Companies will get laser-sharped focus to meet consumer needs
Firms will bring together external resources to better serve customers. This will revamp the organizational structures, and businesses that are on the innovation side will send many tasks offshore.
Next up are a few FAQs about offshore outsourcing that come my way. Let’s take them up before concluding this post.
Frequently asked questions
What are offshore outsourcing services?
Repetitive back-office jobs like data entry, payroll, accounting, human resources, and customer support make up a large chunk of offshore outsourcing services. Companies hire virtual assistants to perform them and cut down their operational costs on a physical office and in-house staff.
Is offshore outsourcing ethical?
There is a fair share of political debate on the topic of business process processing in the US. Forbes reported that consumers (wrongly) believe it to be a concentrated effort by corporations to ‘screw over the little guy.’
But this stems from a wrong understanding of outsourcing, offshoring, and offshore outsourcing.
These terms are often confused with each other and used interchangeably.
What’s the difference between shore and offshore outsourcing?
Based on the location of the service provider, BPO can be categorized as onshore, nearshore, or offshore. While offshore outsourcing has been the focus of this post, let us quickly cover the other two.
- Onshore outsourcing: The virtual assistants in this arrangement are in the same country though they may work from a different state or city for your business. For example, if you are in California, an onshore BPO would mean working with a vendor in a state like Alabama or anywhere else in the US.
- Nearshore outsourcing: It refers to a setup in which you outsource business operations to a virtual assistant in a neighboring country. A BPO in Mexico is a nearshore service provider to a business in the US.
Offshore outsourcing can accelerate your business growth but only when done right. Partner with a BPO service provider who understands your vision and has the resources to realize it. Get together with your strategic business partners and craft a list of non-core operations to outsource right away.