The Benefits of Offshoring
Companies all around the world are experiencing a tremendous amount of pressure to stay ahead of the competition. However, organizations are faced with the dilemma of providing quality for their customers, while at the same time producing products and services at the cheapest cost. Organizations are in a constant fight to remain at the top of the food chain. The “top” no longer resides solely in the U.S., which means companies must be able to compete successfully on an international basis, not simply in their “backyards.”
Companies have adopted new strategies to lessen the pressure of our consistently growing consumer-based economy. A term that has been thrown around quite often in the news is offshoring. However, Americans have been weary of the implementation of offshoring, it has caused quite the controversy, buy why? According to Diana Farrell, author of, “Is it a Win-Win Game”, “Many businesses have turned to offshoring as a way to boost profits while many politicians believe that the gain is made only at the unacceptable cost of American jobs.” American jobs are being shifted overseas causing the economy to weaken. However, McKinsey Global Institute’s research has shed some positive light on the unfavorable topic of offshoring.
The most predominant benefit of offshoring is reduced labor cost. Nonetheless, entering a new market, accessing talent that is not prevalent in America, and avoiding regulations that are domestically enforced, are all underlying reasons organizations resort to offshoring. A significant wage difference is obvious in foreign countries. Research done by Diana Farrell, shows that a software developer in the US, for example, costs $60 an hour whereas one in India only costs $6 an hour. The savings incurred are tremendous, which in turn allows for businesses to increase their profits and investments, also improving the economy of third war countries.
By offshoring, companies are able to tap into a market of greater potential. The advantage of doing so is that companies now have access to a larger volume of potential customers. Entering new markets and providing services are vital for companies to stay afloat. Going hand and hand with that is having the best and highly skilled employees. With the new found employment opportunities, they are able to fill positions much more quickly, and employee recruiting costs are eliminated. According to Aaron Green, author of “On Staff,” For certain occupations there are a greater availability of highly skilled and experienced employees overseas. The U.S. has 4-5% overall unemployment and for certain in-demand positions there is practically zero unemployment. During the 1970′s: The Indian government put in place regulations that mandated that all foreign ventures have Indian majority ownership. Fearing government takeover, many large U.S. corporations, such as IBM, departed, leaving India in the position of fending for itself to maintain its technical infrastructures. This quickly forced the creation of schools to train students in technology.
Though the process of offshoring eliminates some jobs in the U.S., Americans and Foreign competitors have stood to benefit. Because of the reduced cost of manufacturing goods in foreign countries, those goods are being sold in the U.S. at cheaper prices. Products domestically made in the U.S., more likely than not, are much more expensive than products manufactured in foreign countries. Also, by company’s offshoring, they allow themselves to be accessible to a different market, which creates a higher demand of U.S. products. As a result, that money goes back into America’s economy. According to Diana Farrell:
Of the $1.45 – $1.47 of value McKinsey Global Institute estimates is created globally from every dollar spend a domestic company chooses to divert abroad, the US captures $1.12 – $1.14 while the receiving country captures on average 33 cents. In other words, the US captures 78 percent of the total value.
Since the adoption of offshoring, it has appeared to be the more attractive option, when facing a great deal of competition. In search of cheaper labor, better-skilled employees, and costs saving, companies have been sending jobs overseas. However, reasons such as privacy, legal tax advantages, less regulations, and asset protection are silent motivators. Offshoring has opened a horizon of opportunities for companies to cut cost, increase savings, create wealth, avoid taxes, protect assets, and dodge American regulations. Offshoring has allowed U.S. companies to enter into a larger arena. The pressure to stay ahead of the competition still remains, but companies that have implemented offshoring as a strategy, now have an advantage.