Offshoring is a relocation of a business process like research and development (R&D), finance and accounting, manufacturing and production or of the total business itself usually from a developed country to developing countries. Top reasons are privacy, lower labor costs, cheaper goods, favorable tax conditions and lenient regulations.
Offshoring is often associated with the word “outsourcing”, which is a term used for hiring third parties in executing a certain business process. Malaysia, India and the Philippines are some of the preferred countries for Business Process Outsourcing, financial management tasks, and information technology related jobs. Hong Kong and Singapore now also have stronger business environments in Asia while Seychelles and the Commonwealth of Dominica are two good options in Africa and the Caribbean.
If you’re one that qualifies for offshoring, have the resources and willpower to do so, and are very eager to improve your profit, you might consider learning more about the challenges, benefits and opportunities of offshoring.
One of the most challenging topic on offshoring is taxation. Double taxation may occur if parts of the regulations are missed. Intensive study on the tax implications of both countries is vital. Tax evasion charges must also be proactively foreseen. Your hired team of professionals must make sure you are not evading any amount of tax due and to be able to defend you should the need arises.
Finding the right location is another challenge. Various considerations such as form of government, available and proximity to resources, economy, labor force, language and culture should be reviewed. Basing your choice solely on the amount you would save is a fool hardy action when choosing your offshoring location.
There will also be concerns on training and quality standards of the workforce. Sometimes, the locals of your chosen location will not have the adequate skills and education to provide you with your desired level of competence to meet your needs. Training costs must be allocated to ensure the quality of your service or products are maintained. Remember to provide sufficient overseeing and effective management skills to make it work.
The last real challenge in offshoring is finding the right service provider for the task. If all you do is look on the web, you will find a wide range of companies offering offshore services, But be careful the levels of satisfaction will vary wildly, it will normally be a process of both parties becoming accustomed to each others ways of doing business and making sure that the chosen provider is seen as an extension to the business and not just another contractor, this is especially true for customer service and production outsourcing.
Tax benefits are also available for offshore businesses. Depending on the regulations between your primary country and the one you chose to offshore, you will save large sums of taxes. Aside from this, you will also be able to enjoy tax deferment benefits. By deferring tax to be paid in the future, cash outflow is reduced and therefore increasing capital.
Internationalizing is also a good way to protect businesses from inflation and other weak economy implications which reduces risks. Lower labor rates, operational costs and more affordable raw materials in the less-developed country will also increase savings. For US based businesses, maximization of Foreign Earned Income Exclusion maximization is possible.
In the diplomatic point of view, offshoring is beneficial to both countries’ relationship with each other. Free trade agreements will increase and might even be improved. Demand for jobs will rise in the host country, lowering the unemployment rate and improving its economy. The downside is that as the jobs rise in the other country, the jobs in the developed countries fall. Overall, diplomatic statuses between or among countries will improve because of the reduced cultural barrier.
Lastly, executives consider offshoring because of the flexibility, less bureaucracy and privacy.
First opportunity arising from offshoring is business expansion. Because of the relatively cheap commodities and services plus the government’s encouragement, it is easy for companies to expand. Foreign investments in a less-developed country are helpful in creating a stronger economic status.
Diversification is also a very important opportunity that should not be missed when offshoring. Create new products, establish new niche markets, think of more innovative ways to improve your business. Use your resources well and take risks.
Internationalization will also garner a higher value of your intellectual property. Do not miss out on the opportunity of additional earnings from your IP.
Now let’s go back to the basic question – do you really need to go offshore? Finding it out is your homework. The important thing is to equip yourself with indispensable knowledge about the specific needs of your business and the opportunities that await you overseas. Just make sure you read up to date and accurate information and that you are dealing with the right people.