The global outsourcing services market was valued at USD 620 billion in 2020 and is expected to grow at a CAGR of 5.54% over the forecast period to reach a total market size of USD 904 billion in 2027.
Even before the pandemic, companies were strategically relocating business processes in an effort to reduce costs, replenish talent, and step into new markets. Given the unprecedented amount of disruption brought on by the global pandemic, the impacts of the “great resignation,” and the ongoing need for efficient, resilient supply chains, outsourcing continues to attract attention as a viable corporate strategy.
Selecting the outsourcing option that best suits your business needs, whether it be on, near, or offshoring, takes careful consideration of several factors, not the least of which is brand risk.
There are very distinct pros and cons to each scenario. For instance, sourcing locally allows companies to meet the ever-growing demand for fast delivery times and locally made products; however, costs may be prohibitive. In this article, we take a look at the risks and rewards of on, near and offshoring.
But first, an overview and some informative stats.
Outsourcing: An Overview
Offshoring, nearshoring, and onshoring all fall within the outsourcing umbrella, referring to the process of transferring different segments or services of a company’s operational activities to another company, most often in an effort to reduce costs.
To help clarify the terminology, here is a quick explainer:
Offshoring: When a US company outsources to China or India
Nearshoring: When a US company outsources to Mexico
Onshoring: When a US company outsources to Austin, USA
Outsourcing: All of the above
Enticed by the access to the profusion of skilled developers and I.T. capacity available offshore, big hitters such as Apple, Google, and Samsung now all have offshore R&D offices, a sign of the advantages of offshoring.
Here are a few other interesting stats:
- Countries such as India, China, and Malaysia are the leading countries in Business Process Outsourcing (BPO—a subcategory of outsourcing that contracts out internal business functions such as Human Resources, Customer Service, or Procurement)
- In 2021, the global BPO market was valued at USD 241.7 billion. Propelled by an increased focus on core competencies and a need for efficiency improvements and organizational agility, it is estimated BPO will achieve a market size of USD 512.4 billion by 2030
- The global procurement outsourcing services market was valued at USD 2.70 billion in 2021 and is expected to reach USD 7.86 billion by 2029. “The growing demand to improve supply chain efficiency and effectiveness is also contributing to the expansion of the market. Additionally, the use of procurement outsourcing is being driven by the requirement to follow regulatory requirements and guarantee compliance,” says DataBridge Market Research
- Countries like Hungary, Poland, and Ukraine have risen in popularity, attracting foreign I.T. companies due to their proximity to Europe, lower operating costs, and high availability of I.T. professionals. Similarities in working culture with the U.S. and Western Europe ease B2B processes and SRM
The Upsides of Outsourcing
When you are limited in human and financial resources, it may make good business sense to focus on executing your core capabilities to the best of your abilities. If you are having difficulty filling your talent pipeline in your local market and are struggling with skill shortages, offshoring may allow you to get high-quality product development. Savings in fixed costs, development, and production can be substantial and redirected to core activities, so you can circumvent staffing issues, enter foreign markets, and continue to scale.
For example, if a company is focused on R&D and innovation, it can outsource the production of standard parts to a specialized supplier, minimizing costs. Any savings can then be reinvested into R&D, leading to new product launches, and gaining market share.
Offshoring, Nearshoring or Onshoring? (A US Business Example)
Here is a quick overview of the benefits of each:
Offshoring—outsourcing to distant countries such as China or India—is considered the most budget-friendly option, as skilled labor is abundant and costs are low. The difference in time zones can also be advantageous, allowing your business to work around the clock.
Nearshoring—outsourcing to a neighboring or more nearby country—eases logistics and can improve supplier management and relationship building, making travel less costly and time-consuming and thereby allowing for more frequent visits.
Onshoring—outsourcing within your own country—minimizes risks inherent to importing, such as language and cultural barriers, as well as customs duties and taxes, tariffs, and other levies and charges collected by governments.
The Downsides of Outsourcing
- Duties, tariffs, taxes, theft, human-made accidents, logistical bottlenecks, extreme weather events, currency exchanges—the list of risks that lie within the movement of goods is a long one. The longer the supply chain and the more borders, oceans, and lands to cross, the more threats there are to your business and the higher the likelihood of impact
- Outsourced teams expose your company’s data, I.P., and expertise to outsiders, including trade secrets, copyrights, and patents, leaving you vulnerable to theft or information leaks. If you are off or nearshoring, your risk multiplies as contracted employees are not subject to the laws of your country
- A lack of control over processes may lead to quality issues. Distance and cost of travel hinder the in-person meetings, audits, and inspection processes required to ensure quality, making collaboration and performance management a challenge
- Communication can be a major obstacle in the outsourcing process. Varying time zones, language barriers, and cultural differences can all hamper effective communication. Relationship dynamics can further compound the communication issue, often stifling honest and open dialogue as service providers often hesitate to challenge directions or speak up if a request is unachievable
Outsourcing can come with its Own Potential Business Risks
Risks to your Brand from Offshoring
- Turning offshoring on or off is not as easy as flipping a switch. The shortage of masks and other PPE and medical equipment during the onset of Covid-19 stands as an all too real reminder of the risks of offshoring the manufacturing of critical, life-saving supplies as countries found themselves at the mercy of others, lacking the ability to respond to a domestic health emergency due to a sudden spike in demand. Organizations need the assets or resources necessary in place to respond in times of emergency
- Offshoring is far from a magic bullet. Often perceived as a way for the rich to get richer with no concerns for people or the planet, opponents of offshoring believe it takes jobs away from the local market and is bad for the economy, decreasing wages and failing to contribute to the tax base as foreign workers do not contribute to local economies through workers’ income taxes and the like
- Without the necessary due diligence, you may be supporting harmful environmental practices and human rights abuses, as offshoring often happens in many countries whose laws and governments fail to protect workers and the environment, putting your ESG compliance at risk. According to Sedex, “more indicators [of forced labor] are found on average in audits in the lower tiers of the supply chain, where visibility and influence of buying companies is more limited.”
Offshoring Still Has its Advantages
Apart from the above-mentioned business and brand risks, disruptions to supply chains caused by the Covid-19 pandemic and the conflict in Europe, have led to onshoring and nearshoring gaining traction, especially in the last few years. But offshoring still comes with its own set of benefits that help to drive business growth, and globalization is undoubtedly the most important. It allows you to quickly scale up your business and gives you access to skilled workforce, at affordable rates, among other advantages.
Offshoring can not only help to reduce operational costs, but also provide other added benefits like having access to a global talent pool and marketplace
In the end, a company cannot outsource accountability—customers, and depending on where you do business, governments will hold you responsible for your supply chains. That being said, depending on the maturity of internal risk management processes, outsourcing higher-risk business processes such as procurement may be a way to lower a company’s risk exposure while reducing costs.
Whether to offshore, nearshore, or onshore is a complex choice requiring explicit knowledge and a thorough evaluation of market dynamics and critical decision factors such as alignment of culture and language.
Although outsourcing may come with its own set of weighty risks that must be carefully considered, no process is risk free. By enabling companies to remain focused on their core competencies, while taking advantage of the expertise of others, outsourcing allows companies to improve operational efficiencies and maximize outcomes, and thus, will continue to play a crucial role in corporate strategies throughout 2023 and far beyond.
Axis Group International’s Global Procurement & Supply
Axis Group Global Procurement & Supply has supported various projects and operations worldwide for over 20 years. Our solutions are truly integrated and span the entire international value chain from source to final supply – including analytics, sourcing, procurement, supplier performance management, quality management, inspection, expediting and logistics.
If your project or operations are challenged by unacceptably high costs, extended lead times or risk, we can provide additional capability. Reach out to Axis Group International in Australia, Asia, the Middle East, Africa, or the Americas at firstname.lastname@example.org or call +61 483 386 118.