Offshoring – What is Offshoring?

So, what is offshoring? Offshoring is a type of outsourcing. Offshoring simply means having the outsourced business functions done in another country. Frequently, work is offshored in order to reduce labor expenses. Other times, the reasons for offshoring are strategic — to enter new markets, to tap talent currently unavailable domestically or to overcome regulations that prevent specific activities domestically.

India has emerged as the dominant player in offshoring, particularly in software work. Three factors came into play to make this possible. First, in the 1970s 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.

Next came the global ubiquity of the Internet and massive telecommunications capacity, which enabled companies to get computer-based work done seemingly anywhere, including India.

Third, as the year 2000 approached, organizations hired service providers to update their legacy program code. Much of this work was handled in India, where English was commonly spoken, where there was a large and highly trained population of software engineers, and where labor costs were much lower than in developed countries. Y2K work proved the merits of an offshore labor force, and companies have continued tapping the talents and skills (and cost savings) made available by Indian offshore service providers. Major companies working as offshoring service providers in India include Tata Consultancy Services (TCS), Infosys and Wipro.

Russia, Ireland, Czechoslovakia and Poland have also surfaced as popular offshoring destinations for specific types of software expertise.

The Philippines, which has a highly literate and educated population, as well as language and cultural affinities with the United States, has become a popular offshoring region for call center and customer support work.

The dominant location for much of the manufacturing outsourcing (in the form of offshoring) by U.S. companies is China, which has made a push in recent years to also become a provider of services. The Chinese central government has made the “third industry” — services — a priority for its national development plans in the coming decades. English is taught in China starting in the third grade, and its technical schools and colleges graduate tens of thousands of software engineers annually.

At the same time that other countries were coming to the forefront in areas such as software and call center work, the United States was experiencing an economic downturn that struck in 2000 and 2001. The resulting job losses and insecurities created an offshoring backlash, especially among technical workers.

Both the potential for negative publicity and concerns about data security and privacy have prevented some companies from taking work offshore. However, that doesn’t always prevent them from outsourcing. Rural sourcing — having work done in domestic locations where salaries and operating expenses are lower (such as the Midwest for the United States) — is an alternative for companies that want to avoid the negative aspects of offshoring.

Other Dimensions of Offshoring

Nearshoring is taking the outsourced work to a nearby country (such as Canada, in the case of the United States). Nearshoring is a popular model for companies that don’t want to deal with the cultural, language or time zone differences involved in offshoring.

Captive Centers are offshore companies set up by organizations to provide internal services and in some cases to sell those same services to clients. Often U.S. and European organizations set up captive centers for their outsourced work.

Multinational corporations (MNC) are service providers with offices in many countries, which enable them to serve a global market of clients and tap the labor arbitrage available by offshoring certain types of work. Among this category are IBM, EDS, CSC, HP, ACS, Accenture and Keane.