What is Offshore Outsourcing And How Does It Work?

Posted on:
February 13, 2024
min read
Table of Contents
What are the benefits of outsourcing to developing countries?
What are the challenges of outsourcing to developing countries?
Top 5 Most In-demand Developing Countries for Outsourcing
What are some successful examples of companies that have outsourced to developing countries?
What are the best practices for outsourcing to developing countries?
What is Offshore Outsourcing And How Does It Work?
KDCI Outsourcing
February 29, 2024

As of 2024, about 68% of US companies engage in offshore outsourcing. Top brands like Adidas and Amazon outsource their operations to companies like KDCI because of benefits such as cost efficiency, access to a wide talent pool, and flexibility.

That said, what is offshore outsourcing, and how does it work? Here’s everything you need to know. 

What Is Offshore Outsourcing?

Offshore outsourcing is a business strategy wherein companies hire external firms in other countries to handle tasks like customer service, IT support, software development, and manufacturing. This allows businesses to save costs and access specialized skills that are more readily available or more cost effective abroad. 

The tasks outsourced depend on the company's needs, such as a tech firm hiring foreign developers for their expertise or a manufacturer seeking lower labor costs or an Ecommerce company needing more customer service agents.

What Are the Different Types of Offshore Outsourcing?

Offshore outsourcing can be broadly classified into five types, each catering to different operational needs and strategic objectives of businesses. 

Information Technology (IT) Outsourcing

This type of offshore outsourcing involves contracting external organizations located in other countries to handle IT-related tasks, such as software development, application maintenance, network management, and IT support. It's one of the most common forms of offshore outsourcing, driven by the need for technical expertise and cost savings.

Business Process Outsourcing (BPO)

Business Process Outsourcing (BPO) entails outsourcing non-primary business activities and functions such as customer support, administrative tasks, human resources, finance and accounting, and data entry to specialized service providers overseas. The aim is to improve operational efficiency and allow companies to concentrate on their core competencies.

Knowledge Process Outsourcing (KPO)

Knowledge Process Outsourcing extends beyond traditional BPO by outsourcing more complex, knowledge-intensive tasks that require specialized skills. This includes research and development, financial analysis, advanced engineering services, legal processes, and consultancy services.

Learn more about BPO vs. KPO here.

Legal Process Outsourcing (LPO)

Legal Process Outsourcing focuses on outsourcing legal services to external firms located in jurisdictions with lower labor costs. Services commonly outsourced include document review and management, legal research, contract management, and compliance services. 

Manufacturing Outsourcing

This offshore outsourcing type involves contracting manufacturing processes or production tasks to foreign companies. Manufacturing outsourcing is adopted by companies looking to benefit from lower labor and production costs, access to advanced manufacturing technologies, and the ability to scale production based on demand without significant capital investment.

How Does Offshore Outsourcing Work?

Offshore outsourcing follows a structured process that allows companies to delegate certain tasks or business functions to third-party service providers located in countries other than where the company is. The process typically involves the following key steps.

Step 1: Identifying Offshore Outsourcing Needs

Companies first identify the tasks they want to outsource. These can range from IT services, customer support, and manufacturing, to specialized tasks like legal processing or knowledge-based work.

Step 2: Selecting an Offshore Outsourcing Provider

The next step involves researching and selecting the best offshore outsourcing companies with the expertise, resources, and capacity to meet the company's needs. This selection is based on various factors, including cost, reputation, quality of work, and the provider's ability to communicate effectively across cultural and linguistic barriers. 

Usually, companies outsource to developing countries like the Philippines to maximize cost savings. This strategy leverages lower labor costs and access to a skilled workforce, allowing businesses to reduce expenses and improve efficiency.

Step 3: Due Diligence and Negotiation

Companies conduct due diligence to assess the capabilities, financial stability, and track record of the chosen offshore outsourcing company. Following due diligence, the company negotiates terms, including scope of work, service level agreements (SLAs), pricing, confidentiality agreements, and timelines with the outsourcing provider.

Step 4: Transition and Integration

This phase involves transferring the identified business processes to the offshore outsourcing provider. It may include training the provider's team, setting up communication and project management tools, and integrating systems and processes to ensure smooth operation and oversight.

Step 5: Ongoing Management and Communication

Effective communication and management are crucial for the success of offshore outsourcing. Regular meetings, progress reports, and performance reviews help manage the relationship, address any issues, and ensure that the outsourcing objectives are being met.

Step 6: Quality Control and Feedback

Establishing quality control measures and feedback loops is essential to maintain the quality of the offshore outsourcing services availed. This can involve periodic audits, performance metrics analysis, and implementing changes based on feedback to continually improve the process and outcomes.

Step 7: Compliance and Legal Considerations

Ensuring compliance with legal and regulatory requirements in both the company's home country and the provider's country is critical. This includes data protection laws, intellectual property rights, labor laws, and tax implications.

What Are the Benefits of Offshore Outsourcing?

Offshore outsourcing comes with a number of advantages. Listed below are some of the most common benefits.

  • Cost Savings: Offshore outsourcing greatly lowers costs by using cheaper labor from other countries, saving money on salaries, office space, and equipment.
  • Access to Global Talent Pool: It enables access to a vast pool of skilled professionals worldwide, providing expertise that may be scarce or costlier domestically.
  • Focus on Core Business Functions: Companies can concentrate their resources on core activities that drive growth and revenue, enhancing their competitiveness.
  • Scalability and Flexibility: Offshore outsourcing offers the ability to scale operations quickly in response to market demands without large capital investments or long-term commitments.
  • Operational Efficiency: Partnering with specialized offshore companies leads to improved workflows, productivity, and turnaround times, thanks to optimized processes and best practices.

While offshore outsourcing offers significant advantages, it also requires careful planning, effective communication, and diligent management to address challenges such as cultural differences, time zone discrepancies, and ensuring quality standards are met.

What Are the Most Commonly Outsourced Business Operations?

The five most commonly outsourced business operations are:

  • Information Technology (IT): Including software development services, web development, IT support, network management, and cybersecurity
  • Customer Service and Support: Such as call centers, help desks, and customer interaction management
  • Human Resources (HR): Including payroll processing, benefits administration, recruitment, and training
  • Accounting and Finance: Such as bookkeeping, tax preparation, financial analysis, and auditing
  • Manufacturing: Outsourcing the physical manufacturing process of goods, especially to countries with lower labor costs

These offshore services are commonly outsourced due to their universal demand across industries, coupled with the availability of specialized global providers who offer cost-effective and scalable solutions.

What Are the Top Offshore Outsourcing Destinations?

The top offshore outsourcing destinations are renowned for their skilled labor pools, cost-effective services, and business-friendly environments. As of 2024, the leading countries include:

  • Philippines: With a strong emphasis on customer service and English language proficiency, the Philippines excels in providing offshore employees for call center services, customer support, and creative outsourcing.
  • India: Known for its vast pool of IT talent, India is a premier destination for software development, IT support, and business process outsourcing (BPO).
  • China: A global leader in manufacturing outsourcing, China offers a broad manufacturing base and access to a large, skilled workforce.
  • Poland: Recognized for its IT and software development expertise, Poland has become a preferred choice for companies seeking advanced technical skills in Europe.
  • Ukraine: With a growing reputation for its IT and software development talent, Ukraine offers highly skilled professionals in these fields at competitive rates.

By leveraging the strengths of these leading outsourcing destinations, companies can enhance their competitive edge, improve operational efficiency, and drive growth in the global marketplace.

Tips on Finding an Offshore Outsourcing Partner

Choosing the right outsourcing company is crucial for enhancing your business operations and achieving strategic goals. Here are the top five tips you can follow.

  • Define Your Goals and Requirements: Clearly outline your objectives and the specific services you need to outsource to ensure alignment with potential partners.
  • Research Potential Partners: Conduct in-depth research to identify outsourcing firms with a strong track record and relevant industry experience.
  • Evaluate Communication and Language Skills: Choose a partner with excellent communication capabilities to ensure smooth interactions and project management.
  • Assess Technical Expertise and Infrastructure: Verify the outsourcing firm's technical capabilities and infrastructure to handle your projects efficiently and securely.
  • Understand Pricing and Contract Terms: Review the pricing structure and contract terms carefully to ensure transparency and flexibility to meet your business needs.

By following these tips and approaching the selection process systematically, you can find an offshore outsourcing partner that not only meets your current needs but is also well-positioned to grow and evolve with your business over time.

Try Offshore Outsourcing with KDCI

It’s difficult to navigate offshore outsourcing with little knowledge, especially if you have specific business requirements to fulfill. With several things you need to consider, how do you get started?

This is where KDCI comes in. We take the time to understand your needs and requirements, company culture, and pain points to build you the perfect offshore team. With over 20 years of industry expertise, we’ll do everything for you, from finding, vetting, training, and certifying the right talents for your brand, up to managing your operations, saving you time and money.

Learn more about our offshore staffing services. Click the button below to get started.

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