Labor markets and a living wage are very different all over the world. What might cost $60,000 to hire an experienced person in the United States could cost $12,000 to do it overseas – or even less. Because the cost of labor is one of the steepest expenses that a business faces each year, the ability to outsource jobs overseas is an easy way to preserve quality while cutting back on costs.
Outsourcing jobs to a foreign country is sometimes referred to as “offshoring.”
There are always risks that must be faced when outsourcing a job. You lose some control over the outcome of what happens when you outsource. There can be delays in communication or unintended dips in quality because of cultural differences which occur.
There are also many advantages that are possible, which go beyond the ability to save some cash. Here is a look at the complete pros and cons of outsourcing jobs to foreign countries.
List of the Pros of Outsourcing Jobs
1. It lowers the cost of real estate acquisition for the company.
When you outsource jobs to foreign countries, you’re doing more than saving some cash on your labor expenses. You’re also reducing the number of real estate assets you’re required to have to support your people domestically. By reducing your real estate costs, you can lower the number of one-time expenses that occur. You lower your tax profile. You also lower your maintenance costs.
2. It gives you an opportunity to manage risks better.
When you outsource jobs, you’re reducing the personnel risks that come as part of doing business. Instead of an employment contract, you’re creating a B2B relationship that will limit your potential liability as an organization. Even if you work with individuals instead of businesses, the independent contractor relationships provide you with better security against litigation than what you may face domestically.
3. It gives you a chance to diversify your company.
Although diversity is sometimes criticized, there is no denying the strength it provides to an organization in the form of differing perspectives and experiences. When you have access to more ideas, then you have more opportunities to make better decisions. Going to a foreign country also means that you can extend the active hours of your company, providing a customer base with around-the-clock coverage if that is desired.
4. It gives foreign workers new opportunities.
Many people judge the wages that are paid to foreign workers based on the wages that are paid domestically. In Bangladesh, a good living wage is the equivalent of $350 per month for workers in the United States. That is because the economy is built differently there. Even though it seems like a company is paying workers a lot less through offshoring, the reality is that a company could vastly improve the living situation for many workers with this decision. When foreign workers gain access to new opportunities, the rest of the company, customers, and the world will benefit.
5. It reduces the need to hire more employees.
A contractor is different than an employee. In most circumstances, you would not be asked to pay benefits to a contractor when you outsource a job. You might need to train the leadership of the contracted company in your policies and procedures, but it would be their responsibility to train other contractors. In some circumstances, the cost of training can be completely eliminated too. That means you save in development costs, in addition to saving on labor costs.
6. It gives you access to a larger pool of talent.
Companies are bound by the available talent they have locally when hiring for open positions. Even state-based, province-based, or national companies are limited to their local markets. When you outsource to a foreign country, you’re gaining access to a bigger talent pool. You gain instant access to specialized help without the need to compromise on who you decide to hire. You can wait to outsource until you find the right company or contractor that is able to meet your needs.
7. It can increase the speed of your delivery cycle.
Because you have more people working on a project thanks to the lower labor costs in a foreign market, it can improve the speed of delivery you’re able to achieve. When this relationship is built correctly, the quality of the product won’t suffer because you’re putting the same manhours into the final solution. With the optimized resource utilization, you can free up a lot of your management time, focusing on the core elements of your company while you offshore the routine tasks.
8. It may strengthen political ties.
Business and politics are closely intertwined with one another. If a company is able to create a successful experience outsourcing jobs to a foreign country, the governments of both countries may be able to forge closer ties over time.
List of the Cons of Outsourcing Jobs
1. It creates a language barrier.
The biggest disadvantage that comes with offshoring is the language barrier. Even though English is a standard global language, the depths of knowledge and perception of the language is different in each culture. There are even different forms of English that are spoken around the world, with different idioms and slang based on the local culture. It takes a lot of work to understand one another, even if the same basic language is being spoken.
2. It creates communication timing issues.
For companies with multiple offices in the United States, the 3-hour time difference between the west coast and the east coast can be problematic. When outsourcing jobs to foreign countries, the time zone difference can be as much as 15 hours for some companies. That creates the need to have shift patterns in place at both companies to ensure there is matched communication between all entities. This requirement negates some of the benefits that come with offshoring.
3. It may not save as much money as some companies think it will.
The primary focus of offshoring is the reduction in labor costs. It is true that the average company is able to reduce their labor costs by 70% (if not more) when jobs are outsourced overseas. What is not always factored into the budget are higher costs for electricity, infrastructure, and other basic necessities. In some developing nations, the cost of utilities can reduce the advantage of labor cost savings by more than 50%.
4. It puts a company’s intellectual property at risk.
The standards of doing business in a home country can be very different than what they are in a foreign country. Even if you put in contracted protections for your intellectual property, there is no guarantee that the process of offshoring will protect it. You may be able to initiate litigation to recover some losses, but even that may not be possible in some situations. That is why due diligence and research must always be completed before outsourcing jobs to a foreign country. If you lose your IP, you’re multiplying your original costs instead of saving money.
5. It may create issues with quality.
All of the benefits that come with outsourcing jobs to a foreign country go away if the quality of the work is not up to your standards. One must always discuss the quality requirements before agreeing to an outsourcing relationship. If you do not receive the expected quality, then there must be some avenue of rescue that you can follow to ensure the problem gets fixed. Without these protections, the outcome for specific tasks may be quite underwhelming.
6. It can affect the company culture in negative ways.
When you have a positive workplace culture, then you will have higher productivity levels. If you begin to outsource jobs to foreign countries, that positive vibe goes away. Some workers will feel like they’re being replaced. Some will be confused why certain tasks are being outsourced, but not others. There will be some who face bigger challenges in their daily schedule because you’re changing the workflow of the company. All these negative pressures can impact domestic productivity and reduce profits.
7. It alters corporate reputation.
The reputation of the company or contractor which receives the outsourcing contract will now be the reputation of the company doing the outsourcing. The relationship becomes symbiotic in many ways. If the contractors miss deadlines or have sluggish communication with customers, then this is how the home company will be perceived. That is why offshoring is always a gamble, especially for SMBs and SMEs who are looking to do more on a tight budget.
The pros and cons of outsourcing jobs to foreign countries touch on some raw issues. A job sent away is a job that someone at home can no longer have. That can make it difficult for local households to secure employment and the income they need to survive. It feels like someone else is stealing the job. At the same time, however, companies must do what they can to remain in business. When a budget is tight, the cost savings that offshoring provides helps a budget stay afloat.
Natalie Regoli, Esq. is the author of this post and the editor-in-chief of our blog. She received her B.A. in Economics from the University of Washington and her Masters in Law from The University of Texas School of Law. In addition to being a seasoned writer, Natalie has almost two decades of experience as a lawyer. If you have any questions about the content of this blog post, then please send Natalie a message here.