The history of offshoring dates back to the 1960s when companies in the USA set up development centers offshore in Mexico. 1996 was the year when GE offshore for the first time when it opened its development center in India. During that period, many companies followed the trend and minimized their production cost. The major offshoring centers are India, China, the Philippines, etc., where the cost per developer is low.
In software engineering, offshore software development refers to the process of carrying out the process of software development in a place or a country where the development process is less expensive than the home country. Offshore software development helps in minimizing the budget of an organization. The offshore software development could include processes like SaaS development, product design, architecture, eCommerce, coding, testing, CRM, etc.
In this article, we will be discussing the advantages, and disadvantages of offshoring along with the countries to consider offshoring if you are a company based in the US, Europe, or Australia.
Companies nowadays are looking beyond the cost part and are focusing on quality and other advantages as well, even though the cost remains the number one reason.
The prime advantage of offshoring is low cost. Companies will be saving almost 50% of the cost if they were to do the same job in the USA, UK or Australia without compromising the quality of work. The fact that the companies can cut the recruitment costs altogether adds to the advantage. The companies are also able to transfer the cost of operations to the offshoring company. In short, the companies save on resource expenses, training expenses, recruitment expenses, and infrastructure and operational expenses. A mouthwatering deal indeed!
Bigger Resource Pool
When a company takes the crucial decision to offshore, they are unlocking the vast talent pool that’s available outside the home country. Countries like India and the Philippines have a vast talent pool in terms of college degrees, experience levels, and work proficiency.
Speedy Project Delivery and Flexibility
With production in the home country along with the country offshore, the time of delivery gets reduced. This is especially true when a company selects a country like India, which has a huge time difference from the USA and Australia, as the work gets done 24/7, and the overlapping time could be used for discussions and combined team meetings.
When you partner with an offshoring company, you can easily scale up and down according to your requirements. When you have project spikes, you can easily hire more developers and when your need is lower, you can cut the number of developers.
Helps to Set Right Business Priorities
Offshoring certain tasks/ project helps companies to focus on more important projects/ tasks by optimizing the on-site talent and resources. This in turn will help companies to set the right business priorities.
Disadvantages of Offshoring
Data breaches could be a concern for companies that are trying to offshore. Finding companies with the right data protection practices can be a hectic task. Companies can tackle this issue by employing a company with ISO 27001 standard certification. Strong legal contracts will add to the security. More and more companies in India are now complying with ISO standards for information security, which makes India a hotspot for companies that consider offshoring.
Another major problem companies experience is the language barrier with their offshore team/ resources. Companies can tackle this issue by employing companies from Eastern Europe or India, as these countries are good with the language.
Cultural and Social Barriers
Often communication is based on social and cultural norms in a country. When people from different countries do business, these barriers come into play and affect the efficiency of communication.
Even if the parent company gives clear guidelines and documents, the quality could get affected because of the working culture, supply chain, communication, and logistics capabilities of the offshore company.
Countries to Consider
As far as the US, UK, and Australian companies are concerned, India remains the go-to place for offshoring. This has a lot to do with the political scenario between these countries. As India is a US ally, there is minimum business friction between the countries, and ease of doing business has increased considerably over the years. The same goes with India- UK and India- Australia. As China is entering a trade war with the west, the scenario doesn’t look good for Chinese companies at least in the offshore market as many western companies are reluctant to do trade with the dragon. Also, the offshore market in China works primarily for Japan and South Korea as China being the near-shore location for them.
The Philippines is the other Asian location to consider. Rather than development offshoring, BPO works are sent to the Philippines.
Nearshore locations in Latin America (for US-based companies) are also an option as they are much closer and sensitive work can be sent there. Nearshore outsourcing is a much smaller market concerning the offshore market. Also, considering the talent pool and size of countries like India and China, nearshore locations may not have many luxuries to offer.
Weighing the advantages and disadvantages of offshoring, it is clear that the idea of offshoring comes out as a clear winner as most of the disadvantages could be tackled easily. Offshoring gives a high return on investment irrespective of its disadvantages. Even though the offshore market is diversified, the major chunk will remain in India for the foreseeable future because of geopolitical and scale reasons. The ideal thing to do for a US, UK, or Australian company is to enter into a partnership in India primarily to have a base and then diversify to other countries, with a foot planted in India. Happy offshoring!