Offshoring: Costs vs benefits Exploring the often overlooked costs of offshoring

The rise of offshoring has made it hard to compete on cost without taking advantage of the cheap labor and low operating costs that some foreign countries offer. This extends beyond manufacturing. Foreign countries are trying to increase their toe hold in the global economy by offering cheaper alternatives to everything from tech support to engineering. The decision to offshore or not is one that most modern businesses have to face.

Indeed, in some industries the decision is all but made for you. The modern consumer feels entitled to the low prices that offshoring has brought us. The problem is, there are hidden costs to doing business abroad, and they’re unpredictable. Offshoring is not necessarily as cost effective as it seems.

Benefits vs Costs

Potential benefits

Cheaper labor

Tax breaks

Lower operating costs

Potential Costs

Relocating

Training

Long distance communication

Travel costs (for meetings, oversight, etc)

Shipping costs

Less-effective trouble shooting

Learning foreign and international regulations

Reduced quality

Time lost in all of the above

Intellectual property theft

The potential benefits can all be summed up in one statement: you’re lowering costs — theoretically. For the purpose of this exercise, we’re going to assume that you would lower costs and still be profitable if you were to offshore part of your operation, because what we want to explore are not the costs listed above. Rather, its opportunity cost. And to understand this, we need to think about two things: your value proposition, and your ability to innovate and adapt as a company.

The cost of competing on cost

Think about what you’re saying about your business if you outsource to a foreign country. Your value proposition is cheap pricing. Not quality, not service, not support. Not something nobody else can replicate. Whether its tech support in broken English or lower quality, you customers are forced to face the question: would I be willing to pay more for a better customer experience?

For you, there’s a lot of risk in getting caught in a race for the lowest cost. What if somebody undercuts you, and you can’t match? What, then, can you offer to stay relevant? If your customers were only looking for the lowest price, you’re out of luck. But there is a big opportunity here: if the market is being largely defined by price, you can be the only one offering a different value proposition — one where customers get what they want and what they need. You can be the one offering the greatest value, even if it is at the highest price.

Maybe, for instance, the market is weary with low quality products. Maybe they feel misunderstood by the current trends. Maybe they’re frustrated with the support they’re getting (or not getting). Maybe there’s a dozen or more things they could complain about, things that are more important to them than the lowest price.

Impeding innovation

You might ask why you can’t still seize opportunities if you offshore. For the answer to that, refer back to the table above. There are way more cost factors to offshoring than there are benefits. Each of those cost factors represents an impediment to innovation. You’re neck deep in relocation costs, and all the emergent costs that come with offshoring. If you suddenly decide to bring it back home, you’ve got to face some of those costs, like relocating, all over again. And with recent events like Covid-19restrictions and US tariffs, the international supply chain is suddenly looking shaky. That’s only part of it, though.

You can seize the opportunities that come your way, but competitive markets evolve quickly. These opportunities will pass you by if your organization isn’t responsive. Instead of putting in a call to some other country, buying a plane ticket, arriving the next day, and then explaining your ideas to people from another culture, who speak another language, and live completely different lifestyles than the consumers of your product, you could be calling a meeting and implementing changes in the span of a few minutes.

And it goes deeper than that. You simply won’t see as many opportunities if you offshore. Your company made a large commitment to competing on price, and that’s where your focus and energy is going. But there’s room for improvement in every facet of an organization. There are some facets you rarely or never see if they’re on other continents. How will you innovate if you don’t have intimacy with all the parts of your operation? Opportunities, lost.

Offshoring is hardly thinking outside the box. Is a price war really your best strategy? That’s your decision to make. The opportunity cost of offshoring is impossible to measure. But that’s just one more major cost on top of the rest.

There is no definitive way to determine if offshoring is your best strategy or not. But you can make the most informed decision about the future of your company by considering the direction you are committing to when you seek lower production costs offshore.

 

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