Owing to the growing globalization of markets the pressure on organizations in industrialized countries increases and forces them to critically assess and question their performance and to decide whether it would be more beneficial to produce or procure some of them across borders. The terms used for this are offshoring and outsourcing. Although both terms are generally used in a synonymous way, there is a significant difference between them which can create confusion.
Outsourcing is the transfer of work to an external company. In case the work is transferred to an external company abroad it is described as offshore outsourcing. However, if a company opens a subsidiary abroad it is called offshoring production or offshoring services and has nothing to do with outsourcing. Although these steps were taken in the past exclusively by larger organizations, it has also become common practice for smaller companies as a consequence of the fierce global competition in their industries. But what are the general motivations of companies to go this direction? Well, that differs from company to company and sometimes even for multiple reasons.
● Labor costs benefits in foreign country
● Avoid high investment costs in home country
● Bypass legal requirements and regulations in home country
● Tax benefits in foreign country
● Improving quality and performance through process transfer to experts
● Focus on core competencies in home country
● Entering in new and strategic markets
It can therefore be described as a necessary step in order to remain competitive in the long term and to continue making profits. However, due to increasing wages in the previously preferred production regions, such as Eastern Europe and China, alternative choices have to be found in order to achieve the desired added value of cost reductions for organizations. This development together with the ongoing trade war between the United States and China has in the meantime led to the situation that Thailand with its distinctive infrastructure and large supply of cost-effective manpower is now seen as a location with high potential to many companies.
In this connection, however, there are many risks associated with offshoring and outsourcing and increased reports in the news about a re-shoring trend by many companies to their home market has caused further uncertainty in the decision making process of small and medium sized companies. These risks cannot be played down since the have the potential to put a business out of business if a company is not able to offset them from the very beginning.
● Expected cost-reductions are not achieved
● Poor quality and delivery delays by external companies
● Failure to comply with foreign laws due to unawareness
● Change in import tariffs and trade agreements
● Loss of process oriented knowledge and skills
● Theft of sensitive data or intellectual property
● Long-term commitment to contracts and investments
● Resistance among workforce, e.g. dissatisfaction and fluctuations
● Loss of image for the company due to negative reporting
Offshoring or outsourcing might sooner or later become the only option for small and medium-sized companies to survive in this increasingly competitive global market. However, it is important not to rush blindly into any partnership without making use of experienced and competent consultants who are perfectly familiar with the economic conditions in the foreign country since compared to larger and experienced organizations they may not have an easy time with their undertaking and won't be able to cope with related issues in the same way.
● Absorb possible offshoring / outsourcing failure
● Afford best regional business consultants and lawyers
● Setting up own factory or regional office according to internal requirements
● Recruit high-skilled employees to manage operation effectively
● Receive best possible service due to negligible cross-compliance obligations
● Benefit at a higher level due to larger production or service volume
● Provide enough expertise and power to deal with foreign companies
Are you considering to move your service or manufacturing processes to Southeast Asia but don’t know how and where to start? With our expertise and long-term experience in this sector we are able to assist you in finding competent and reliable offshore partners in Thailand. Keep in mind that conducting a thorough feasibility study is only a small investment that will most of the time lead to significant cost savings and fewer worries afterwards. So don’t hesitate and talk to us today.