What is offshoring?

For HR leaders and business executives exploring global expansion strategies, understanding offshoring is essential. What was once a small sector had grown into an $80 billion global industry by 2008, making it a critical component of international business strategy—whether you're considering relocating manufacturing facilities, establishing overseas service centers, or simply evaluating different approaches to building an international presence.

This article breaks down what offshoring really means, how it differs from outsourcing, why companies choose this path, and the practical considerations you'll need to keep in mind.

Interested in Oyster but want more information about how the platform works? This product overview should help.

What is offshoring

Offshoring is the practice of moving business operations or processes to another country. This business strategy involves relocating entire departments or functions—like manufacturing, customer support, or software development—to foreign locations to take advantage of lower costs, access specialized skills, or operate more efficiently.

While it can be a powerful way to grow, it also introduces new complexities around legal compliance, payroll, and managing a team across different cultures and time zones.

Offshoring vs outsourcing: what's the difference?

Understanding the difference between these two strategies is crucial for making the right business decision:

• Offshoring: Moving your own business operations to another country. You maintain control over the work and employees, just in a different location.

• Outsourcing: Hiring a third-party company to handle certain tasks or functions. This company could be located anywhere—domestically or internationally.

So you can offshore without outsourcing (opening your own office abroad), and you can outsource without offshoring (hiring a local contractor).

Why do companies offshore?

Every company's reasons for offshoring can be different, but they usually fall under one of the following categories:

• Cost savings: Labor costs, operational expenses, and overhead can be significantly lower in certain countries, helping companies improve their profit margins.

• Access to talent: Some regions have deep pools of specialized skills. In fact, research shows that over 70% of offshore service providers narrow their global operations to just a few key locations, with India, China, and the Philippines among the most frequent choices.

• Quality and expertise: Certain locations have built world-class capabilities that can offer higher quality work. For example, research on U.S. manufacturing found that service offshoring had a significant positive effect on productivity, accounting for roughly 10% of labor productivity growth between 1992 and 2000.

Types of offshoring

Offshoring isn't a one-size-fits-all strategy. It generally falls into two main categories based on the type of work being moved:

• Production offshoring: This involves moving manufacturing or physical production processes to another country. A common example is a car company opening a factory overseas to build vehicles at a lower cost.

• Services offshoring: This focuses on moving service-based tasks, such as IT support, software development, accounting, or customer service call centers. For instance, a tech company might base its technical support team in a different country to provide 24/7 coverage.

Examples of offshoring

To make the concept clearer, here are a couple of real-world scenarios:

• A clothing brand based in France moves its entire garment manufacturing and assembly line to a factory in Vietnam to reduce production costs.

• A U.S.-based software company establishes a dedicated development hub in Poland to tap into the region's strong pool of engineering talent. The Polish team works as a direct extension of the company, not as a third-party contractor.

Limitations and risks of offshoring

While offshoring offers significant benefits, it's important to be aware of the potential challenges. Moving operations overseas can introduce complexities like:

• Communication barriers: Differences in time zones and languages can make collaboration more difficult.

• Cultural differences: Varying work ethics and social norms can impact team dynamics and productivity.

• Quality control: Maintaining consistent quality standards from a distance requires strong management and clear processes.

• Compliance and Supply Chain Risks: Beyond navigating unfamiliar labor laws and tax regulations, recent events have highlighted how offshoring can create intolerable national security risks by concentrating critical supply chains overseas.

Thinking through these challenges ahead of time is key to a successful global strategy, as the outcomes can be complex; for example, some research suggests that while offshoring causes substantial worker reallocation, it can also lead to a modest increase in net domestic employment.

Building a global workforce with Oyster

What if you could access global talent without the complexity of traditional offshoring? For many companies today, the goal isn't just to move operations—it's to hire the best people, wherever they happen to live.

A global employment platform like Oyster allows you to engage talent in over 180 countries without the need to set up your own legal entities. We handle local compliance, payroll, and benefits, so you can focus on building a great team. Ready to see how it works? Start hiring globally.

FAQ

What's a specific example of offshoring?

Think of Apple designing iPhones in California but manufacturing them in China—that's classic offshoring.

What is the main reason companies choose offshoring?

The primary driver is typically cost reduction. By moving operations to countries with lower labor costs, companies can significantly decrease their expenses, though some research has found this practice is associated with wage declines for US workers.

Is offshoring the same as having remote employees?

No—offshoring moves entire business functions to another country, while remote hiring engages individual workers anywhere without relocating whole departments.

Disclaimer: This article and all information in it is provided for general informational purposes only. It does not, and is not intended to, constitute legal or tax advice. You should consult with a qualified legal or tax professional for advice regarding any legal or tax matter and prior to acting (or refraining from acting) on the basis of any information provided on this website.