Offshoring


Offshoring is the relocation of a business process from one country to another—typically an operational process, such as manufacturing, or supporting processes, such as accounting. Usually this refers to a company business, although state governments may also employ offshoring. More recently, technical and administrative services have been offshored.
Offshoring neither implies nor precludes involving a different company to be responsible for a business process. Therefore, offshoring should not be confused with outsourcing which does imply one company relying on another. In practice, the concepts can be intertwined, i.e offshore outsourcing, and can be individually or jointly, partially or completely reversed, as described by terms such as reshoring, inshoring, and insourcing.
In-house offshoring is when the offshored work is done by means of an internal delivery model.
Imported services from subsidiaries or other closely related suppliers are included, whereas intermediate goods, such as partially completed
cars or computers, may not be.

Motivation

Lower cost and increased profitability are often the motivation for offshoring. Economists call this labor arbitrage. More recently, offshoring incentives also include access to qualified personnel abroad, in particular in technical professions, and decreasing the time to market.
From 2018 to 2023, many firms reacted to tariff escalation, geopolitical frictions and industrial policy shifts by diversifying production across multiple countries rather than exiting a country entirely, with Vietnam, India, Mexico, Thailand, Taiwan and the United States among the most frequent destinations. Companies typically cited several overlapping drivers per move—most commonly geopolitical risk and trade-war tariffs, alongside rising costs and the desire to reduce dependence on a single country—indicating multi-causal decision-making rather than a single trigger. Firms often first shifted volumes to already-known suppliers to maintain continuity, then added new sites to build redundancy as conditions stabilized.
Jobs are added in the destination country providing the goods or services and are subtracted from the higher-cost labor country. The increased safety net costs of the unemployed may be absorbed by the government in the high-cost country or by the company doing the offshoring. Europe experienced less offshoring than the United States due to policies that applied more costs to corporations and cultural barriers.

Criteria

Some criteria for a job to be offshore-able are:
  • There is a significant wage difference between the original and offshore countries
  • Remote work is possible in the job
  • The work can be transmitted over the Internet
  • The work is repeatable
Additional feasibility considerations observed in 2018–2023 included the availability of multi-country supplier portfolios and destination-country policy incentives that enable staged capacity transfers without disrupting continuity.

Variations

Offshore outsourcing

Subcontracting in the same country would be outsourcing, but not offshoring. A company moving an internal business unit from one country to another would be offshoring or physical restructuring, but not outsourcing. A company subcontracting a business unit to a different company in another country would be both outsourcing and offshoring, offshore outsourcing.
Types of offshore outsourcing include:
Empirical evidence shows that multi-country configurations have become more common in manufacturing relocations since 2018; only about one-third of observed moves involved a single destination, with many firms splitting volumes across two to six countries to hedge risk.

Nearshoring

is a form of offshoring in which the other country is relatively close such as one sharing a border.
Being nearby results in potentially beneficial commonalities such as temporal, cultural, social, linguistic, economic, political, or historical linkages.
According to the 1913 New York Times article "Near Source of Supplies the Best Policy", the main focus was then on "cost of production."
Although transportation cost was addressed, they did not choose among:
  • transporting supplies to place of production
  • transporting finished goods to place of sale
  • cost and availability of labor
The term nearshoring derives from offshoring. When combined with outsourcing, nearshore outsourcing, the nearshore workers are not employees of the company for which the work is performed.
Nearshoring can involve business strategy to locate operations close to where product is sold. This is contrasted with using low-wage manufacturing operations in developing nations and shipping product back to the country that offshored the work.
With nearshore outsourcing, the work is done by an outside company rather than internally, but in contrast to typical offshore outsourcing, the work is done in fairly close proximity to the company headquarters and its target market.
Nearshoring is often used for information technology processes such as application development, maintenance and testing.
In Europe, nearshore outsourcing relationships are between clients in larger European economies and various providers in smaller European nations. The attraction is lower-cost skilled labor forces, and a less stringent regulatory environment, but crucially they allow for more day to day physical oversight. These countries also have strong cultural ties to the major economic centers in Europe as they are part of EU. For example, as of 2020 Portugal is considered to be the most trending outsourcing destination as big companies like Mercedes, Google, Jaguar, Sky News, Natixis and BNP Paribas opening development centers in Lisbon and Porto, where labor costs are lower, talent comes from excellent Universities, there's availability of skills and the time zone is GMT.
US clients nearshore to countries such as Canada, Mexico and nations in Central and South America.

Reasons to nearshore

Culture
Cultural alignment with the business is often more readily achieved through near-sourcing due to there being similarities between the cultures in which the business is located and in which services are sub-contracted, including for example proficiency with the language used in that culture.
Communication
Constraints imposed by time zones can complicate communication; near-sourcing or nearshoring offers a solution. English language skills are the cornerstone of Nearshore and IT services. Collaboration by universities, industry, and government has slowly produced improvements. Proximity also facilitates in-person interaction regularly and/or when required.
Other advantages
Software development nearshoring is mainly due to flexibility when it comes to upscale or downscale teams or availability of low cost
skilled developers. The nearshoring of call centers, shared services centers, and business process outsourcing rose as offshore outsourcing was seen to be relatively less valuable. More recently, companies have explored nearshoring as a risk mitigation strategy for operational and supply chain weaknesses uncovered during the COVID-19 global pandemic crisis, when offshore BPOs experienced sudden closures and disruptive quarantine restrictions which hampered their ability to conduct day-to-day business operations.
The complexities of offshoring stem from language and cultural differences, travel distances, workday/time zone mismatches, and greater effort for needed for establishing trust and long-term relationships. Many nearshore providers attempted to circumvent communication and project management barriers by developing new ways to align organizations. As a result, concepts such as remote insourcing were created to give clients more control in managing their own projects. Nearshoring still has not overcome all barriers, but proximity allows more flexibility to align organizations.

Production offshoring

Production offshoring, also known as physical restructuring, of established products involves relocation of physical manufacturing processes overseas, usually to a lower-cost destination or one with fewer regulatory restrictions.
Physical restructuring arrived when the North American Free Trade Agreement made it easier for manufacturers to shift production facilities from the US to Mexico.
This trend later shifted to China, which offered cheap prices through very low wage rates, few workers' rights laws, a fixed currency pegged to the US dollar, cheap loans, cheap land, and factories for new companies, few environmental regulations, and huge economies of scale based on cities with populations over a million workers dedicated to producing a single kind of product. However, many companies are reluctant to move high value-added production of leading-edge products to China because of lax enforcement of intellectual property laws.
Since 2018, labor-intensive sectors such as footwear and textiles were often the earliest to relocate part of their output from China to established hubs, while capital-intensive industries like electronics and automotive tended to move more slowly and in stages as local supplier ecosystems were developed. Across destinations, firms combined moves to existing plants with greenfield investments, with Vietnam, India, Mexico, Thailand and Taiwan among the principal recipients of capacity. Entry strategies also differed: when entering a country for the first time, companies more frequently chose direct manufacturing, whereas relocations to countries with existing relationships more often used contract manufacturing to retain flexibility.