Offshoring Is the Practice of

Offshoring is the practice of staffing all or part of a business outside the home country (Malos, 2010). The practice has become widely popular, especially in multinational enterprises (MNEs), but has even become a viable option for small businesses. For most companies, offshoring is conducted to lower costs, taking advantage of different sources of competitive advantage in foreign labor and input markets. Offshoring has come into vogue in recent decades, beginning with the offshoring of production in Asian nations during the 1960s and 1970s.

Such locations provided an abundance of low-cost labor that enabled them to product goods at a lower price than could firms in the West. This form of offshoring evolved over time. Nations that once had cost advantages in labor lost those advantages as their economies grew. In situations where such countries were relatively resource-poor -- Japan, Hong Kong and Singapore fro example -- those nations then began to develop service and information economies.

Today, nations around the world compete for offshoring business both on the basis of labor cost and on the basis of labor specialization. The decision to engage in offshoring, therefore, has become more complicated. Managers need to consider not only the cost implications of offshoring, but they also now must consider worker skills and the administrative and regulatory contexts (Malos, 2010). Employment laws can impact the cost structure of a decision, but also can impact the ability of the company to follow its chosen strategy in a given country.

As a result, companies must study the issue of offshoring much more carefully than they have in the past before making a decision. Advantages and Disadvantages of Offshoring Offshoring is believed to result from a desire to save costs (Malos, 2010). Companies believe that they can produce goods or services at a lower cost in another country, so they offshore production or even service functions. There are other potential advantages as well.

For example, a firm may find that certain skills its home market are scarce, but are readily available in other markets and decide to offshore to facilitate growth. Some firms offshore to escape burdensome regulations. For example, employment restrictions on foreign nationals in the United States have resulted in American companies setting up offices in Canada, where laws against foreigners do not exist. Offshoring can be conducted in order to implement an operating hedge for companies that already sell their products in a particular foreign market as well.

There are number of disadvantages to offshoring, however. Quality or perceived quality may suffer as a consequence of offshoring, as exemplified in the stereotype of the technical support operator in India who does not speak English well enough to understand the problem. It should be noted, however, that cultural elements are not one of the major disadvantages of offshoring. Asian and American firms have the same preferences in offshoring, suggesting that cultural elements are a non-factor compared to cost elements (Hahn & Bunyaratavej, 2010).

Of most significant importance in the current situation is the impact of offshoring on the remaining employees. This is perceived as almost universally negative. Outcomes on surviving domestic employees after a round of offshoring are "lower organizational performance, lower perceived fairness, lower affective attachment, lower sense of job security and higher turnover intentions (Maertz, et al., 2010). This has not stopped certain offshoring functions, such as it, from being commonplace even in small and medium sized enterprises (SMEs) (Tafti et al., 2008). For a small enterprise, the impacts can be devastating.

The company's workforce is more likely to be close-knit, which would amplify the impact of having key personnel laid off to support an offshoring initiative. In addition, there is question as to whether the cost savings earned from such offshoring would be sufficient to justify these costs, given that a small company would not be able to enjoy economies of scale associated with those savings. Offshoring, therefore, needs to be conducted carefully, and only when such activities are sustainable in the long run.

There ongoing challenges with respect to integrating foreign employees into the company when the offshoring is direct and personal, as in a small company. The culture clash may not be a key issue for management in making the decision to offshore and where, but it is a key issue for management in terms of the implementation process. In addition, the company needs to ensure that the promised cost savings will materialize.

This requires an examination of a number of factors, including "facility location factors, supplier selection metrics, and sustainability factors" (Dou, 2010). The cost savings may be the key advantage, but only if they truly materialize. It would be too easy to simply assume that offshoring is going to lead to success, without actually analyzing the factors why.

Five Areas Relating to the Management of People that need to be Considered The first aspect that needs to be considered with regards to managing people is that offshoring introduces new cultures and norms to the organization. Culture may not play a significant role in the selection of an offshoring site but it should be. The degree of congruence between the culture of the domestic organization and its offshored operations can be a key determinant of success of the entire offshoring initiative.

It is worth considering the issue of intercultural communication because breakdowns in communication can result in increased and unexpected costs associated with the offshoring venture. The second aspect that needs to be considered is the impact on the remaining employees at home. These employees are likely to be fearful for their own employment, have a lower sense of satisfaction with the company, or feel resentment about friends that may have lost their jobs to accommodate the offshoring.

It is important to consider each of these possibilities because the results can be disastrous for the company. The company could face increased turnover, reduced productivity and other negative outcomes as the result of offshoring. There are also the legal and regulatory aspects to consider. One of the reasons that offshoring lowers costs is that it takes the work to jurisdictions where employment regulations are much lower. Prior to embarking on the offshoring venture, the company should consider the ethical stance that it wishes to take.

Using offshore suppliers puts the company at further risk of legal, regulatory and ethical issues, as it can be difficult to manage the behavior of these subsidiaries. The fourth element that is worth considering is the issue of offshoring multiple units. The operation in the domestic market has all of its employees working for the main company. If multiple parts of the company are offshored, then the human resources department at home will need to coordinate the efforts of a number of different companies.

Lines of communication between these different units will need to be developed and coordinated. This increases complexity for management, in dealing with a number of different offshore suppliers, multiple contracts and multiple strategies to address every problem. The fifth element worth considering is a reduction of skills in the workforce.

While there is some evidence to suggest that on aggregate a country gains from offshoring because its citizens are focused into high value-added careers, most evidence supports the idea that skills are lost from the nation and from the company through offshoring practice (Hirschheim, 2009). The corporate community becomes focused on the short-term profit gains that accrue from offshoring, but fail to recognize the cost of losing skilled positions overseas.

Those positions almost never come back, which creates a feedback loop by which companies are forced into further offshoring because of the lack of talent in the domestic market. This cycle makes it difficult to retrench from an offshoring policy. Overall, there are a number of problems related to offshoring. While its immediate cost structure gains translate into short-term profits, there may be a number of dangerous impacts as well. Culture clash between the domestic firm and the offshore firms can lower productivity, as can miscommunication.

The company may alienate its remaining workers, leading to morale decline and an increase in turnover. The skill level of the workforce may deteriorate, necessitating further offshoring. There are legal aspects that need to be considered as well. Finally, for a small company offshoring could spread the work around to too many different companies. It may be difficult to manage all of the different overseas units that could result from offshoring.

Understanding the challenges associated with offshoring will help the company to make the right decisions before the offshoring is conducted. Offshoring is to some extent difficult to reverse once it has been enacted, so it is imperative that the company understand all of the risks prior to making the decision. Once all of the risks have been carefully assessed, the company will be in a better position to make the right decision with respect to offshoring.

Specific Recommendations to Overcome the Identified Problems A small company faces unique challenges with respect to offshoring, but it can be done to great benefit if done correctly. The first issues to address are the core issues with respect to offshoring that apply to all companies. The company must identify the strategic objective that it hopes to meet through offshoring. At this point, that has taken place. The decision to look at offshoring has been undertaken on the basis of a television show.

This is not a good way to decide corporate strategy. The decision to pursue offshoring should be made on the basis of fulfilling a broader corporate strategy. In the case of this company, there is little reason to believe that there is another benefit to the company to offshoring other than cost reduction. Therefore, cost cutting must be congruent with the company's broader strategy. In terms of difficulties, one difficulty is that of finding the right cultural fit.

Most company do not adequately address this as they tend towards the lowest bidder, a function of using cost reduction as the primary motivation for engaging in the offshoring in the first place. It is recommended that the CEO pursue offshoring on the basis not only cost but cultural fit as well. This is critical because the offshoring needs to be effective.

The company has few resources to dedicate to managing this new resource, and the distance and time zone differences will make direct management of offshored employees much more difficult than employees in the same office as the CEO. It is recommended that to address this problem, a study be done of cultural dimensions. Hofstede's cultural dimensions will provide insight as to which foreign cultures have the best fit with our culture.

With this knowledge, a firm can be identified that may be able to provide workers with such a cultural fit. In addition, however, it is important that the company also draw up specific guidelines for hiring workers/companies/contractors offshore. These guidelines will guide the hirers to employees with the best cultural fit. There will still be difficulties, however, so it will be necessary to provide our management team with material on the type of culture with whom they will be dealing.

For anybody in the offshore unit that is going to deal with our management directly they should receive training about our culture as well, to ensure that miscommunication and cultural misunderstanding is minimized. The second problem that was identified is that the remaining employees at home are likely to go through a range of emotions. They are likely to feel fear, anxiety, stress and all of these factors could lead to declines in productivity, increased turnover and other negative outcomes.

It will be necessary for management to address these issues as well. The first step towards addressing these issues will be to communicate to the remaining members of the company the rationale for the offshoring and the benefits that it will convey to the company. They need to understand that there is not going to be a second round of offshoring, so their jobs are safe.

This will remove the apprehension and fear, and understanding how important the offshoring is to the company will help them to accept and hopefully approve of the plan. There will also be a second step because this is a small company. The employees likely all know one another. This means that if any offshoring takes place, the remaining staff will have had friends that lost their jobs as a result of the restructuring. This can be expected to cause bitterness and resentment among some employees.

Management can alleviate this by communicating the necessity of offshoring -- that it promotes growth, that it will help the company to survive, that it was necessary in the face of stiff competition. The remaining employees must be convinced that the offshoring was absolutely necessary, so that they are less likely to harbor bitterness and resentment on behalf of their former co-workers. The third problem that needs to be addressed is that of the legal and ethic issues.

Offshoring is cheaper for a number of reasons, among them the lack of labor laws in many countries overseas. Moving overseas raises some ethical issues for the company, as many other firms that have gone overseas have noticed -- Nike for example was the subject of sweatshop scandals in its Asian shoe factories. It is recommended that to address this problem the company create a code of ethics and responsibilities for dealing with overseas suppliers of goods and services. The company most likely does not have such a code.

By developing one, the company will not only be able to govern the standards by which it wants its overseas suppliers to adhere, but the code can also be applied domestically. In addition to an ethics and responsibility code, the company will need to acquaint itself, at least loosely, with the laws of the country in which the offshoring is to be done. If the employees are working for a third party contractor, then this need only be done in a cursory manner, to get the basic idea.