Offshoring

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Offshoring, can be defined as relocation of business processes (including production/manufacturing) to a lower cost location.

Offshoring can be seen in the context of either production offshoring or services offshoring. China has emerged as the preferred destination for production offshoring while India has emerged as the dominant player in the services offshoring domain.

Frequently used terms

Offshoring can be contrasted with outsourcing and offshore outsourcing which implies that a third party service provider takes over the business process and runs them based on service level agreements.

Other related terms are are nearshoring which also implies relocation of business processes to (typically) lower cost locations, but in close geographical proximity (e.g. shifting US bases business processes to Canada/Mexico); inshoring, which means picking services within the US; and bestshoring, picking the "best shore" based on various criteria. Business Process Outsourcing (BPO) refers to outsourcing arrangements when entire business functions (such as IT, Customer Service, etc) are outsourced.

Production offshoring

Production offshoring involved relocation of physical manufacturing processes to a lower cost destination. Examples of production offshoring included manufacture of electronic components in Taiwan, production of apparels, toys, consumer goods in China, etc.

Production Offshoring got its big push when NAFTA made it easier for manufacturers to shift production facilities out of USA. The trend later shifted to China which offered cheap prices through very low wage rates and economics of scale.

Services offshoring

The growth of Services Offshoring is linked to availability of large amounts of reliable and affordable communication infrastructure following the telecom bust of late 90s. Coupled with digitisation of many services, it was possible to shift the actual delivery location of services to low cost locations in a manner transparent to end-users.

India benefited from the trend as it has a large pool of English speaking and technically qualified manpower. India's offshoring industry took root in IT functions in 90s, and has since moved to back-office processes such as Call Centers, Transaction Processing etc as well as high end jobs such as Research & Development, Equity Analysis, etc.

Other offshoring destinations are Philippines, Ireland and Eastern European countries.

Offshoring: Transfer of Intellectual Property

Offshoring is often enabled by the transfer of valuable information to the offshore site. Such information and training enables the remote workers to produce results of comparable value previously produced by internal employees. When such transfer includes protected materials, as confidential documents and Trade Secrets, protected by Non-Disclosure Agreements, then Intellectual Property has been transferred or exported. The documentation and valuation of such exports is quite difficult, but should be considered since it comprises items that may be regulated or taxable.

Offshoring: Debate

Offshoring has been a controversial issue with heated debates. On one hand it is seen as benefiting both the origin and destination country through free trade. On the other hand, job losses in developed countries has sparked opposition to offshoring. Some critics agree that both sides will beneifit in terms of GDP and numbers of jobs created, but argue that the subjective quality of the new jobs will be less then the previous ones.

There is an online futures market which has been set up to settle this question: The Foresight Exchange includes a claim called The Future of IT Jobs in America. If this futures market trades above $0.50 then there are predicted to be more IT Jobs in America in 2012 than there were in 2002.

Offshoring: History

In the United States, moving jobs out of the country began in the 1970's and continued throughout the eighties. It was characterized primarily by the closing of factories, frequently with the corporations opening new factories in Mexico. Many of these new factories were called Maquiladoras.

In 1994 NAFTA, the first of the major free trade agreements went into effect.

The World Trade Organization Ministerial meeting in Seattle in 1999 saw a protest by approximately 50,000 activists. There were more than 600 arrests.

Currently efforts are underway to expand free trade to many new nations. A recent Free Trade Area of the Americas meeting in Miami drew massive protests and a heavy police response.

With the development of the Internet, many new categories of work such as call centers, computer programming, reading medical data such as X-rays and MRI's, medical transcription, and income tax preparation can be offshored.

External links

OffshoreXperts.com - Offshore Outsourcing Marketplace