Offshoring versus Onshoring: What You Need to Know and Why It Matters

Over the past seven years I have been privileged to work with some truly talented media and web development teams. As an entrepreneur and investor I have learned a thing or two about the processes of offshoring and onshoring and whether they make sense for a business. Whether you are have a startup business or one that’s well established, choosing the right outsourced vendor can mean the difference between a project’s success and ultimate failure.

First we need to define the difference between offshoring and onshoring.

ONSHORING

Onshoring or homeshoring is relocating business processes to a lower-cost location in the U.S. (If you are starting your own business, it may not be a matter of “relocating,” but one of choosing where to set up various operations in the first place.) Onshoring has become very popular today among American business owners, as it provides a great opportunity to keep jobs in the country, especially in states that have higher unemployment rates, while still being able to lower the overall cost of business.

Business owners who once offshored work (sent it overseas) in an effort to achieve significant cost savings are bringing work back to the United States. An interesting article in Newsweek in 2011 stresses this trend, highlighting several key factors:

- The value of the Yuan is increasing – President Obama’s federal tax credits and incentives have led many states to offer their own incentives to bring manufacturing into their states – Unions and workers are more willing to provide concessions in order to get back to work.

Perhaps most important, however, is the fact that the article estimates labor costs in China and in the US will converge by 2015.

OFFSHORING

When a business engages in what is known as offshoring, it contracts some of its business processes overseas to another country. Offshoring is normally done to save cost and reduce overhead. This trend was very popular in the late ‘90s and early 2000s, when costs such a technology were not seen as mission critical, and the lure of greatly reduced IT costs was prevalent. Following the dot-com bust, many firms outsourced their IT and other related business processes to India or China in an effort to improve efficiency.

While offshoring and onshoring may seem like two sides of the same coin, there are significant considerations that business owners need to carefully consider when sending their business overseas:

LANGUAGE AND CULTURE

Despite the widely-held belief that is English is the common business language spoken throughout the world, this is far from reality. Many entrepreneurs, investors, and businesses transact business in various languages. Additionally, cultural norms and ideas are dramatically different from one country to the next. For example, if you are trying to produce a media campaign in an effort to communicate your brand to your customer, an offshoring firm may not understand the cultural nuances you are trying to convey to your customers and will ultimately fail to accurately deliver your intended message.

ACCOUNTIBILITY

American business owners need to negotiate contracts and settle disputes according to the US legal system. Unfortunately there is no single international body of law that is accepted by every country. While escrow intermediaries like Elance and Guru attempt to solve these legal issues by protecting both parties in financial transactions, many companies do not use these service providers. Sometimes business owners may try to use a service such as PayPal to make a down payment for a service, only to realize PayPal does not provide protection for services, only for physical goods.

Whether you decide to offshore or onshore business processes, there are five best practices that I recommend:

1. Find a vendor whose interests are clearly aligned with your business goals.

Depending on your industry and defined goals, finding a vendor who will serve as a true partner is especially difficult, but well worth the effort. For example, our business was looking for an online, cloud-based accounting solution. After looking at all of the available vendors, we decided to partner with a firm that was looking to make an entrance into a market where we were already dominant. A partnership in this case made sense for both parties, as our business goals were aligned.

2. Fit is very important.

In both corporate culture and startup environments, the proper FIT is very important. Fit is defined as the ability of two organizations to work together seamlessly. For example, when Company A acquires Company B, a proper fit would mean that personnel in both organizations had similar work ethics and performance goals. With acquisitions or partnerships, this is rarely the case, and ultimately the situation ends poorly – with people on both sides pointing fingers.

3. Price should be a secondary consideration.

When considering purchasing the services of an outsourced vendor, I rarely go for the highest or lowest bid. In my experience, the most successful projects are often the ones where the vendor offers a balance of good value and quality results. This is no accident.

4. Review portfolios and samples.

I remind business owners that recommendations and even portfolio work can be faked. Our team once placed a bid on Elance (a freelance site which allows companies to outsource work) and two different vendors submitted the exact same portfolios. We had to go back and investigate who actually owned the work by emailing both parties. Of course it could have been a tricky situation if both parties had claimed ownership of the portfolio, but fortunately the scam artist disappeared.

Business owners need to do their own due diligence with regard to potential outsourced partners. This may include calling references or speaking directly to the principles of the firm, in addition to reviewing portfolio work. If, after all of this, you are still unsure of the vendor’s capabilities, consider asking them to do a quick mock-up or provide a basic outline of a work. A service provider who wants to win your business may be able to give you a rough concept to clarify their approach to solving your problem. But do not cross the line by asking for a fully complete mock-up. No qualified professional expects to work for free.

5. Start small

Finally, when engaging with a service provider for the first time, start with a project that is relatively small and simple in scope. This will give you a better idea of the provider’s style and capabilities before you entrust them with a “mission critical” project.