Why Companies Use Offshoring | 4 Real Business Benefits
Offshoring allows companies to access talented engineers at a lower cost than at home. Great! But what are the actual business benefits of doing that? Financially. Operationally. What do companies gain by investing in an offshore team?
What is offshoring, really?
When discussing offshoring, most people dive too quickly into specifics: you can build a bigger software team! You can save money! It’s safer than outsourcing!
All true, but we should slow down. What is offshoring? Fundamentally, it’s a way to increase a business’s output, and improve its technical expertise, without undue stress, hassle, or cost.
At its most basic, offshoring is simply expanding your business with a new team, with new (or complementary) skills. Aside from being geographically distant (which isn’t a major issue in 2019) it’s no different from hiring locally: advertise, recruit, work, reward — it’s the same process.
So if it’s the same process, then why are companies using offshoring? What are the real business benefits of offshoring?
1. Higher profit margin
A lot of companies and articles talk about “lower costs” when offshoring. We want to be a bit more helpful and specific.
Say you establish a 5-person development team in Bangalore, along with your 5-person team at home in New York. Now let’s look at two comparisons: first, a pure salary comparison between India and the USA, and then the total cost of doing business offshore versus in-house.
- Salaries only — If you hire the same team in Bangalore (same ranks, experience, and quality) then the salary difference will be substantial. Comfortably 3–4 times cheaper — but this comparison is too simple to be useful.
- Total cost — For our average client, the total cost of doing business here (including premises, administrative staff, legal work, payroll, developer salaries, insurance — the works) typically comes in at 50% the cost of your at-home developers’ salaries.
There’s no industry where skilled Indian workers cost more than in Western Europe or the USA. The differences in cost of living are just too substantial.
It’s everything else — offices, admin, and these things — which are most important. Handled correctly by your dedicated offshore partner, offshoring offers higher margins and, therefore, higher profits.
Why are these salaries so different?
We need to remember there are two sides to the story. Pound for pound, Indian workers are always cheaper than their British or American equivalents. But that’s been the case for decades; longer than decades.
So why do we suddenly want to cash in on Indian labour?
- The quality of Indian workers has improved. Specifically, in IT, engineers across India are getting the same education, training, and practical experience as Westerners. They’re incredibly capable, and that’s attractive to businesses.
- Lower cost of living = lower salaries, period. It’s basic economics. Until India’s economy grows significantly compared to the west, the Rupee will be worth less than the Dollar. Therefore, salaries will remain smaller in India — regardless of the quality of service.
- Engineering scarcity in the west — This is something we can’t afford to forget. In isolation, quality Indian engineers cost more than they used to. However, in Europe, the UK, and the US, engineers are very hard to find and extremely expensive. Because of scarcity. Part of why Indian labour is so “cheap” is actually because local labour is so expensive.
So perhaps we should stop dismissing “cheap” Indian rates with so much scepticism: it’s all relative to the obscene wages that engineers command at home. Today, the main reason western businesses invest in offshoring isn’t to be cheap — it’s to hire equally-skilled talent at affordable costs.
2. Access to niche or rare talent
We’ve looked at how expensive engineers are to hire in western countries and cities. There’s no hiding from it: you could be facing $100+ an hour for a capable senior developer. And why are they so expensive? Because their skills are incredibly in demand.
In the USA alone, 250,000 software engineering jobs are currently unfilled and increasing. There simply aren’t enough new developers to fill the gaps.
Colleges are pushing IT and engineering hard, but there’s an inevitable delay before those graduates trickle into the industry. To make things harder, the number and variety of tech companies are also increasing. Good candidates can pick and choose their employers.
Hence the holy grail of incentives: crazy wages.
A problem of availability
Today, the main reason companies are looking to build offshore teams and engage Indian developers isn’t cost — it’s availability.
India produces 1.5 million engineering graduates every year, a good proportion of which are in software. Thanks to the high training pedigree (including niche specialisations) and extensive English language training, these engineers roll out of university ready to work.
English is the language of the industry. Indian engineers can communicate with general fluency, but can also be extremely clear and concise in a highly technical environment.
Even if you ignore the lower rates, there are some niche skill sets that are just plain old hard to find. It wouldn’t be unreasonable to work with an abroad contractor to get those skills.
Offshoring can sometimes be seen as an extension of that idea: access to highly-skilled developers you can actually find (and afford!) who happen to live elsewhere.
Combined with the lower rates, the argument is a no-brainer. Recruiting world-class engineers requires an experienced hand, but in India, there’s an extremely accessible pool of talent to get you started.
3. The opportunity to scale up sustainably
Scaling up a company is never as easy as it sounds. Taking on new employees (especially skilled, i.e. expensive ones) is a huge investment and presents a significant financial risk.
- If those employees decide to leave early (very common in this work era) you could be overburdened with work. The quality drops, clients go elsewhere, and the whole business is in trouble. Worst case, but it does happen!
- But what if everyone stays, but you can’t drum up as many new clients as you expected? You’re left with spare resources on the payroll, twiddling thumbs and burning up cash. Again, a nasty situation — and an unsustainable one.
With an offshore team, things are a little different.
First, the cost of recruiting and paying staff is lower. Thanks to the reduced payroll, a business could shoulder down periods more easily with an offshore team. At the same time, expanding your offshore team can be done much faster than in-house. We have brought multiple groups of engineers to our clients’ teams in as little as 4 weeks. Vetted, tested, and ready for work.
Second, since the offshore team will have ample, inexpensive office space, there’s no concern over moving to a larger property.
A game of margins
The more you grow your offshore team to provide increased capacity, the higher your profit margin.
Say your current staff wages are £250,000 a year for 5 developers. Revenue is £1m and business is going great, but you want to grow.
You manage to negotiate another £1m in jobs for the coming year. You have 3 options:
- Hire 5 more local developers — For another £250k per year, you can simply double the size of your existing team. Assuming zero extra costs in doing so (which, of course, is impossible) your total profit is now £1.5m. In reality, it’s some amount less than, but close to, £1.5m.
- Hire 5 new developers in an offshore team — The total cost of business with this team is, worst case, 50% of the at-home salaries, remember? Let’s say £125k, which means the other£125k goes straight into your profits.
- Dismiss the in-house team for a 10-person offshore team — £250k for your offshore team, but still £2m in revenue, so a whopping £1.75m in profit.
So while option 1 amounts to some amount less than £1.5m in profit, option 3 offers a guaranteed £1.75m profit.
Now we don’t want companies to ditch their in-house teams. It’s just a matter of demonstrating how significantly offshoring can impact the bottom line. In brief, it impacts it a lot.
4. The administrative burden is not increased
On its own, this is not a good enough reason to build an offshore team. “Things won’t get any worse” is not an incentive — but stick with us.
Given the first 3 points on our list, this is an important topic. Expanding any team is usually a big logistical effort. With offshoring, the administration, payroll, recruitment (except final decisions), accommodation, insurance, and so much more are all taken care of by us.
As an offshoring partner, our role is to make this as effective as possible for you, while also limiting stress and inconvenience wherever possible. Building a similar team at home would be much more resource-intensive.
At the end of the day, offshoring with the help of an experienced, versatile partner makes all the difference. It allows companies to leverage all the benefits of offshoring without compromise.
Over to you
As we said, how offshoring works is no big secret: you go to India and build a team of developers there. It’s the benefits, the real, tangible business benefits of offshoring that we rarely cover. To recap: