SMEs Can Scale New Heights by Adopting Offshoring
Any small- and medium-sized enterprise (SME) can ship jobs or hire a freelancer. However, 99 percent of them cannot feasibly offshore (in terms of having a secondary office located overseas). Herein lies the significance of remote professionals. Now, small firms can send jobs to a remote location in a manner that was previously considered viable only for large multinational corporations.
The true value of the remote dedicated workers is often vastly underestimated. This is because many clients think if they hire a remote worker they are outsourcing (whereas employing a remote worker is actually offshoring). Outsourcing, freelancing, and offshoring are terms that are commonly used interchangeably. Let’s first try to understand the differences between them.
Outsourcing is where one company contracts with another external third-party company to handle its work. The key point about outsourcing is that the service provider completes the work independently and on the behalf of the client that is sending the work. Take for instance a small law firm based in California. If this law firm wanted to create a website they would in all likelihood send the project to a company that specializes in web development (as opposed to developing the website in-house).
Hiring freelancers over the internet (via popular sites such as oDesk, Elance and People Per Hour) is where individuals are contracted to work from home. As freelancers often work with several clients simultaneously, freelancing is typically most suitable for low budget, short-term projects, (the average value of most freelancing projects on oDesk is $400). Though freelancing and outsourcing are very similar, a distinction can be made on the basis that a client, to a certain degree, manage and collaborate with a freelancer, while it’s not the case so far as outsourcing is concerned.
Offshoring simply means that work is completed overseas. Even within this, there are two forms of offshoring. The first where a company sends work overseas and to an external third party. The second where the company offshores work from one of its offices to another of its offices but one which is located overseas (and thus the work remains internal and is not really ‘outsourced’). For the purpose of this article, consideration and analysis will only be made regarding this latter form of offshoring. A good example of this form of offshoring would be IBM; IBM not only has offices in the USA but offshore offices all around the world. Thus, the defining aspect about offshoring is that there is no external third party company involved. There is only one company, with multiple offices. All the employees hired across all the different offices are working for the same company, irrespective of the country from where they are based.
Offshoring is poles apart from both outsourcing and freelancing. When companies offshore they retain control, whereas when they outsource or employ a freelancer they give up control.
The vast majority of SMEs cannot offshore because they do not have the initial upfront investment necessary to set up an office. Even if SMEs have the required investment, they lack the economies of scale to attain a profitable return on this investment.
SMEs lack the upfront investment necessary to offshore
The logistics involved in setting up an offshore office are so cumbersome that the vast majority of SMEs simply cannot afford to undertake such a venture. Could the owner of a small web development company in America plausibly set up an offshore office in India? It will require travelling to India, renting an office, recruiting staff, managing the offshore employees, registering the company, purchasing the required infrastructure, etc.
A company like IBM has the financial muscle necessary to overcome such logistics and costs. However, SMEs don’t have the required time, money, and energy to set up an offshore office.
The economics of scale of offshoring
Even if a SME had the upfront investment needed to set up an offshore office, it would still lack the economies of scale to make such a venture profitable. As a general rule, the greater the scale on which a company offshores the more profitable and feasible offshoring becomes. This is because the cost per offshore staff decreases, as the number of offshore staff that are hired increases.
For example, a large multinational corporation opening an offshore office in India to employ 2,000 employees would most likely be a financially viable and profitable venture.
For instance, if the company could save, let’s say save $40,000 per staff recruited per year in India over hiring locally, then the potential savings would soon outweigh the cost of setting up from scratch an entire unit abroad. The effectiveness that comes with employing more staff results in a positive, faster return on investment.
By comparison, a small 20 staff company seeking to open an offshore back office in India to employ just 5 full-time staff would be financially illogical to say the least. How long would it take before a profitable return is seen on all the investment made to hire, set up, and manage a team of 5 staff in India? And how practically viable would such a venture be for a small firm?
In short, the resources, time, and investment made would override and negate any advantages most SMEs would gain by offshoring. Offshoring is simply not financially or practically feasible. This is why 99 percent (if not more) of SMEs around the world do not have an offshore presence.
SMEs need to offshore more than MNCs
Quite simply, the success of an offshoring venture is proportional to the scale of investment made. Greater the economies of scale, greater are the cost advantage. This is an important point, because it means that SMEs can’t and don’t offshore only because they lack the necessary economies of scale.
But take economies of scale out of the equation and a stronger business case can be made for SMEs needing to offshore than MNCs. MNCs are already vastly profitable organizations; by offshoring, they are merely increasing already significant wealth. Because of their established reputations, MNCs are always in a position to recruit and pay for the brightest talent locally. From this perspective, one could certainly make the case that SMEs have a greater need to offshore and reduce their costs, circumvent strict employment laws, and employ talent that might not be available for hire locally. Hence, it is not the case that SMEs don’t have a need or a desire to offshore. They just simply don’t have the economies of scale so that they can profitably do so.
The SME offshore vacuum
As a result of the inability of SMEs to offshore, they are often forced to seek out alternatives, i.e. outsource or freelance as a means to reduce costs. A lot of work cannot, however, be sent as a mere time-bound project.
A US web design firm that needed to reduce costs would most effectively achieve this with the support of developers in India working remotely for them on a full time, dedicated basis. Shipping, ongoing, daily web development work on a per project basis would, however, be highly inefficient, because the company would be giving up control over areas of its core competencies. And, employing a freelancer would simply be impractical, too unstable and unprofessional for the company’s high-end value work.
This is not to say that outsourcing and freelancing are not valuable and needed services; they are. For instance, a law firm that wants to create a website for an online presence may find outsourcing web development and web designing highly beneficial. Nonetheless, outsourcing, freelancing, and offshoring serve different purposes, markets, and should be utilized at different times. One should not outsource or freelance work that should be offshored and vice versa. These business practices are not interchangeable. And, if one incorrectly hires a freelancer or outsources when they should actually be offshoring, the results will be poor.
This point can be illustrated with an analogy. A plane, a car, and a rail are modes of transport. One mode of transport is not necessarily better than the other, and which mode one uses depends entirely on the circumstances surrounding the need. If one needs to travel from New York to California the most effective way would be by plane. If an individual could not afford a plane ticket and so instead travelled by car, the journey would take a lot longer and thus a lot more inefficient. This, of course, does not mean that commuting by car is unsuitable; it simply means that one method is more suitable than the other, given the circumstances.
Similarly, outsourcing, freelancing, and offshoring serve their own markets. They can all be highly efficient and cost-effective business practices provided they are utilized correctly, and for the purpose they were intended for. If, however, one started outsourcing work, when they should be offshoring a client will struggle to achieve productive results.
This, unfortunately, is precisely what many SMEs have been doing; hiring a freelancer or outsourcing work when they should actually be offshoring. And this is why the Virtual Employee is a revolutionary concept because the VE makes offshoring feasible for SMEs.
How we enable SMEs to offshore
An offshore office is one where the head office in the home country has control over the offshore staff in the foreign country. We achieve this with the following:
1. Business model
Outsourcing is an A – B – C model. The client (A) tells a service provider (B) what they want to achieve. A and B do not work together; A simply tells B what is desired. B then works internally with their own staff (C) to execute the completion of the task at hand. In this model, B has control over C, but A does not. Outsourcing is, therefore, most suitable for work that is a project and a non-core competency, because it is in areas of non-core competency which a company would want to give up control.
Freelancing is an A – C model, (where A is the client, C is the freelancer, and B would be the freelancing website that pairs the two individuals together). Although in this model, A interacts directly with C, and there is collaboration and interaction between the two, it is not akin to an employer-employee partnership because a freelancer is not a dedicated resource. For instance, when one hires a freelancer, the client cannot instruct the freelancer what office hours they must work, or how they must work, etc.
With a remote staffing solution provider, A (the client) works directly with C (the dedicated resource). In this instance B (remote staffing solution provider) does not instruct C as to their duties; it simply makes it possible for A and C to work directly together, remotely. In effect, C becomes a direct employee of A. Though a remote dedicated resource works remotely from another country and office, he/she becomes a part of the client’s team and company.
2. Support offered by remote staffing solution provider
Working directly with a dedicated offshore employee is in itself not sufficient to constitute an offshore office. This is because while the client may be able to work directly with this individual, if that individual works independently and is not physically supervised, the client will have little accountability and control.
With the help of remote staffing solution provider, however, the client’s remote professionals work from our office in India. Our role is to supervise and manage the client’s employee on their behalf. For instance, ensuring the employee reports to work on time and is working dedicatedly during office hours. This gives the client control, because firstly, the employee is held responsible for their conduct. The psychological impact this has on an individual’s professional conduct and output cannot be underestimated. Secondly, if the client requires any recourse management support, the client can instruct our management team to directly implement any directives with regard to their employee on their behalf.
Therefore, though the client and employee are situated thousands of miles apart, the client can control their dedicated staff with as much control as they would for a locally hired resource. This is because remote staffing solution provider acts as the client’s physical representative here in India. Whatever the client requires, from additional hardware for their employee to supporting a working visa permit for their employee to visit them in their country for training, the remote staffing solution provider acts in whatever capacity required by the client. In short, remote staffing solution provider acts as the client’s physical representative here in India and this coupled with working directly with a remote dedicated professional is why our office becomes a client’s own offshore office and presence in India.
The economics behind offshoring with remote staffing solution provider
The economics behind how remote staffing solution providers like us make offshoring cost-effective for SMEs is actually very simple. With our service our employees, office and management team are effectively leased out to the client. Hence our employees, office and management team in effect become the client’s “staff,” office and management team for the duration of which the client wishes to offshore. Thus, the client does not have to invest their time, money or effort in setting up an offshore office, e.g. coming to India, renting an office, purchasing infrastructure, recruiting staff etc… We already have everything in place, ready to go as and when the client wants to start.
Secondly, although the client attains an offshore office, they themselves do not have to invest their time, resources or finances in managing and maintaining the office. If, for instance, the dedicated resource requires a new PC, the client does not have to be concerned with purchasing a new one. We take care of all such things.
Typically, a company needs economies of scale to make offshoring profitable. This is because a large initial upfront investment is needed to set up an offshore office and secondly, there are significant overhead. If a company does not have sufficient economies of scale, then they won’t see a return on the investment they make.
When offshoring with a remote staffing solution provider, a client does not make any investment in: a) setting up an office, b) maintaining the office (as the client is simply effectively just leasing this). An SME, therefore, ships jobs by simply “piggybacking” on remote staffing solution provider’s economies of scale. Hence, the scale on which a company wants to offshore is no longer an issue. An SME can have an offshore office in India with as few as just one employee (one seat). This is why the Virtual Employee concept is so revolutionary; offshoring is made possible without economies of scale being a factor.
Why SMEs should offshore
With technological advances (coupled with our unique business model), offshoring is the next natural evolutionary step for SMEs.
The fact that SMEs have been sending jobs to India for the last 10 years is proof that the talent exists. So why stop at just shipping a project or employing a freelancer in India? The logical conclusion would surely now be for SMEs to have an offshore presence with full-time, dedicated staff supporting their head office? Why just move the creation of a website overseas? Why not employ a full-time website developer to work remotely? Large multinational corporations have been sending jobs to India for years, and with great success. If offshoring is considered a sound business practice for the most successful and profitable companies in the world, then why not for the SMEs? If anything, SMEs with small turnovers, margins, and profits are in greater need of offshoring (provided cost effective). Now that SMEs can offshore too, it is only prudent that they also tap into this huge talent pool of highly talented, yet cheap, workers.
The advantage of employing remote dedicated professionals goes beyond just cost savings. The client gets to work with a dedicated employee, but without having to spend time on managing all the time-consuming, tedious but necessary management that comes with employment. For instance, technical support, tax, insurance, maintenance and so on. This enables one to streamline their business, so that they can devote more time to focusing on core competencies and working with staff, rather than managing them.
The Reward of Offshoring vis-à-vis Outsourcing and Freelancing
Offshoring also presents higher rewards and lower chances of failure in comparison to outsourcing or hiring a freelancer. Take the hypothetical scenario of an accountancy firm that wants to create a website so that it can have an online presence. By shipping project to India, the firm can save a few thousand dollars. If the cost of development in the States would cost, let’s say for the sake of argument, $5,000, by offshoring to India the firm may be able to get the development done for $1,000, and so make an instant savings of $4,000.
However, if the same accountancy firm had a back office presence in India to support the head office with everything from bookkeeping, invoicing, and tax returns, the potential saving would be significantly more. If the cost of hiring an accountant in the US would be $50,000 per year, the same position could be filled offshore in India for as little as $15,000 – $20,000 per year. This would offer a savings of $30,000 per year on just salary alone for just one position. And this is not even after taking into consideration savings that would be gained from other expenses, such as overheads. The potential cost saving through offshoring is significantly greater than outsourcing or freelancing.
Risk Assessment of Offshoring vis-à-vis Outsourcing and Freelancing
Though outsourcing and freelancing can be very profitable undertakings, there is a higher chance of failure compared to offshoring. The key reason for this is control. Offshoring with a remote staffing solutions provider is a very straightforward process. Just as an employer would hire staff locally, with the remote staff supplier an employer does the same except that their “staff” works from India. The remote staff supplier acts as the “middle man” to make it possible for employer and employee to work together and for the process to be efficient and cost-effective for the client (employer). The important point to appreciate is that this model has a high success rate because it is akin to hiring locally. Just like an employer is in control when they hire locally, the same is true when offshoring with a remote staff supplier. As a result of the role a remote staffing solutions provider plays, the fact is that the client’s control does not diminish just because the staff is situated abroad. It is this element of control that gives offshoring a much higher success rate than outsourcing and freelancing.
As mentioned earlier, when one outsources an A-B-C model exists. And so the client has to transfer knowledge to B to get the desired result. It is very difficult to transfer knowledge accurately as one desires. In addition, it is very easy for one to misunderstand or misinterpret the knowledge being transferred. Secondly, the client does not themselves work with the staff. This situation leaves the client with little control and thus plenty of margins for error, inefficiency, and failure.
Similary, when freelancing, the collaboration between client and freelancer – although more than when outsourcing – is nevertheless still limited. This again can make knowledge transfer problematic. Furthermore, because freelancers work from home and with several clients simultaneously, the process lacks professionalism, structure, and dedication. Again, it means the client lacks control, which leads to inefficiency and ultimately means there is a higher chance of failure than compared to offshoring.
Competitive advantage of offshoring
With exponential improvements in technology, the world continues to become ever more in the clouds, globalized and smaller. Those entrepreneurs that can realize the benefits of the remote dedicated professionals will gain a huge competitive advantage over their rivals. Those that remain rigid in their thought process will simply find the competition much tougher.
The SME outsourcing and freelancing industries over the past 5 to 10 years are ample proof of this. Outsourcing and freelancing brought the talent of the entire world to one’s PC. Those entrepreneurs that were able to identify this and the huge potential it offered were able to reap rich dividends (irrespective of the size of their business). One needs not look further than The Four Hour Work Week by Tim Ferris, for a great insight into how one’s work load could be radically transformed through offshoring, outsourcing, and freelancing.
Those who refused to move with the times sometimes simply got left behind. The vast majority of successful small- to medium-sized web development firms in the USA are shipping jobs to India. At the front, people see an American company, staffed by Americans. But more often than not this head office is also sending jobs to India, and people are simply unaware. Those web development firms that resisted job shipping often found themselves unable to compete with their rivals and soon went out of business. However, outsourcing and freelancing are now passé and offshoring is the latest buzzword.
In today’s fast-moving world, entrepreneurs must continue to push the boundaries. Today, that boundary is offshoring. Just as those who embraced outsourcing and freelancing to their advantage 5 to 10 years ago were able to gain a huge competitive advantage, similarly those that can understand the huge opportunity a remote dedicated resource presents will also gain an upper hand. The advantage offshoring bestows upon those that embrace it will, however, be even greater and more significant than the ones accrued through outsourcing or freelancing.
Tho clients that are accustomed to and familiar with outsourcing and freelancing, but do not realize the uniqueness of the remote professionals, too, risk falling behind. Many clients consider outsourcing, freelancing, and offshoring as interchangeable practices and fail to understand the added value of the remote dedicated professionals. This is a fatal error; offshoring has its own niche market. For daily work, offshoring provides a far superior, professional, and cost-effective solution than outsourcing or freelancing. Hiring a team of remote dedicated employees can propel SMEs to new heights. Offshoring is the latest buzz. The SMEs that can see this will be able to revolutionize their business and stay ahead of their competitors.