Offshoring - Make or Buy?

Offshoring - Make or Buy? Captive Offshoring or Offshore Outsourcing?

ALTHOM Konzept

 

Companies and organizations are confronted today with a lot of challenges, with the most important being the progressively increasing globalization, the changing of client’s requirements, the adaptation to the latest technological developments and the shortage of qualified personnel. The steadily increasing competition raises the pricing pressure, rendering the need for business internationalization mandatory. In order for a company to remain competitive in this environment, the Offshoring (relocation of production and /or business processes abroad) provide the solution.

Offshoring enhance the economic conditions for a company, through the higher accessibility to qualifi ed specialists, labor costs advantages or increasing capability for market growth. Furthermore, the progressive liberalization, deregulation and privatization not only provide a company with more opportunities into becoming active in a foreign market, but also they demand it.

How can Offshoring be implemented?

Offshoring can internally (Make) or externally (Buy) be carried out. With the external relocation (Offshore Outsourcing), the relocated activity is realized by an external service provider or business partner. In this situation, a transboundary Outsourcing exist without the requirement for own facilities. With the internal relocation (Captive Offshoring), on the other hand, the activity is realized by the company itself. For this particular application, the need for own facalities is mandatory. The answer to the question which Offshoring way is the most appropriate for an enterprise can be given by ALTHOM ‘’The Offshoring Company’’, which is specialized in the Offshoring process and has utilized both forms in practice.

The practical experience in the last years has shown that with the external relocation the transaction costs for the communication, transport and journey abroad have decreased signifi cantly, while at the same time the qualifi cations of foreign employees have increased. In particularly, under the condition of standardized and effortlessly isolated processes, which exhibit few interfaces with other internal activities, the Offshore Outsourcing is considered the best solution. One important advantage when compared with Captive Offshoring is the higher planning reliability, since the external service provider, with whom usually a long-term partnership exists, ensures stable prices for the contract period. Consequently, a share of the project risk can be undertaken by to the external partner. By use of outsourcing, the enterprise’s management can focus on strategically more important areas and as a result the company becomes more compact and flexible.

With the Offshore Outsourcing on the other hand, a company faces the risk from the strategic point of view, not only to lose specific internal technological know-how, but also to become dispensable through a severe minimization of the work volume. An expert in Offshoring, like ALTHOM, is able to identify which part of work volume should be retained in-house, in order to counter both the above mentioned risks. Moreover, the increased administration costs (e.g. information search, contract negotiations, monitoring, etc.) should be kept at minimum, through clearly standardized processes and professional Quality Management systems.

By means of Captive Offshoring, a company retains its influence and control over the relocated activities, while the know-how and the expert knowledge remain inside the company. Furthermore, the possible process changes are not required to be accomplished by the external service provider. If it is a matter of additive relocation e.g. market development, obtainment of access to human resources, the Captive Offshoring is strongly recommended.

Both methods face the risk of low flexibility in possible market chanlitiesges and high cost investment (time and money). In addition, there may be challenges during the implementation, not only due to the internal structure of the organization, but also from the unavailable knowledge of the foreign regulations and laws. In order to overcome this challenges, an offshoring expert with experience in the target region should be consulted so as to describe the market characteristics (law, competition, skilled personnel).

Offshoring is a multitude or decisions, whose advantages and disadvantages must be analyzed and be taken into consideration. Although the classic question of Make of Buy remains the crucial aspect, it follows now a different way: Considering that the external relocation in the past was tight restricted by the tactical productivity gains, a company jumps on the today’s globalization train, follows the faster technology cycles, exploits the diminishing transaction costs and the outsourcing becomes a strategic option with increasing popularity. In this sense, the company’s self-determined core competences can be outsourced and with the help of an outsourcing partner can the global competitiveness be preserved. Last but not least, the outsourcing can become a good opportunity for a company further to specialize in a new business area, without neglecting the current profitable ones.

 

This article was published in the journal "Ingenieurspiegel" (1 | 2015).

ALTHOM is specialized in offshoring and offers its customers access to low-cost foreign development and production capacities in combination with German project management and quality assurance as a service.

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