Remote job vs Offshoring which is better for cost savings

What is best for achieving corporate cost savings? Adopting remote job policies or offshoring? This article answers the question many corporate executives and chief financial officers pose when seeking to maximize shareholder profits. We know remote jobs are job functions that can be completed offsite, usually at home or other nearby locations to offset commercial leasing costs.

Adopting remote work policies lowers office leasing costs

We know remote jobs are job functions that can be completed offsite, usually at home or other nearby locations to offset commercial leasing costs. Fortune estimates remote work adoption as lead to a $500 billion drop in commercial real estate values. Hence, more cost savings for the employer. But are there other advantages that are not as superficial? Where one must peel the onion to see if there are other deep cuts and substantial corporate savings possible? On par with offshoring, for instance?

But what about offshoring? Before we compare and contrast, let’s take a look at the many ways in which corporations may choose to offshore manufacturing or services.

How is offshoring, inshoring, and onshoring comparable to remote work?

Harvard University Research makes distinctions between what is typically referred under the umbrella term “offshoring” into three categories, others like Investopia provide additional delineations also covered below:

Offshoring. Manufacturing of goods and services overseas to take advantage of lower labor and production costs.
Nearshoring. Establishing contract agreements with subcontracting companies (servicer) within the region where the company (buyer)is located. A US based company would nearshore to Canada or Mexico (right along the country’s borders).
Inshoring: Moving business operations to less expensive locations within the company’s country.
Reshoring: Returning the manufacturing process and product assembly back to the country of the company’s origin.

Let’s face it. It seems as though we’ve come full circle. From offshoring to China from the US which is roughly 7,200 air miles to 6,200 nautical miles to inshoring remote work contractors a few miles from the corporate satellite office.

Corporations consider remote work viable cost cutting alternative

Corporations are beginning to consider adopting remote work policies as a viable cost cutting alternative because offshoring posits a number of threats. For instance, recent headlines in the press seems to put the thumb on the scale for adopting remote work policies rather than offshoring. Why? The disruption of supply chains would be one reason.

Freight Specialist in its article, “How trucking work strikes affect us all,” it was glaringly stated “trucking work strikes can have a significant impact on various industries.”

This is particularly true for sectors that are heavily reliant upon the import of goods (as a way to avoid high domestic labor costs). Today, it is widely discernable that the producing goods and services outside of the domestic market makes our economy vulnerable to:

global labor strikes and work stoppages,
natural disasters,
worldwide cyber security hacks and data breaches,
inclement weather
ocean and waterway pirating.

The list goes on. The good news is localized and nearshore remote work adoption, hybrid arrangements and distributed working solutions could be the wave of the future.

Localized, inshore (nearshore) remote work shows promise

Localized, inshore, and nearshore remote work may have overtaken offshoring as the favored cost reduction strategy. Theoretically, assigning job tasks, projects and business processes to be carried out virtually, could dull the shine of the need to offshore by conglomerates.

Remote work adoption may lessen human capital destruction

Harvard University Research has shown that offshoring practices threatens to destroy the human capital of corporations. How so? When a displaced employee loses his job, the knowledge he held, acquired, and built upon during his years employed at the company is lost. Not only the skills and abilities he applied to complete everyday job functions and tasks. Also, his vast and deep knowledge of the company, internal culture, strengths and weaknesses, as well as knowledge of other disciplines for which the company obtained at a discount. The examples given by the researchers are, “a highly paid IT consultant will typically know much more than just IT. She will know about the unique needs of her firm,” its business processes, procedures and unique tactics employed to address company-specific dilemmas.

These large multinational companies strive to realize significant growth and dramatic reductions in costs simultaneously through the use of offshoring. How could this be so?

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The history of business consultancies promoting offshoring

The Economic Policy Institute (EPI) reported almost 20 years ago that there were cracks in the low cost battle armor of its proponents. Economists concerned about the threats of losing white collar jobs suggested that corporations relying upon offshoring to lower costs did not factor full economic costs into the equation. Labor economists at the time dared to argue that the benefits of offshoring, by and large, is “concentrated in the incomes of a relatively select percentage of American households (para 3, line 8).” This damming conclusion was drawn after economists reviewed two independent studies from McKinsey Global Institute and Global Insight finding that their Goldie Locks theories of widespread benefits to the masses were overstated and wholly excessive.

Faulty data and assumptions lead to misguided corporate offshoring activity

To support its critical analysis of reports from business consultancies promoting offshoring practices, EPI provide the following evidence of faulty data and assumptions:

The “implicit” rate of return set at 14% is way too high (the Indian firms sampled from a very small data set may have tainted the results),
The rate of return referenced is conditioned upon firms with the largest payoff not the average, median or mode rate of return,
Increased imports were calculated at a 1:1 trade off with exports, not taking into account the societal and macroeconomic costs incurred to finance imports from the transfer domestic resources, and
The US GDP (gross domestic product) runs the huge risk of contraction when foreign countries begin to show proficiency in internal production of products, good and services for which the US has traditionally exported.

American workers are net losers when firms offshore

There was just one summary statement taken from the consultancies’ white paper upon which EPI agreed. Namely, “American workers are net losers. This can be seen by comparing the “savings accrued to U.S. investors and/or customers” (the first bar in Figure 1) to the “value from U.S. labor re-employed” (para 13, lines 2-4).

The environmental conditions ushered in by the pandemic made the realization of the true costs and risks associated with offshoring more glaring. Further, governmental mandates of lockdowns and public facilities closures made possible the remote provision of goods and services. All of a sudden services, goods and products supplied from another location and/or virtually seemed to be much less daunting. In fact, it is now a fabric of society.

We all know the benefits of remote work and remote job task completion. Let’s talk about offshoring and the factors that facilitate the decision by major corporations to offshore.

The Early Promise of Cost Reduction by Offshoring

Based upon these findings, Price Waterhouse Cooper opines that the promise of reduced costs in comparison to producing a service or good in-house is not the driving factor culminating to the decision to outsource. The advisory firm indicated that there were other factors leading to the growth in outsourcing.

They were involving the promise of:

greater product and service quality
enhanced support of rapid growth in the industry
faster speed with which to bring new products and services to market, and
advanced innovation and creativity.

In light of these promises, other experts cited in the report worried that organizational cohesiveness and the inability to build an internal ‘backbench’ of knowledge has the unintended effect of leading companies who rely upon outsourcing into a ‘death spiral.’

Not for naught, however, Price Waterhouse Cooper was quick to lay aside the ominous foreboding of many of the naysayers of outsourcing. They pointed to statistics demonstrating that companies who choose to offshore are obtaining about a 30% to 40% growth in revenue every quarter.

Almost 15 years ago, in January 2007, the respondents of the CEO Survey replied that on average, “they gain major competitive advantages from outsourcing.” These competitive advantages aside, they understood also the complexity of offshoring and were still seeking methods for reducing transaction costs as well as lowering the risk associated with early contract terminations.

Let’s face it. Not all job functions and job tasks are conducive for offshoring or outsourcing.

Job tasks and job functions most suitable for outsourcing / offshoring

BMA Global analyzed the 2021 outsourcing market and identified the following tasks most conducive for outsourcing:

Information Technology
Administrative Services
Accounting and Finance
Sales and Marketing
Human Resources
Legal Services
Customer Support
Tax Preparation
Computer Programming
Manufacturing
Shipping and Logistics
Web Design
Healthcare Services Engineering

Offshoring trends: Opportunities for remote work and remote online businesses

I know we talked about earlier how offshoring is a bust for traditional employees dependent upon patriarchal multinational corporations to earn a decent living. But, based upon current offshoring trends, opportunities are abundant for remote service providers, businesses, remote workers and freelancers, gig workers in search of remote job tasks for which to bid. For instance, BMA Global projects that offshoring trends this year (2022) that will impact businesses moving forward in the following ways:

Incorporating digital offshoring technology such chatbots (robotic process automation), artificial intelligence, cloud computing, cloud storage, and cyber security into longstanding business models,
Establishing collaborative partnerships and joint ventures as a hedge and protection against work stoppage due to natural disasters and bottlenecks in international supply chains for instance,
Focusing on cost reduction initiatives due to the uncertainty in the global marketplace. Rising inflation, shortage of labor, and rising customer expectations of product and service quality as well as availability and access come to mind.
Taking into account transportation, fuel costs and higher risks to preferring nearshore (national, regional, local) sources of offshoring rather than typical far-range offshoring.
Factoring agility, flexibility and adaptability into the decision-making model so that the alternative that promises a high rate of cost reduction is not selected without the consideration of possible and/or foreseeable risks.

To repeat. Current offshoring trends show that there may be an abundance of opportunities available for remote service providers, businesses, remote workers and freelancers, gig workers in search of remote job tasks for which to bid.

Offshoring trends: implications for remote work

These trends are favorable for the worker working from home, working from anywhere, the remote worker, gig and freelance workers completing remote job tasks, and the small business looking to pick up new clients. Why?

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Because corporations large and small are recognizing the benefits associated with an agile workforce and supplier pool. The pandemic brought about environmental conditions of mandated lockdowns, shortages of labor, highly fickle consumers, changes in consumer behaviors, restricted local, regional, national and international travel, global political upheavals, and threats to changes in trade tariffs and rising sanctions.

The number one concern of businesses is financial solvency.

Remote work fosters agility and business survival

The ability to ‘turn on a dime’ is vital to survival. Remote work is an essential concept connected to agility, nimbleness and adaptability. Larger, less spry corporations, in spite of a long history of offshoring may have found out the hard way.

The American Bar Association presented statistics prepared by economists. These economists analyzed the rate of bankruptcy filings during 2020. They found that bankruptcy filing by corporations with assets larger than $50 million increased by nearly 200% in 2020. On the other hand, family households, small and mid-sized businesses were less likely to file for bankruptcy in 2020.

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Smaller companies perhaps, as more frequent users of remote worker and contingent worker platforms like UpWork and Freelancer for the completion of remote job tasks, may have reduced their debt or ‘obligations load.’ They may have also relied upon their own sourced network of subcontractors and consultants tele-commuting and thereby responded faster to the rapidly deteriorating environmental conditions. Lowered debt obligations, absence of lease and employee agreements may have lessened the immediate financial fallout of the pandemic crisis.

As we may see, cost reduction through offshoring and cost reduction through remote work are not one in the same.

Cost reduction and offshoring

In 2020, reducing costs represented the #1 reason employers outsourced. Deloitte’s 2020 Global Outsourcing Survey found that 70% of the employers participating in its survey said cost reduction was their primary aim and rationale for outsourcing good and services.

These findings remain unchanged through the years. Regardless of the time in which the survey was conducted, the environmental and economic conditions faced by employers or the consulting firm. In most instances, cost was the driver of offshoring behavior.

Price Waterhouse Cooper prepared a report titled, “Outsourcing comes of age.” The consultants surveyed 226 customers of outsourcing firms and 66 firms who provide outsourcing services in the spring 2007. The premise of the report is that outsourcing, while used to expand into new product lines, lower costs associated with producing a product and providing a service; disadvantages remain.

Offshore contract ended due to increased costs

While the promise of cost savings caused corporations to salivate at the suggestion of offshoring, the promise may not have been fully realized in a number of instances. For instance, Price Waterhouse Cooper cited the number one problem is that, most deals fall through prior to the pre-planned contract termination date, due to:

increasing costs, and
growing mistrust between the two contract participants (the client vs the service provider or producer.

Conclusion: Opportunities for remote work and remote businesses

So this point gets back to our earlier discussion about the abundance of remote work opportunities for remote first businesses, freelancers and gig workers working virtually to bid upon and complete remote job tasks and projects.

Hop to it!