Question

offshoring creates value by combining organizational capabilities with the comparative advantages of different countries, but offshoring carries what risk?

Answer 1

Risk/disadvantages of Offshoring:

1. Increase Unemployment

The biggest criticism versus companies that offshore is that it increases the level of unemployment of the local economy.

The aforementioned companies Caterpillar and Nike have been accused of taking away jobs from Americans and displacing their existing work force in favor of other nationalities.

These companies argue that by offshoring they are able to improve profitability by lowering costs and increasing revenue. Thus, the increased profits can be used to improve facilities and programs of the principal company.

2. Cultural and Social Differences

The client will be immersed in the culture and social practices of the host country. This may have an effect on productivity and communication.

Unlike outsourcing, time zone differentials may work against the offshoring company because production could end up being delayed due to changes in manpower availability.

3. Security Issues

Whenever you are sharing, transmitting data to another party, you are always at risk of security breach and compromised data integrity.

There will always be transfer issues when it comes to data even when there is shared space collaboration.

4.Language and communication barriers

Many offshoring countries use English as an official language in business and government transactions. But there are different degrees in the depth and understanding of knowledge of English between the workers of the offshore country and their foreign counterparts. The accent can also be a challenge when offshore employees come from a region with a strong local accent and they have to talk to foreigners with distinguished accents.

5.Cultural and social issues

Offshore countries have cultural and social customs that are very different from the countries of the originating companies. For example, an American executive may talk in a candid, outspoken manner while his Filipino employees are more reserved and not used to the frank approach of communicating. Both parties may miscommunicate what they intend to say to each other and this could lead to misunderstanding.

6.Quality control problems

For manufacturing offshoring, ensuring that a product is strictly built according to the parent company’s standards may be a challenge under the offshore location’s manufacturing set-up. Even if the parent company provides quality guidelines, the differences in working culture, language, logistics and supply chains of the country where the factory is located may affect the quality of the finished product.

7.Effect on jobs in the home country

The parent company may have to terminate the employment of its local workers if it offshores their jobs to overseas subsidiaries or hire the services of offshore services providers. This can contribute to a high unemployment rate in the local community where the workers were laid off and affect its economy. Another issue is the impact on the remaining jobs in the factories or offices where the company laid off many workers. Stagnation of wages, uncertainty about job security, and low morale could affect the output of employees. This could eventually lead to low productivity and affect business operations. The company’s public image may also be damaged if there is a lot of negative publicity generated in the media about the local economy losing jobs to other countries.

8.Time zone adjustments

The time zone differences between the home country and offshore country can be a problem for both manufacturing and services offshoring. It can be challenging for the management in both countries to organize shift patterns that are not disruptive for both sides. This can be an issue when both sides have to find an appropriate time to talk to each other. The gaps in communication times could also affect the decision-making process. For example, the offshore country needs to make an important decision about a project, but it cannot move forward without consulting with the home country. The time it takes to wait and get a decision could affect urgent tasks that are time-sensitive and deadline driven.