Offshore Engagement Model – Components, Types, And More
In the year 2000, when the internet and the advanced technologies in telecommunication were being introduced, the E-commerce business stood at $ 286 billion. The prediction for the year 2023 for the E-commerce industry is set at $ 6.3 trillion. The major factor in the giant leap has been the introduction of the Offshore Engagement Model which has been the actual facilitator of acceleration in globalization. From well-established companies to start-ups are not limited locally but can now go big globally. So here is a brief introduction to everything about Offshore Engagement Model.
Introduction to the History of Offshore Engagement Model
General Electronics in the 70s started outsourcing its manufacturing division to lower-cost countries and thus became the pioneer in Offshore Engagement. Soon a majority of US companies followed suit and started shifting their manufacturing process to Mexico. The Mexican government introduced then a unique system to boost the employment ratio in the country. The Maquiladora System was introduced by the Secretariate of Industrialization and Development, under which in the 1980s huge manufacturing units were set up to be leased by the US Giants. The labor force was local and much cheaper compared to the US workforce. When the model was introduced it employed 20,000 employees, which by the 1980s shot to 1 million employments. Soon Japan followed suit and started offshoring in countries like India, Sri Lanka, the Philippines, Malaysia, and Eastern Europe. In the 1990s with the rise of the telecommunication industry, IT industry, and BPOs a huge demand for Offshore Engagement Models took place, which has now become a major fast-growing business.
Introduction to the Concept of Offshore Engagement Model–
The Offshore Engagement Model is to set up service, or manufacturing units in developing countries and Third World Countries, where the cost of the service, manufacturing cost, and manpower costs is lesser as compared to the country where the Client Company is based. The Government promotes Offshore Engagement Models, by setting up manufacturing units and special economic zones. This in turn helps the Government to attract foreign investment that aids in economic growth. The employment rate gets a good boost and the local talent gets better opportunities.
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Key Components for Choosing Offshore Engagement Services
Setting up Offshore Engagement for a company depends on many key factors, following are the main factors on which the decisions are based :
Companies prefer to start Offshore Engagement in countries that have easy laws and regulations for setting up processes, and where the government is stable and there are no risks of political instability. The time zone differences should be manageable and the language barrier should not be too tough in those countries. The offshore country should have a good labor force that doesn’t charge too high and labor unrest is very minimal. The country should have a growing market and not a volatile and unstable market. The country should be geographically at an advantage too.
Infrastructure and Connectivity :
The location should be easily connected to ports, road networks, and rail networks for ease of transportation and accessibility. The telecommunication network and the internet network should be strong without any major disruptions. A constant supply of power should be there at all times.
The major factor for companies choosing developing countries is the cost-effective and cheap workforce as compared to the one available in their parent country. The second factor is the talent pool which is untapped in these countries which enables the companies to embark on innovations and advancements at costs which are way below the ones that experts in their field in their home ground charge.
Governance and Law:
Chad, Venezuela, and The Central African Republic are amongst the worst countries to set up an Offshore Engagement business as they have major public unrest, violence, and difficult laws and regulations. Thus, companies choose locations where they have a stable government. The laws for setting up, and getting credits and permissions are easy. Those places where investor protection rights and security is high are most favorable. These governments also have a good record in compliance and contractual right fulfillment.
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Types of Offshore Engagement Model
Companies choose Offshore Engagement Model based on their needs and objectives. There are seven major types of models for the companies to choose from, and they are as follows :
When the company sets up its offshore subsidiary on its own in a non domestic location then these are known as Captive Centres. The company sets up everything from scratch which are location choice, infrastructure setting up, operations, manpower hiring, and control and management of the entire center. The employees working in the center are legal employees of the parent company. India has approximately 1300 captive centers running in various locations.
Advantage – The advantage of a Captive Center is that the company has complete control over all the processes and there is a greater scope of changes and flexibility.
Disadvantage – The negative aspect of this is that the company has to put in a major chunk of investment in setting up. The operations, manpower, and departments have to be handled from remote locations. The company has to handle all the setting up laws, government approvals, and labor laws directly. In case the project doesn’t work the ramping up is another tedious and loss bearing end result.
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Outsourcing Offshore Engagement Model:
A company undertakes outsourcing in offshore non domestic locations to avoid the cost of setting up and manpower management. In this Offshore Engagement Model, a third party vendor provides the location which can also be owned by them. The vendor undertakes all the responsibilities of setting up an office, manpower hiring and management, and all the operational costs. The company has the choice of either outsourcing a complete project, any division, manufacturing unit, or even an entire department like the customer care department or the call center. For Ex, IBM outsources 70% of its employees. Accenture is the world’s largest company that does outsourcing for different clients.
Advantage –The advantage of this type of engagement model is cost effectiveness, and the company can focus on its core competencies. They can tap the talent pool at a better cost as compared to local expensive experts. They can tap on the time zone difference by enhancing service availability all around the clock and continuation of work on the project even after business hours finish in the domestic location time zone. Businesses can be more flexible in areas of hiring or downsizing as per the market requirement.
Disadvantage – The disadvantage of this model is the complete dependency on the third party vendors. Logistics is also another concern as traveling to these locations can be expensive for physical meetings and training. The company has to depend entirely on the vendor and staff for avoiding breaches in data and sensitive company information.
Built – Operate – Transfer (BOT):
In the engagement model the following steps take place :
Built- The company hires third party vendors in a non domestic location to undertake the infrastructure setting up, manpower hiring, and implementation of processes and strategies which are aligned with the main company’s goals.
Operate – The vendor takes care of the daily running of the setup which includes project management, resource allocation, and delivery of the service or products. The role of the parent company is restricted to monitoring and performance management.
Transfer – After a stipulated time period the parent company takes over the offshore location and merges it with the main company operations.
Advantage – The major advantage for the parent company is lower initial investment and efforts in setting up the location. As the vendor undertakes the setting up and daily operations which align with the local and company requirements, thus lowering the risk and uncertainties for the company. The skilled resources of the offshore location get transferred to the company and help in increasing the talent pool and development and innovation areas.
Disadvantage – There can be risks and differences due to language and culture while taking over the local center by the parent company. The company has to depend entirely on the vendor during the setting up and running of the daily operations. There can be potential taking over rules and regulations and compliances which would prove an obstacle created by the vendor or the government.
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Offshore Development Centers:
This model is employed mostly by the IT sectors or software development companies. The company sources out a project or the development of any software to the vendor. The company employs a Dedicated Development Team. Here the company chooses the manpower and manages the entire team till the completion of the project. The other option is a Fixed Price model in which the vendor manages the entire project or development at a fixed price for the company. The third option is Time and Material Model in which the vendor bills the parent company on the time taken and the resources employed. The billing is mostly on an hourly basis.
Advantages – This model proves to be cost-effective for the company as the process of hiring is cheaper in a non domestic location. It helps in faster delivery of the service/product. The work continues around the clock due to the time zone difference. This model offers more scalability and flexibility in terms of upsizing or downsizing.
Disadvantage – The parent company has to ensure strict quality controls in the beginning as the differences in the work culture, language, and labor laws can affect the quality of the deliverable. The entire dependency of the parent company is on the vendor. There are potential risks of data breaches and sensitive company information misuse.
Joint Ventures are undertaken when two companies together form an alliance with a third party vendor/company in a non domestic location. The companies share their investment, resources, and expertise with each other and the offshore client. The most famous examples of Offshore Joint Venture are Kellogs and Wilmar, Mercedes Benz and Volvo, Uber, and Volvo, and Sony and Ericsson to name a few.
Advantage – This model is a good way to gain local market access and presence. The risk gets mitigated as it is shared with the partner company. Both companies benefit from the sharing of their respective talent pool, resources, expertise, and technology. All the decisions are made in collaboration, thus cashing in on each other’s expertise to effectively mitigate potential risks. This is a potentially cost effective method to gain access to the local market and understand their culture and labor force. The benefits and profits are shared, thus, lowering the potential for loss.
Disadvantage – Joint Ventures can face disputes or differences in decision making due to the differences in their respective policies, procedures and approach. This can also impact the time for decision making. A major risk factor is the potential of incurring loss or risk due to the partner company. The exit policies can be complicated.
Global Delivery Model (GDM):
The offshore Global Delivery engagement model involves the parent company seeking multiple non domestic locations, depending on the cost effectiveness, ease of delivery, and faster market turnover. The company can seek a combination of nearshore and offshore locations.
Advantages – The offshore resources selected by the company be rove to cost effective and give access to a wider talent pool as compared to the domestic talent pool. The delivery of the product/ service to the customer is faster which can be due to the proximity to the customer and also due to the time zone difference the service/delivery is round the clock. It provides access to multiple local markets and local workforce.
Disadvantages- The biggest challenge the parent company can face in a Global Delivery Model is managing multiple locations. There is heavy dependency on the vendors. The local culture, work regulations, workforce culture, and governance are different, and keeping up with all of them at the same time can prove a big challenge. Traveling to multiple locations for monitoring, meetings or training is expensive and not feasible timewise. There is an increased potential for risks to take place.
Managed Offshore Engagement Services :
The Managed Services Offshore Engagement Model is adopted by the company when their main focus is on its core competency. They outsource resources like the IT department, infrastructure maintenance, application maintenance and support, customer support, finance and accounting, procurement, and data center operations. The rules, regulations, and work processes are as per the main company.
Advantages – The Service Level Agreements set up by the company for the vendor ensure maintenance of the quality, parameters, and faster response time to key factors, by the vendor. The company can divert its internal resources to its core competencies, thus, saving time and money for handling the rest of the departments. The company has more flexibility in engaging and disengaging the service.
Disadvantages- The company has to depend on the vendor totally for managing the location and delivery of the final product. The language barrier can prove another problem in managing the employees directly as and when required by the company. The vendor has access to the company’s intellectual copyrights and proprietorship which is another risk to be misused.The company should be aware of the legal and regulatory laws to avoid any future complications and risks.
Conclusion on Offshore Engagement Model
The Global Outsourcing Business market share is USD 268.21 million, which is estimated to grow to USD 576.98 million by 2030 with a CAGR of 8.9%. This volume itself suggests that the Offshore Engagement Model is gaining popularity fast. The company can plan global outreach in an easy and less risky manner. With Offshore Engagement a company can test the market before diving in fully and turning towards ownership. Most developing countries have a talent pool that has not been tapped into its full best potential, and they are not as expensive as the domestic talent pool, in fact, many countries have the Government promoting Offshore Engagement as it is the best way to invite overseas Company giants and major foreign funding. The Offshore Engagement Model helps in opening up a major chunk of employment opportunities. It gives an opportunity for the local talent to be identified and given the opportunity of getting trained in-house on subjects to which as such the local employees would not have access to or financial backing to do so.
Yet, companies before indulging in the Offshore Engagement business should have set goals aligned with profitability and cost optimization. They should be well aware of the laws and regulations of the country before deciding on a location. The supervision and management by the client company should be well established and tested in accordance with the local work culture to be successful. In conclusion, Offshore Engagement is the best way for Governments and companies to head for a globalized economy.
FAQs on Offshore Engagement Model
Q. What is an offshore engagement strategy and what are the benefits?
An Offshore Engagement Strategy is when a company chooses to hire the location, services, and manpower for an entire business department, projects, or for any particular task through a vendor in a non domestic location. The company manages the entire operations either remotely or through selected company representatives stationed at the location, or through periodic meetings and visits.
Offshore engagement setting up is done in locations where the investment is cost effective and minimal. The workforce expenses are not as high as the local labor. The different time zones ensure delivery, production, and services around the clock. The talent pool is good and cheaper as compared to the experts in the company’s own country.
Q. What are the key points to be considered before opting for an Offshore Engagement Service?
Before choosing an offshore location a company has to keep in mind the accessibility to the location which should be well connected with the road network, rail n, network and proximity to airports and ports. The second aspect is that the location should be good internet connectivity and a constant supply of power without any disruptions. The governance should be business friendly, promoting foreign investments by setting up good infrastructure, and should have easy laws and regulations for setting up, conducting, and when required ramping up the business too. The language barrier should not pose a major barrier and the labor workforce should not unstable. The most important aspect is selecting a good and reputed vendor, as they are the ones who take care of the entire business at the offshore location from setting up the infrastructure to managing the daily business.
Q. What are the different types of offshore engagement setups ?
There are primarily four types of common offshore models used by customers which are:
- Build- Operate- Transfer: In this type, the company hires a vendor to do the initial setup of the location, hiring of the manpower processes set up, and takes care of the laws and regulations. It is done as per the company guidelines. The vendor manages the business for a stipulated time, post which the entire business is transferred to the parent company legally.
- Dedicated Team Model – The company hires a team for a particular service or project with the help of a vendor in a non domestic location. The team is generally hired for IT development and projects, call centers, customer support centers, human resource, accounting, and other areas. This helps the company to focus on its core competencies.
- Fixed Time Model – The company hires the offshore location for a specific time period or for a specific project. The billing is fixed for the entire time to be taken.
- Time based Model -The company hires the offshore model for a specific task and hourly payment is done for the time taken to complete the project.
Q. Which countries are best for offshore project development?
The following countries are the best for setting up offshore engagement services :
- Czech Republic
Here is also a list of countries not good for setting up offshore engagement services :
- The South African Countries