Labor Offshore & The World in 2023

In the ever-changing market conditions and globalized production lines, there are very few products that are truly domestic or national. Several world economies take most advantage of outsourced productions, yet the true cost of products remains with the business who designs products. Two very common symbols of globalized economies are a Barbie doll and an iPhone.

Barbie’s production process starts in Saudi Arabia where oil is refined into ethyne for the plastic body. [1] The Chinese Petroleum Corporation then buys ethylene from Saudi Arabia and sells to Taiwan’s leading producer of polyvinyl chloride plastics where raw material is prepared. It is sent to China, Indonesia and Malaysia where US-made body shaping machines, the most expensive machine of all Barbie’s manufacture, are put in action. Complete dolls leave for the US from Hong Kong, one of the world’s largest ports. Yet the added value of marketing is never outsourced or offshored, and stays within the US.

Likewise, the iPhone spans the globe in its production. [2] In a nutshell, its display is made by Samsung or LG in South Korea. The flash memory is sourced in Kioxia’s factories in Japan. The protecting Gorilla Glass comes from a Corning factory in the USA, Taiwan or Japan. The custom silicone parts are designed in California but sourced from Taiwan’s semiconductor company TSMC. Just like with Barbie, though, the major cost of the iPhone, its programming core, is designed in the USA where major earning stays.

These success stories are possible because of labor offshore. Indeed defines it as “setting up infrastructure overseas or using a third-party vendor in a different country to perform services or manufacture products”. [3] The terms outsourcing and labor offshore are frequently confused. Outsourcing refers to delegating work to a contractor locally. Both a company and a contractor are in one country, and money transactions are not international. On the contrary, labor offshore is when part of work is done abroad cost-effectively, i.e. in countries with lower salaries and living costs.

Labor offshore today is not a shady business practice. It is a developed leverage used by transnational companies worldwide primarily to cut costs. Although Barbie and iPhones are examples of offshore manufacturing, intellectual and creative jobs can be offshored, too. Italian companies rely heavily on Romania where their call centers are located. [4] Microsoft builds up entire hubs of development and client support in the Balkans. [5]

It must be noted with care, though, that Information Technology and Creative industries see a lot of potential in labor offshore. The industries favor the opportunity as much as manufacturing industries do, i.e. traditionally offshoring companies. Naturally, any growing business is primarily guided by cost reduction. However, in labor offshore for the IT sector, a lot more than lower costs is required and assessed.

The key benefits of labor offshore, across industries, are:

• Access to cheaper skilled workforce: see the figure below to see the difference in wages. [6]
• Service across time zones: for non-stop support and overnight task completion [7];
• Localization at its best: as will be seen from a case discussed below, foreign workforce has a unique understanding of local markets which is invaluable when it comes to market expansion [8];
• Lower payroll costs: Employer of Record offered by EasyStaff allows companies to legally avoid tax payer status in certain jurisdictions, thus considerably saving on taxes. [9]

Data by qubit-labs.com [6]

Overall, as an umbrella term, labor offshore has three variations. [19] As Agile Tech describes them, they are:

• Onshore: a team in California outsources some work to a company in New Jersey. Both parties are in the same country and jurisdiction.
• Nearshore: a team in New Jersey moves part of their work to the nearest countries, like Mexico and Brazil.
• Offshore: a team in Mexico delegates some work all the way to Ukraine. The two countries are far apart from each other.

The early days of offshore software development began in 1996 when the US company General Electric opened its first IT center in India where production costs are much lower. [10] The tendency was picked up by the tech giant Google after they observed local workforce shortage in the US. According to the report Moving Offshore: The Software Labor Force and the U.S. economy, [8] in 2006, as Google was rewriting its search engine and monetization system codes for the fourth time, it transpired that Google required a far larger amount of resources than there was in the US at the time. Namely, Google sought “language-specific software skills and, in many cases, a high degree of cultural sensitivity were necessary”, explained Dr. Wayne Rosing, the engineering director of Apple Computer’s Lisa team. “The company had begun to hire people abroad, and those people were needed in their own cultures, so it was not practical to bring them to the United States”.

One of the catalysts behind offshoring in software development in particular and the information sector on the whole is complexity. The more complex a business is, the more difficult it is to compete and stay ahead of the curve. A firm either restlessly runs ahead or delegates part of work to those that do it best.To support the claim, a story of Texas Instruments is given. The company had gone to India 20 years prior to tap into a well-educated software pool, “which it had managed on a captive basis since”. [8]

To further argue the necessity (and benefit) of labor offshore, Mr. Jack Harding, CEO at eSilicon Corp., shares that about two decades ago a team seeking investment in Silicon Valley was supposed to rely on a remote team in India. Even then labor offshore was sort of a must-have. “It would not be seen as competitive if it wanted to hire workers at $125,000 a year in Silicon Valley when comparable workers were available at $25,000 a year in Bangalore”. [8]
Given how (1) necessary were remote contractors to expand and how (2) cost cuts help small and medium businesses compete, labor offshore has developed tremendously since 1996. In response, the salaries of software developers keep increasing. We can already see an increase of about 3,8%, and this number will keep growing until the end of the year. Speaking of the technologies that experienced the most significant rise, these are Java, Python, React, ReactJS, Ruby on Rails, NodeJS, and PHP. In 2022, the developers specializing in the mentioned technologies got an increase in salary up to 20% compared to 2021. [6]
While big enterprises can afford to pay the highest prices and win this competition, most smaller companies have to look for talent in countries with lower living costs. This is how Eastern Europe, Latin America (LATAM), Asia, and Africa became known as regions for offshore software development. [11]
Despite worldwide salary increase, the gap between Western countries and overseas lower living cost countries is still considerable [6]:

Data by qubit-labs.com [6]

Eastern European countries such as Ukraine, Poland, and Romania are now among the top global software development destinations. The volume of IT exports in Ukraine was 3.74 billion dollars, in Romania it reached 3.2 billion euros in 2022, and in Poland it was 26 billion dollars. Moldova, the Czech Republic, Bulgaria, Hungary, and Serbia are among other noteworthy players in this region. [11]

In their Offshore Software Development Comprehensive Guide 2023, LTS Group explains the three following offshoring models. [10]

If you outsource a project and a price is agreed upon before the work begins, it is a fixed price IT sourcing model. The vendor is responsible for financial, legal and other risks, and the output is understood by all parties. The mode is perfect for one-off projects that are not likely to be influenced by changing customer needs or unpredictable market conditions.

If a company works with an offshore contractor on a project that doesn’t have a clear set of requirements and its output is not predictable, then the Time & Material IT outsourcing model should be employed. When working on a T&M basis, the client only pays for time (hourly wages) and material (costs) devoted to the project. The model is flexible when it comes to tailoring spend in response to changing market conditions or under any other outside influence.

If a company has an entire team working elsewhere on long-term high stakes projects, then it is the Dedicated Team Outsourcing model. These contractors are long-standing partners that perform high quality, high stakes operations and are given several projects at a time. It is basically a remote in-house team that works entirely and exclusively under the client’s management.

According to The 2023 Global Benchmark Report: Offshore Creative Production [12], there is no higher emphasis than in offshore production as it provides ‘lower-cost resources at scale, while ensuring quality standards, and communication excellence’, while also keeping cultural alignment in place. Today, 20% of total production spend is currently managed offshore. As for labor offshore prospects, 55% of companies that don’t offshore now will surely offshore creative production in the next year, with a further 28% considering an offshore model.

The geography of the report gravitates towards the UK & Europe (64% of all respondents), North America (24% of all respondents), and the rest of the world (12%) is not coming in a large proportion. However, despite being skewed towards two regions of the world, the report is still very much relevant, since the UK is one of the top expensive salary-wise and the US inhouse labor is exceptionally high. So it can freely be said that the statistics and trends seen in these countries are very much translatable to the rest of the world.
In the order of importance, the respondents believe that the following services are most suited to being offshored: banner & digital ads, image retouching, artwork & pre-press, CGI & 3D modeling, and Web development. As much as 60% currently offshore elements of their creative production/post production. And 47% view India as their go-to location. LATAM countries, including Colombia, Costa Rica & Mexico proved popular, too. Interestingly, when asked if they are planning on offshoring more production/post-production in 2023, 54% claimed they are going to offshore more, and 0% answered that there will be less offshoring.

As for business drivers behind offshore acceptance, the following reasons are named: access to lower cost skills & resources; access to resources that can scale; access to 24/7 resources. Although costs remain the leading reason for offshoring in the UK & Europe (81%), North American respondents said that it is access to non-stop content production that lures them (27%). To the rest of the world, the scalability of offshore work force seemed to be the major reason to move parts of work abroad (45%).

The challenge that leads the transition to production offshore is content-at-scale. And really, the tendency is not surprising, given the commercial restraints, economic uncertainty and resource challenges many brands and agencies are experiencing across the US, the UK and Europe.

Location-wise, the report shows that these regions gravitate towards India in the first place. Several factors make the country especially attractive for the purpose. India’s creative economy reaches a total market size of $36.2 billion and contributes to 8.3% of the country’s overall employment. The sector employs more females (28%) and more 16-29 year olds (30%) than non-creative sectors. The workforce has strong language skills. The country has long been an offshore destination, so it has a well-developed infrastructure for international clients. Last but not least, the Indian time zone ensures clients from overseas can get their content ready overnight. Colombia has been on the verge of breaking through as a leading offshore creative service destination thanks to its ‘orange economy’ that has seen a lot of investment in the past years. It is now worth $10.8B, and it includes services relating to graphics, advertising, content and application development. Costa Rica is also one of the offshore destinations, and it was ranked number one in digital skills in LATAM. Lastly, Mexico generates almost $42B of the city’s total income through its creative design industry which employs approximately 70,000 people, according to Adweek.

Production teams going offshore named their top three criteria when selecting an offshore partner: levels of expertise, quality assurance & control, and communication.

Smartshoring is viewed as an innovative shoring model that stands in line with onsite, offshore and nearshore models discussed above. The report explains that Smartshoring is a fast-growing category and the most progressive form of offshore creative production. As production entails more steps and stakeholders than ever, a more progressive model to service the market was needed. As We Are AMNET puts it, “Smartshoring ensures culture, communication, quality and commercial value can all be realized through a hybrid model of regional client services teams and offshore production hubs, offering a fully integrated service”. [12]

NetLabsGlobal explains that “...smart-shoring has its unique benefits. Unmatched flexibility and the liberty to distribute workflows as per one’s budget and quality preferences are two important factors that have made Smart-shoring the most preferred shoring model in the modern business landscape”. [13]

The article aims to prove that offshoring has never been this easy and advantageous. Ironically, there are certain areas where nearshoring and even re-shoring are the tendency.

As TechTarget puts it, re-shoring is the process of bringing outsourced personnel and services back home from overseas where they were originally offshored. [14]

Supplyframe CMO Richard Barnett in his recent article on RCR Wireless News explains that for product designs that rely on electronics components traditionally sourced in China reshoring and nearshoring are the leading trends. They are driven primarily by a desire to be less dependent on China, but also by the supply chain fragility revealed during COVID. [15]

Barnett writes that “In November 2022, Deloitte said that 62 percent of US manufacturers have already begun building nearshoring and reshoring production capabilities. The Wall Street Journal recently reported that the construction of new manufacturing facilities in the US reached $108 billion in 2022”.

Global Trade further explores the topic of reshoring. [16] Just like Barnett, the article “Can Reshoring Manufacturing Spark a New Era of Resilience in Supply Chains?” states that “The need for supply chain resilience has become painfully clear after the COVID-19 pandemic, the war in Ukraine, semiconductor shortages and other disruptions”. For example, in 2022 job postings for reshoring and foreign direct investment positions have reached a whopping 360,000, an all-time high, and it’s 53% higher than seen in 2021. Reshoring drove this trend, accounting for 58% of these new roles.

There are several reasons how reshoring will build supply chain resilience. The major reason is shorter transit times. “Sudden demand shifts and inventory distortion are less impactful when companies receive goods in less time. Even if it takes domestic manufacturers just as long as foreign alternatives to increase output, lead times are still shorter because there’s less ground to cover between facilities. Faster shipping times also reduce risk factors related to transportation costs.”

Secondly, it is increased visibility that makes reshoring a powerful move towards higher supply chain resilience. Although control of offshore manufacturing processes is possible through a complex system of Internet of Things (IoT), this costly ecosystem is not available for smaller companies.

Thirdly, third-party dependencies make companies vulnerable to distortion when businesses rely entirely on a single facility overseas that they have little control over. An excellent example of that is how chip production shortage basically brought car manufacturing to a screeching halt. To avoid such weakening dependencies, companies choose to build relationships with domestic suppliers that, in addition, don’t carry risks from geopolitical tension, unlike offshore production.

Some remaining concerns should be admitted, nonetheless. Despite future independence, costs are the major concern. The long-term price to pay for declining overseas suppliers and transitioning back home cause high short-term expenses. Additionally, in some sectors domestic production capacity stands no comparison with established foreign companies. As mentioned above, chip production in China is tremendous, and American local productions barely match that potential.

Yet overall, reshoring of manufacturing is a prominent tendency and a promising shift. As the article says, “the extra costs and complexity are worth it in the long run because reshoring mitigates the impact of disruption”. Seeing 11,000 supply chain disruptions in 2021, the resilience built through reshored production capacities will pay off long term.

Overall, the tendency, as with many other trends in the world, follows a somewhat pendulum mode. While some industries that have traditionally offshored are reshoring, i.e. domesticating outsourced operations, others, like design, are only now starting to offshore. It is likely, then, that they will at some point choose to keep all processes in-house.

However, EasyStaff’s view is that the tendency to offshore is only growing. It is useful to take a quick glance at additional data that comes from other parties engaged in offshore labor.

• Freelancers are emerging as a powerful tool for small and medium businesses. Being flexible and cost-effective contractors, they support small and medium businesses greatly. The numbers are: 70% of SMBs in the U.S. have worked with freelancers at least once; 81% of these companies plan to hire freelancers again; 83% agree that freelancers have greatly helped their business. Worldwide 1.57 billion people in the world are freelancers, which is almost 47% of the global workforce. [17]

• Freelance management platforms are growing in number, and each one individually receives more clients. Freelance Platforms Global Market Report 2023 by the Business Research Company sites several statistics sources. According to research by WinATalent, freelance management platforms were used by 48% of the Fortune 500 companies to find freelancers in 2022. Reciprocally, the research by DDIY shows that the number of freelancers in the US has grown to more than 73 million from 70.4 million in 2022. “The increasing adoption of freelance platforms by established companies is driving the freelance platforms market”, the report concludes. [18]

• EasyStaff users. As a serious player with international presence, we would like to contribute to the discussion. Over the last 2 years of our existence, about 1,600 companies sent over €30 million to their 9,000 remote workers.

At the end of this article, it would be wrong to ignore the moral anguish over offshore labor. Those against the practice have been vocal ever since the argument began. As a service that facilitates labor offshore, we do not agree with the opposing parties, although we admit there is room for conversation. A perfect wording for our business-oriented belief is Autodesk CEO Carol Bartz’s: “When you can get talent at 20 percent of the costs, it isn’t about waving the American flag. It’s about doing what’s right to have a good company.”

https://medium.com/@easystaff/labor-offshore-the-world-in-2023-ad5c42ef70e8