Expense reduction is often cited as one of the primary objectives of offshoring. However, because financial analysis doesn't always take all factors into account, cost savings may not add up. We report on the realities of offshoring.

In an era of fierce competition, organisations are doing everything possible to slash labour costs. This includes outsourcing many functions that were previously handled in-house.

As the corporate playing field has grown to encompass the globe, many outsourced functions have ended up in other countries, often overseas; hence the term offshoring.

Outsourcing is inextricably linked to cost-cutting

Lured by opportunities for savings, companies sometimes move labour-intensive operations abroad. Indeed, according to the 2005 Offshoring Survey Report just released from the Society for Human Resource Management (SHRM), a majority of organisations, 76 percent, cite lower labour costs as the primary reason for offshoring.

Clearly, the prevailing perception is that offshoring results in less expensive labour and therefore lower costs. But there can be obstacles.

Labour issues

"Most are political obstacles," says Hans Sennholz, former professor and chairman of economics at Grove City College in Grove City, Pennsylvania, who now explores economic issues as an author, consultant, and lecturer.

Sennholz indicates that despite the popularity of moving operations abroad, there is a great deal of anti-offshoring sentiment. "All those who are adversely affected will object or complain, mostly the labour unions," he says.

This is particularly true where the policy is to work less and earn more, Sennholz tells Expatica. "Those industries seem to be shrinking," he says.

But even labour unions are under pressure says Sennholz, noting how old European countries have 10, 11, and 12 percent unemployment. "Labour costs more than it produces," he says.

In the United States, where unemployment currently hovers around 5 percent, the cost of labour is also an issue.

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