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Outsourcing - Factors to Consider Before Moving Production to Another Country

Updated on November 28, 2016

Choosing the right labor market is one of the most important decisions global business executives and managers must make before deciding to outsource business operations. In order to make an informed decision, global business leaders must be in tune with the business environment of all places in the world where they may choose to set up shop. Before opening a plant or working with an existing manufacturing facility, the wise global business manager will familiarize himself or herself with

  • the going labor rate;
  • the overall skill level of the potential labor pool relevant to the goods being manufactured;
  • the general sense of satisfaction of workers with the labor rate;
  • the general satisfaction level of employees with the working conditions in a given factory;
  • tied to the previous two points, the potential for unrest of laborers (such as likelihood to strike) due to dissatisfaction with labor rates and or working conditions;
  • national labor laws that govern labor practices in a given country, and
  • the general length of time and amount of fees necessary to process through bureaucratic red tape

These are just a few of the factors global managers need to take into account before outsourcing work to another country or region in the world.

General Cost of Labor

Before outsourcing business to another nation, global business executives and managers must consider the general cost of labor relevant for the desired skill sets for that nation. The cost of labor will be directly tied to whether the move will be worth it or not. If there is not a significant savings in labor, then it is not likely that the move will be worth the effort for the business.

Skill Sets of the Potential Pool of Employees

A second factor global business leaders will want to consider before offshoring production is the skill sets of the potential pool of employees in the target labor market. Many developing world nations with low cost labor forces do not have enough inhabitants with the advanced skill sets necessary to produce the proposed goods with quality and in a timely manner. It is possible that laborers from the target market will need to be trained how to do what the oursourcing company wants them to do. This may mean losing valuable time to train workers for their tasks. Heady international business leaders will research each potential target market to gain a sound understanding of the effort needed to ramp up production to full capacity with high quality output. If time is of the essence then it might be wise to consider keeping production where it is or finding another foreign market where workers have more advanced skills.

General Satisfaction of Workers with Labor Rates

The general satisfaction of the labor force with the prevailing labor rates is another factor to consider before outsourcing production to another market. Corporations looking to open a new manufacturing plant in a foreign market should study the history of manufacturing in that market to gauge and understand how workers have gotten along with management over the years and in recent times. In other words, do those from the potential hiring pool think wages and benefits are fair? If not, what is the likelihood workers may strike to make gains in labor rates? A lack of satisfaction in wages with the potential for a labor strike could mean a long delay in getting the plant off the ground and producing at full capacity. A delay in production due to labor issues will delay profitability and potential returns on investment.

General Satisfaction of Workers with Labor Conditions

A fourth factor to consider when outsourcing production would be the general satisfaction of workers with labor conditions in their country. What are the expectations of potential employees in regards to labor conditions? Of course, an American company looking to expand production overseas should provide factory conditions that meet American guidelines for employee health and safety. Yet, in recent years, there have been reports from places like Bangladesh where factories have collapsed while workers were inside them. It has been made obvious that some who operate factories in Bangladesh do not have the same expectations for working conditions as those in the United States or European Union. Thus the importance of learning the culture to understand attitudes towards workers as well as the expectations of the workers. This does not mean aiming at meeting minimum expectations to save money and increase profitability. If the prevailing labor conditions in a country have been less than humane, then the potential workforce might already be restless and prepared to demand better conditions for all. A business preparing to set up shop when those types of conditions exist should realize the potential for delays due to calls for universal labor strikes. The potential for such delays should be considered carefully before making a decision to move production to that country.

National Laws that Govern Employee Labor Practices and Conditions

Another factor to be considered when outsourcing would be national laws that govern labor practices and conditions. In general, any business company that wants to set up operations in foreign countries should take adequate time to learn the laws that govern labor conditions and practices in each respective country where it may choose to do business. Taking time to become an expert in the legal framework governing the working conditions in each labor market where the company does business will save time and money. Learning the legal framework will save time because it will minimize the opportunities for misunderstandings and legal actions. It will save money because it will lessen the chances of being fined by local legal authorities for violations or being sued by workers for ill treatment.

Time and Money Needed to Process through Legal Red Tape

Another factor business executives should consider before moving operations to a foreign country would be the amount of time and money it would take to open the business. Every country has its own bureaucratic process to be navigated before a business can be established in that country. The bureaucratic process, which has also been described as legal red tape, dictates the steps and legal fees necessary before the manufacturing plant will be allowed to begin production. The World Bank publishes a report of the average number of days it takes to open a business in most countries of the world. The official and actual costs related to setting up a business in a respective country may differ depending on the published fees as well as unofficial fees (aka as corruption) charged by authorities in the country.

Cultural Factors that Might Play a Role in Employee Employer Relations

A seventh factor, and certainly not the least in importance, would be cultural factors that would play a role in employer employee relationships. Three major research projects dedicated to identifying differences in dimensions of national cultures include: Hofstede, Trompenaar, and the GLOBE Project. Each have devised models of national culture that have helped understand how those from different cultures view such things as (a) leadership; (b) personal achievement; (c) the use of time; (d) propensity for change; and other important factors related to life and interaction with others. Edward T. Hall is another researcher that observed how those in a particular culture communicate with one another and devised a model for what he called high- and low-context cultures. These are all valuable tools to help get a general picture of the cultural differences that may be encountered by a business executives and managers that desire to outsource business operations to another country.

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    • Larry Rankin profile image

      Larry Rankin 

      2 years ago from Oklahoma

      I prefer insourcing whenever possible.

    • ecoggins profile imageAUTHOR

      ecoggins 

      2 years ago from Corona, California

      Thank you AshutoshJoshi06 for your comments to my hub. I appreciate your insights into this issue.

    • AshutoshJoshi06 profile image

      Ashutosh Joshi 

      2 years ago from New Delhi, India

      Despite all the constraints, the legal barricading companies world over continue expanding businesses or outsourcing business, because end of day profitability and sustenance matters. In an increasingly competitive and shrinking world you cannot think one dimension.

      Speaking specifically in terms of developing nations their workforce certainly are far more skilled. Even their acquired skills are at par. They are technology savvy and hard working at the same time. Their training , rentention and operational cost continues to remain comparitively low and hence businesses are very easily attracted.

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