Thousands of brands today are curious to find out the difference between offshoring Vs outsourcing meaning. Most businesses today prefer to outsource or offshore services when thinking of enhancing their organization’s productivity and profitability. No doubt, instead of hiring a full-time team, these models have helped the companies to grow larger with more specialized skills. It has helped them to get the work done faster with a lower cost of production.
Consequently, the list of benefits of outsourcing and the benefits of offshoring gives several reasons to organizations to both outsource and offshore. But, the question is what is the difference between outsourcing and offshoring? And, how to know which one is better for your business requirement?
In this blog, we will talk about offshoring Vs outsourcing meaning in depth. Also, we will cover the benefits and risks of offshoring Vs outsourcing to understand the suitable practices to choose according to your business.
Offshoring Vs Outsourcing Meaning
Business owners often use outsourcing and offshoring to reduce their operating costs and increase the quality of their products and services while simultaneously maximizing the profit they take in. It’s very confusing when we hear about offshoring Vs outsourcing. When thinking about delegation services to another company, outsourcing versus offshoring are bound to be concepts present in the discussion.
However, these terms are neither the same nor interchangeable. The article covers a detailed discussion of the major difference between outsourcing and offshoring in businesses and manufacturing organizations. In addition, we will also discuss which model offers a better fit for you and your company. But first, let us understand what these two terms mean individually.
What is Outsourcing?
Outsourcing or outside resourcing refers to the practice of contracting out parts of your business activities to someone else instead of doing the work yourself. Here, the companies hire an external party to perform services on their behalf. It can help you accomplish more and give you more time to focus on your strengths by taking over some responsibilities that may not be your strengths.
In simple terms, here, we hire another entity to get the work done on behalf of the company. Many experts feel that if outsourcing is done correctly it helps to increase the competitive advantage with a natural division of labor evolving in every society.
When outsourcing a service, a business owner surrenders significant control over how a third party will provide that service. For example, a company outsources a US Staffing Agency to hire some IT Experts and deals instead of hiring a full-time in-house team of Software Developers.
What is Offshoring?
So you must be wondering about offshoring, the benefits of offshoring, and how it is different from outsourcing. Well, offshoring essentially means obtaining services or products from another country or relocating certain aspects of a business overseas.
Offshoring offers one of the best strategies for improving your business’s productivity and performance. Here, the business decides to shift its functions or activities to some other country where it can find a better environment and resources at less cost.
It’s the practice of taking business operations out of their original country with lower labor costs, more favorable tax structures, and better infrastructure. In other words, it allows organizations to perform geographical business activities to obtain some overseas products and services.
Conclusively, if done rightly, the benefits of offshoring give the direction for the key to your business success. A company would choose to offshore because of cost savings, taxes & tariffs, and to increase the capability while maintaining full control of its business operations. For example, a customer service organization established in India helps to solve the queries of American customers.
History of Offshoring and Outsourcing
Outsourcing was first introduced in the 1980s by the economist Ronald Caase. Outsourcing processes have been around for most of the 20th century and IT companies were the first ones to start outsourcing. After that, outsourcing has gone through its most significant boom in the past two decades due to the rapid development of modern technologies.
As the business model expanded, it required more and more specialized skills for the process. Through outsourcing professionals, they realized the efficient completion of processes in less cost and time.
It transformed from farming out basic “blue collar” jobs to outsourcing highly skilled services called “White collar” jobs. Therefore, this resulted in promoting the adoption of outsourcing for certain activities or projects where specialized skills were needed.
The introduction of offshoring came into existence at the end of the 20th century. Improvements in the telecommunication and worldwide shipping structure resulted in encouraging business activities to offshore certain processes (Mostly where the daily wage cost was comparatively lower).
A popular example of captive offshore work is Multinational Corporations or MNCs that were majorly established in different regions of the world to get their different work done from international employees.
Specialized Outsourcing Services
As mentioned earlier as well, there are a lot of business functions that can be outsourced. However, these outsourcing firms majorly differentiate themselves from others on the basis of specialized outsourcing services they are superior in. Certainly, the market has so many outsourcing sub-services such as –
In such cases the organization decides to contract another organization to help them manufacture their products and services.
Business process outsourcing
A popular specialized outsourcing service where businesses hire specialized units to help them with back-end functions like customer services and data processing.
IT outsourcing unit benefits organizations by handling their IT infrastructure effectively.
Software development outsourcing
When businesses asks a third party to develop their software products it’s called software development outsourcing.
Project outsourcing refers to when a company takes the help of third-party professionals to meet the requirement of a complex project.
To sum up, if you find a suitable outsourcing company with the suitable skillset, desired technology, and rates that happen to be in another region, then it’s called outsourcing offshoring.
New Models of Offshoring: Offshore Vs Onshore Software Development
Ultimately outsourcing comes in two basic types (offshore vs onshore software development) based on the location. When the outsourced company is within the country it’s called onshore outsourcing. When it’s outside the primary county it’s called outsource offshoring.
While offshoring originally means running a part of a business operating outside the country. A new practice of offshoring (i.e Outsource offshoring) has emerged increasingly during the COVID pandemic. But what does outsource offshoring actually mean?
To clarify, with this model, companies plan to hire some part of their in-house team outside the country. In simple terms, outsource offshoring includes the blend of outsourcing and offshoring. Here, the company not only controls the third party for work but also agrees on contracting the work to be performed outside the country.
In offshore vs onshore software development, outsource offshoring offers businesses a guaranteed way to reduce risks. With the continuously rising costs of hiring local software engineers, many companies consider bringing in a software development partner. To keep costs down, offshore engineering offers a favorable option.
To sum up, the practice combines the benefits of both outsourcing and offshoring models while delivering the prominent benefits of low-cost production while utilizing the skills of a larger and scalable labor pool.
Mitigating Uncertaining with a New Model of Outsource Offshoring
Likewise, outsource offshoring has combined the benefits of outsourcing and offshoring. Similarly, it has the caliber to indicate the risks of offshoring and outsourcing. Some of the major risks include lack of communication, disconnected control structures, and more. However, there are several practices too to mitigate such risks of offshoring outsourcing that have resulted in improved outcomes.
Many of those best practices are related to business process models. For example, CMMi and Six-Sigma measure. These models help businesses to improve the quality of outsourced processes. In addition, it also focuses on better monitoring of these processes by measuring key metrics continuously after some progress.
Benefits of Outsourcing Versus Offshoring: Offshoring Vs Outsourcing
If we want to find the difference between outsourcing versus offshoring (Offshoring Vs Outsourcing) it’s essential to first list the benefits of outsourcing and the benefits of offshoring individually. So let’s weigh the benefits of offshoring Vs outsourcing.
A. Benefits of Outsourcing
The major benefits of outsourcing are:
One of the major benefits of outsourcing includes the ability to maintain a high quality of products and services at comparatively lower prices. Certainly, when we decide to outsource services it usually results in turning a more pocket-friendly decision.
In some projects, businesses require some advanced skills for certain activities. Here, an organization can find a more efficient solution to outsource an expert. In other words, businesses tend to outsource specialists or go for IT Hiring and Staffing to perform a specific job that they are not the best at. Moreover, it enables them to access higher-quality results by outsourcing vendors.
Competitive advantage over competitors
A core activity of the business includes the one in which the company has the potential to perform better than the competitors. In other words, it offers the main attraction for customers to invest in your business. However, the business not only depends on the core competencies, instead it includes a lot more functions that need to be focused too.
For instance, human resources, information technology, marketing, payroll, and others are some examples of other basic functions that a business needs to run effectively. And outsourcing such functions so that the experts can perform them offers a great advantage. This way they can handle the non-core functionalities while you can enhance your core activities.
Lastly, flexibility includes another major advantage among the key benefits of outsourcing. It enables organizations to quickly fill up the human resources needed to complete a certain project effectively.
For example, if a company needs some backend programmers for 6-8 months here outsourcing provides a feasible option to cover the requirement without investing too much in hiring a full-time employee in the team. Therefore, companies only plan to pay for the outsourced services they need for that particular project.
B. Benefits of Offshoring
Major benefits of offshoring are:
One of the major benefits of offshoring includes enabling businesses to acquire services at lower rates compared to locals. Organizations from developed nations prefer to outsource services from developing countries due to their low wage advantage. Hence, this results in saving costs and investing the price in embracing the brand.
When companies decide to offshore services internationally, they also look out for some tax relaxation. To give an example, many countries prefer to offshore from countries with lower import rates. Hence, it enables them to save a lot more on production than usual.
Lastly, another one of the important benefits of offshoring includes control over the entire production process. Instead of sharing control of the production with some local providers, the benefits of offshoring allow organizations to enjoy complete control over the process.
Undoubtedly, certain regions offer a much better ecosystem for certain types of industries. As a result, outsourcing from an offshore software development company would also offer a better availability of skilled workers for that specific function.
For instance, India has a wide pool of English-speaking youth that meets the ideal match for some business centers. Hence, offshoring certain activities with better opportunities to IT Staffing Companies in India would provide businesses with a competitive advantage.
The Risk Involved:
According to a survey, 90% of U.S. companies consider outsourcing crucial to their growth. Meanwhile, 78% of new and small companies think that outsourcing gives them a competitive advantage. Similarly, developing an offshore team offers a great way to save money and access a global talent pool. In the past decade, the increasing adoption of globalization has resulted in the fastest-growing segment of the offshoring market. However, offshoring employees have faced a lot of criticism too.
Especially from a political point of view. A strong standpoint blames these practices for stealing jobs. On the other side, many also feel that it offers a great way to lower the production cost of a company. There are several risks of offshoring Vs outsourcing associated with a project. While the companies see very similar benefits of offshoring and outsourcing. Still, they do not share the same disadvantages.
This is because offshoring supports moving the business to other countries and therefore faces major political opposition. While in the case of outsourcing, the risk majorly includes the choosing of the wrong vendor or alignment of long-term goals of client and vendor. Outsourcing is on the rise and brings a myriad of benefits for your business; but that neither terminates nor mitigates the risk associated with outsourcing business.
Similarities Between Outsourcing and Outsource Offshoring
The combination of outsourcing and offshoring helps businesses to overcome uncertainties and offers the ability to scale up and down human resources as the need changes. This is because here the company outsources the offshore workers into their team instead of contracting a third party for their functions.
The ultimate similarities between Outsourcing and Outsource offshoring include the involvement of third-party organizations to maintain and handle their non-core operations effectively. Not only this but in both scenarios, the major goals include reducing the overall production cost while enhancing the non-core operations of the business.
Difference Between Outsourcing and Offshoring
Outsourcing includes contracting out to a third party for some specialized work skills, while offshoring means getting work done in a different country to leverage the price benefits. It’s very clear that offshoring Vs outsourcing is two different terms used to help business operations with the utmost advantages.
However, it should be noted that both terms help to serve their own specific objectives while adding different values to the organization. We can clearly see the difference by analyzing multiple outsourcing Vs offshoring examples today.
How COVID-19 has helped businesses to outsource and offshore increasingly?
Certainly, the invasion of COVID-19 resulted in blurring the lines of differences between outsourcing and offshoring. This is because at that time maximum businesses were operating remotely, and when everyone works from home how does it matter whether the employee is from the same country or overseas?
The goal of outsourcing business processes focuses on embracing the core activities of the production process. Whereas, in the case of offshoring the ultimate focus includes lowering the cost of production.
The ultimate difference between outsourcing and offshoring is that outsourcing allows business processes to be done with a high level of specialization by hiring an external organization. Meanwhile, offshoring enables the business process to move to another country.
Where offshoring can be only done internationally, outsourcing, on the other hand, can be carried out both locally and overseas. Another major difference between outsourcing and offshoring is that when we outsource, the functions are performed by non-employees (third-party employees). On the other hand, when companies decide to offshore, the functions are performed by the business entity established in some other country.
Furthermore, it’s important to note that offshoring is known as the subset of outsourcing. Outsourcing involves shifting activities to their parties, whereas offshoring involves shifting business entities outside the primary country.
To clarify, in case a company plans to outsource a certain international organization for some specific work, it will be called an act of offshoring. Also, known as outsource offshoring, where companies hire workers to perform the work internationally.
To sum up, the innovation in the technology and rapidly growing digital economy have resulted in delivering more and more services online. Coincidently, giving the current gig economy the perfect atmosphere of flexibility and staff in demand worldwide.
Offshoring vs Outsourcing: Key Difference
To find out which one is better outsourcing versus offshoring it’s important to determine their factors individually.
Offshoring Vs Outsourcing: Comparison Table
Offshoring Vs Outsourcing: Which one should you choose?
Offshoring Vs Outsourcing – these two terms are majorly used interchangeably but have a very thin line of difference that can change your game adversely. Both of them offer very unique strategies for businesses to operate effectively.
But you must be wondering how to know which one to choose and when? Don’t worry we have highlighted some major points to consider before choosing the best model that would work perfectly for you:
Time Duration of the Service
If your organization only wants a specific skill for certain projects then it is not a feasible option to hire employees for your in-house team. In such cases, it’s more appropriate for an organization to contract out a professional for a certain period only.
This will help the business to complete the target effectively while only paying the professional for that particular time. In addition, it will provide a faster source to fill the required skill and also avoid the cost that comes with hiring full-time employees.
Amount of Control the Project Needs
When considering outsourcing versus offshoring, the organization must look after the amount of control the project needs from the company. If the project desires regular interference and full control over the project then offshoring offers a great option.
With offshore software development, organizations have the ability to maintain and manage the operations themselves while evaluating the progress from start to finish. Furthermore, it helps you to save significant cost savings in the long run.
If your company’s projects handle confidential data that could lead to some serious legal interference then it would be more appropriate to choose an offshore model.
Here, outsourcing a third party would not offer a secure option. On the other side, in-building your offshore team would be more reliable to avoid potential data breaches and ensure the security of sensitive client data.
How Quickly Do You Need to Implement the Services?
Lastly, when deciding between Offshoring Vs outsourcing, companies should consider the time it would take to implement the service. In simple words, outsourcing offers a quick solution for quick projects. On the other hand, offshoring provides a long-term solution, ideal for flexibility and scalability.
Where an offshoring team requires an extensive training session to ensure that they fit perfectly with the organization’s requirements. Not only this, but you must also look out for the time differences and language barriers that might come in the way of effective communication. However, these are all temporary hindrances that we can manage with effective planning.
Subsequently, the major difference between outsourcing and offshoring includes the geographical location of the service provider. Secondly, another major factor of difference when comparing offshoring Vs outsourcing meaning involves the political risks that offshoring outside workers involves. Similarly, we can find a number of outsourcing Vs offshoring examples in today’s times. It’s on the business to decide which option is more suitable to their current functioning needs.
In the end, offshoring Vs outsourcing both offer great solutions for businesses to enhance their productivity. If chosen and implemented correctly, one of these will surely benefit the organization to achieve its goal while reducing the costs of production. However, you have to differentiate and evaluate the models effectively to identify which one suits your needs the best.
Whether it’s offshoring Vs offshoring or offshore Vs onshore software development, in the end, it’s your decision to find the ultimate match to complement your existing operations.
In this article, we tried to provide you with the head-to-head difference between outsourcing and offshoring. We have given insights into offshoring Vs outsourcing comparison with the benefits and risks of offshoring and outsourcing in detail. In addition, we have also highlighted major considerations to look at before deciding on outsourcing Vs offshoring examples suitable for you.