Explaining the difference between outsourcing and offshoring

Explaining the difference between outsourcing and offshoring

Are you searching for ways to streamline business processes and reduce costs? You may be considering outsourcing or offshoring. While these two business practices have similar characteristics, there are also significant differences between them.
Before diving into which solution is a better fit for your business, learn all about outsourcing and offshoring and what sets them apart.

What is outsourcing and what is offshoring?

Outsourcing and offshoring can be confusing because both business practices are geared towards improving the productivity and efficiency of the business by decentralizing the workplace.
When a business has to perform tasks that are not within their core competencies, it could hinder their business growth. That’s where outsourcing comes in. Outsourcing is the practice of hiring a third party to carry out certain tasks or services for the company. Instead of spending too much resources on aspects that are outside your core competencies, you can hire an external service provider that is better equipped to handle the job.
The contracted third party doesn’t necessarily have to be from another country. They can be from the same country as well. Startups, businesses that are beginning to take off, or small to medium-sized enterprises often outsource their accounting, IT management, and administrative tasks so the managers or owners can streamline their workforce and focus on their core competencies.
Offshoring, on the other hand, is relocating the processes or services of the business overseas. Unlike outsourcing, the company still has control over the business process. The people working abroad are generally employees of the company.
The IT industry in the United States, for example, offshores their teams due to the shortage of developers in the country. To keep up with client demands, the company has various offshore teams to handle their tasks. Multinational corporations are no stranger to offshoring their manufacturing processes as well. Businesses may also offshore the production of their products for better quality, increased productivity, or lower costs.

How does outsourcing and offshoring help a business?

When a business outsources their activities, tasks, or services, it gives them the opportunity to focus on their core activities. Startups, for instance, usually have a relatively small number of employees at the beginning. But once their business starts taking off, they may need to call for outside help to keep up with the growing operational needs. While the third party provider takes on the non-core tasks, the business can keep doing what they do best.
Lower operating costs is another major benefit. Since the company doesn’t need to spend time, money, and effort on searching, hiring and training people, they can focus on what they do best.
As for offshoring, this practice lets the company save on labor and production costs. Tax rates in a different country may be lower as well. Another huge advantage of offshoring is having full control over the business process. Offshoring allows for easier collaboration since those abroad are also employed by the company.
Offshoring also gives the company an opportunity to tap into the global market and have access to a wide pool of talent with the knowledge and skills that they need.

What are the disadvantages?

One of the drawbacks of outsourcing is having to share important information with people outside of the business. There’s always a risk that comes with sharing trade secrets and other proprietary information. The quality may not be at the level you expect as well. That’s why it’s important to find a good third party provider that you can create a successful partnership with.
As for offshoring, given that it involves working with people in a different country, the time zone difference can be hard to manage. Majority of offshoring companies work with a significant time difference, which can cause delays and planning issues. A language barrier can also make communication and collaboration a challenge.
The key to offshoring is constant communication. Whether it’s overlapping your schedule with the offshore team or using the latest technology to meet, having an open line of communication can make all the difference.

Which one is better for your business?

As a business owner, it’s important to choose the method that will lead your enterprise to success. Do you need total control over the output? What are the tasks that require extra bandwidth? What are non-core tasks? Knowing what your business needs is a huge help in deciding which business solution to take.

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