Offshoring vs Outsourcing
There are a lot of talks these days about outsourcing and offshoring, especially since both can seem the same, but they hold a few differences from each other. Both outsourcing and offshoring have their pros and cons, and it can be difficult to decide which the better option for your company is.
In this blog post, we will explore the differences between outsourcing and offshoring, and help you decide which the best choice for your business is. Stay tuned!
As we stated above, the first thing to understand is that offshoring and outsourcing are not the same. They may seem similar, but there are a few key differences between offshoring and outsourcing:
- Offshore outsourcing always refers to sending work to another country, whereas outsourcing can occur within the same country.
- Offshoring is usually used for more specialized work, especially for an entire business function, whereas outsourcing can be used for a variety of tasks
- Offshore outsourcing generally requires a longer time commitment than outsourcing
Yet, how and when did this business strategy start?
Outsourcing: An Overview
Outsourcing has been around for centuries, but it wasn’t until the late 20th century that it became a popular business practice. The term “outsourcing” was first coined in 1981, and it referred to the practice of companies contracting out a service provider to perform business operations previously carried out by in-house employees.
Nowadays, outsourcing is a common business practice, and it’s used by companies of all sizes in a variety of industries. The outsourcing market is huge, and currently, you can find outsourced services almost everywhere. Business processes and services that are most commonly outsourced include:
- customer service
- data entry
- lead generation
- appointment setting
- IT support
- human resources (HR) services
- accounting and bookkeeping
- web design and software development
- manufacturing industry
With so many services offered by outside companies, it’s not a surprise that according to Statista, the global market size of outsourced services in 2019 was estimated at 92.5 billion U.S. dollars, which means the market saw an increase of approximately seven billion U.S. dollars from the previous year.
By seeing these numbers we can agree something good comes up when a company decides to hop into outsourcing efforts, let’s review the outsourcing benefits!
The Benefits of Outsourcing
There are many reasons why companies choose to outsource certain business processes, but the main advantages of outsourcing include:
One of the most common reasons why companies outsource is to save costs. When you decide to hire business process outsourcing or service, you can often get it done for less than it would cost to do it in-house.
In fact, outsourcing, according to companies, results in an average of 15% of cost savings!
Wider talent pool
When you hire an outsourced provider, you have access to a wider talent pool than you would if you only hired in-house employees. This is because outsourcing allows you to hire industry experts from many countries.
Outsourcing can also help improve your company’s efficiency. When you outsource a business process or service, you can often get it done faster and more efficiently than if you tried to do it in-house.
For example, molding outsourcing manufacturing is a great example of a manufacturing process that is often outsourced. This is because it requires specialized equipment and knowledge to do it effectively.
Focus on your core business
Outsourcing can also free up your time and resources so that you can focus on your company’s core business. This is because outsourcing non-core business processes or services can help you focus on the things that are most important to your company.
For example, the most frequently mentioned reason for outsourcing information technology services is to free up resources to focus on core business (49% ).
When you outsource to a service provider, you can often get a higher quality of work than if you tried to do it in-house. This is because service providers are experts in their field and they have the resources and knowledge to get the job done right.
In summary, companies benefit from outsourcing by allowing you to cut costs in the early phases of the business by converting fixed costs to variable costs, releasing funds for investment elsewhere in your business.
The Challenges Of Outsourcing
Now that we know the advantages of outsourcing, it’s important to understand that there are also some challenges associated with this business strategy. These challenges include:
- Risk of data breaches: When you outsource a business process or service, you are also outsourcing your company’s sensitive data. This can be a risk because if the client company is not properly secured, your data could be breached.
- Loss of control: When you outsource a business process or service, you are also giving up some control over that process or service. This can be a challenge because it can be difficult to monitor and manage an outsourced service.
- Dependency on the service provider: Outsourcing can also create a dependency on the company providing the service. This is because if the company is not available, your company may not be able to function properly.
However, it’s important to note that these challenges can be mitigated by carefully selecting a reputable and reliable outsourcing partner!
Now that we’ve reviewed the basics of outsourcing, let’s turn our attention to offshoring.
Offshoring: An Overview
Offshoring is a type of specialized outsourcing that involves sending work to other countries, most of the time to developing countries. This can be done for a variety of reasons, but the most common reason is again, to lower costs.
When offshoring work, companies often send work to countries where labor is cheaper. For example, according to the Outsource Accelerator, the most popular country for offshoring work is India. This is because labor costs in India are much lower than they are in developed countries like the United States.
The Advantages of Offshoring
Offshoring shares some benefits with outsourcing, such as cost advantages, some of the advantages of offshoring include:
- Cost savings: Of course, the most common advantage of offshoring is cost savings. Offshoring can often be cheaper than outsourcing because you can take advantage of lower labor costs in another country.
- A global talent pool: Offshoring also gives you access to a global talent pool. When you offshore work, you can often find talented workers in other countries who may not be available in your own country. This can be especially helpful if you are looking for workers with specific skills or experience.
- Labor flexibility: Offshoring also offers labor flexibility. This means that you can often find workers who are willing to work odd hours or weekends. This can be helpful if you need to get work done outside of normal business hours.
Actually, did you know that Nike does not have its own production facilities? Instead, the company decided to hire offshore manufacturing from the Philippines, Vietnam, China, Indonesia, and Taiwan to complete the work.
Nike has around 500,000 people worldwide in its sneaker manufacturing business!
The Challenges of Offshoring
While offshoring has its advantages, there are also some disadvantages associated with this business strategy. These disadvantages include:
- Communication difficulties: It can be difficult to communicate with offshore workers because of the time difference and cultural differences. This can make it difficult to manage offshore workers and may lead to misunderstandings.
- Time zone differences: Another challenge associated with offshoring is time zone differences. This can be a challenge because it can make communication and coordination more difficult.
- Cultural differences: Offshoring also presents some challenges due to cultural differences. For example, offshored workers may not be familiar with your company’s culture or business environment.
In short, offshore outsourcing is a type of outsourcing that involves sending work to another country, most of the time to developing countries.
Outsourcing, on the other hand, is simply contracting with another company to provide a service. Both offshoring and outsourcing can offer cost advantages, but they also come with some challenges.
When to Outsource or Offshore: Choose Wisely
Hiring products or services from another company can be a great way to save money and improve efficiency. But it’s important to choose wisely when deciding whether to outsource or offshore outsourcing.
One of the most important factors to consider when deciding whether to outsource or offshore is your budget. If you have a limited budget, then outsourcing may be the better option because it can be less expensive than offshoring.
However, if you have a larger budget, offshoring may be an option worth considering because it can offer access to a global talent pool and labor flexibility.
Finally, cultural differences can also be a factor to consider. If you are worried about cultural differences, then offshoring may not be the best option. However, if you are comfortable with cultural differences, then offshoring could be a good option for you.
Communication and Coordination
Outsourcing can be a good option if you need to communicate and coordinate frequently. This is because outsourcing companies are often located in the same country as their clients. Therefore, if you think communication may be an issue, then outsourcing might be the better option.
Offshoring can be a good option if you don’t need to communicate and coordinate frequently. This is because time zone differences can make communication and coordination more difficult.
Outsourcing companies often have better data security than offshore companies. This is because they are subject to the same data protection laws as their clients.
On the other hand, offshore companies may have weaker data security. This is because they may not be subject to the same data protection laws as their clients.
If you are a startup or small business, offshoring can be a risky proposition. This is because you may not have the resources to manage an offshore team effectively.
On the other hand, if you are a large company, offshoring can be less risky because you will likely have the resources to manage an offshore team.
Risks and Criticism
Even though we have reviewed the many benefits of these business strategies, outsourcing and offshoring have been the target of some risks and criticism. Especially, from political standpoints.
In fact, it was during President Obama’s first term that the issue was brought to light on a national political stage. The Obama administration was critical of companies that outsourced labor overseas. They argued that these companies were taking advantage of cheap foreign labor at the expense of American jobs.
- The risk of job loss: One of the most common criticisms of offshoring is that it can lead to job loss in the developed world. This is because companies may move jobs to the developing world where labor is cheaper, thus hindering job security.
- The risk of data loss: We said this before and we repeat it as it’s an ongoing issue in these practices. You can lose your data when you outsource or offshore as companies may store data in countries where it may be subject to weak data protection laws.
- The risk of lowered wages: Offshoring can lead to lowered wages in the developed world. This is because companies may move jobs to the developing world where labor is cheaper. Thus, offshoring may harm wage growth in the developed world.
Nevertheless, on the other corner, we have Alphonso Jackson, former U.S. Secretary of Housing and Urban Development, who confidently said “…the other part of outsourcing is this: it simply says where work can be done outside better than it can be done inside, we should do it.”
Best Outsourcing Practices
We can avoid mishaps with these business strategies if we follow good practices! Certainly, businesses should assess their risks and opportunities when outsourcing.
They should also understand that there are certain types of work that are more difficult to outsource than others, so they need to be very careful in their selection process. For an organization to reap the benefits of outsourcing, they should:
- first, identify the business functions or processes that they want to outsource;
- second, conduct a cost analysis to determine whether it is cheaper to outsource the function or keep it in-house;
- third, find a reputable and qualified vendor who can provide the services;
- fourth, establish clear service level agreements and expectations with the vendor;
- and finally, monitor the progress of the project and the vendor’s performance.
When done correctly, an outsourcing arrangement can be a successful way for businesses to reduce costs and improve efficiency. However, don’t forget to carefully consider all factors before deciding to outsource.
Outsourcing and offshoring are two business strategies that can be used to reduce costs and improve efficiency. When deciding whether to outsource or offshore, businesses should carefully assess their risks and opportunities, as well it’s important to understand that there are certain types of work that are more difficult to outsource than others.
If you do decide to outsource or offshore, be sure to follow best practices, such as identifying the business functions or processes you want to outsource, conducting a cost analysis, and finding a reputable and qualified vendor.
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