6 Key Differences Between Offshoring and Outsourcing

While roughly 64% of offshored outsourced technology functions have to do with software application development, 71% of financial sector executives outsource or offshore some of their services.

Note that the terms offshoring and outsourcing are commonly used interchangeably. The implications and meanings of the terms, however, are significantly different. 

In this blog, let's understand the concepts of outsourcing and offshoring and what distinguishes them. Let's begin!

Outsourcing and Offshoring – The Concept and Examples

Outsourcing

Outsourcing is delegating a portion of a company's operations or processes to a third party. The majority of outsourced processes involve non-essential, ancillary activities. 

While it is commonly associated with commissioning work to an overseas partner, the location of the outsourcing company can be the same as the location of the company looking to hire.

For example, to keep costs down and build the software, Skype needed to acquire the necessary expertise and abilities at a price range that made sense. Several developers were hired by Skype to work on the project from Estonia, which is in East Europe. 

As time passed and these engineers succeeded, Skype hired them as partners, further solidifying the bond between the two parties. Skype's business plan was successful, as Microsoft acquired the company in 2011 for $8.5 billion.

Offshoring

On the other hand, offshoring is relocating business activities to a country other than the home country where resources are inexpensive, lowering the company's overall costs. It could imply relocating the company's production facility, service centers, or routine operations overseas.

The company wishes to relocate its operations from a developed country to a developing country to take advantage of lower labor costs, lenient laws, less government interference, cheap availability of resources, lower tax rates, and other benefits.

For instance, before WhatsApp's 2009 launch, it offshored the development of its software to Eastern Europe. While their in-house engineers were focused on client-related responsibilities, such as customer assistance, WhatsApp relied on offshore expertise for backstage management, design solutions, and core app development. 

The chat app quickly rose to the top of the AppStore and Google Play. This circumstance even compelled Facebook to acquire WhatsApp for $19 billion to defeat its greatest rival. It was the largest venture capital-funded company acquisition at that point.

6 Differences Between Offshoring and Outsourcing

In the most basic sense, outsourcing and offshoring are similar in that you assign a team from another location that is physically outside of your local company's premises to perform specific business processes. Another similarity is that the underlying reasons for outsourcing and offshoring services are cost efficiency and overall productivity.

However, there are significant differences between these two approaches. Understanding these distinctions will assist you in determining which option will best suit your business based on your objectives and the services you require.

1. Capabilities

Outsourcing typically entails hiring a workforce to perform a single task within a process chain. While these tasks can be tedious, repetitive, and time-consuming, they are essential in promoting productivity by streamlining overall business operations. These activities are typically measured in terms of time, quantity, quality, and headcount.

Offshoring entails delegating more complex and involved tasks to a dedicated team in another country. The offshore team is made up of specialists who are well-trained and experienced in their roles, which involve a wide range of functions and necessitate a higher level of responsibility and initiative.

2. Duration and Scalability

In the sense that it is a quick and efficient option for ad hoc or per-hour-based projects, outsourcing is scalable. Outsourcing can help with peaks and troughs by allowing you to "flex up and down" staff as needed throughout the year. 

Outsourcing these functions can be ideal when additional support is required due to peak seasons in your business, such as filing income tax returns. Given that the provider is in charge of the hiring process, the hiring time should be short.

You can scale the size of an offshore team based on your business needs. There is no need to make significant upfront investments in workforce and equipment, but it is considered the best fit for those who require a full-time employee capacity. 

Begin with a small or large team, and as your company grows, you can diversify the team by adding more roles as needed. Because the hiring process is more personalized, it is regarded as a longer-term strategy.

3. Control Requirement

Offshoring is a great option if you want complete control over your operations and the quality of your products or services. With an offshoring partnership, you can manage the team and monitor project progress from start to finish.

The initial investment for an offshore project may be higher, but you will see significant cost savings (and less stress and frustration) in the long run.

4. Uncertainty Management

Managed service offshoring enables businesses to scale up and down as their needs change. Companies also have more control over their operations because they hire offshore workers instead of outsourcing work to another company. 

This level of control is critical because customers have more power and options than ever before, and the quality of the customer experience is vital. Regardless of where your company is located, you can find the right employee for the right job.

The managed service model of offshoring also provides more than just a job—the organized service provider trains supervises, pays, and offers benefits and career paths that independent contractors or marketplace workers do not have. 

As the employees work for the service provider, the risks associated with political or social disruption fall solely on that company. The good news is that you do not need to manage the employee's performance. It is entirely up to the service supplier to do so.

5. Involvement

The third-party provider conducts the recruitment and interviews without your involvement in outsourcing. Because some outsourced tasks do not require in-house knowledge of your core business operations, you can thoroughly integrate the outsourced staff into your company. The third-party provider will be in charge of supervising the team, providing training, and managing performance.

Offshoring allows you complete control over the hiring and selection of your candidates. This includes providing the offshore services provider with your specific requirements, selecting from their most qualified candidates, interviewing them, and approving their employment. 

You are also involved in the team's direct management to ensure that their work meets your business standards. It is expected that new members of your offshore team will go through an onboarding process that explains your company's culture, objectives, and strategies so that they are fully aligned with your business goals.

6. Confidentiality

Outsourcing is not the best safe choice if your business must adhere to any individual legal requirements or if your team handles sensitive customer information. On the other hand, working with an outsourcing partner enables you to make further efforts to prevent violations and guarantee that your offshore workforce complies with the law.

Final Thoughts

Utilizing offshoring and outsourcing for call centers has been commonplace during the past ten years. Outsourcing any business function or operation to a location other than the company's base is known as offshoring. 

The company or organization can decide whether to employ all those techniques simultaneously or separately. Offshoring is frequently regarded as a subset of outsourcing.

Businesses with sizable international sales, like Microsoft Corp. and Apple Inc., can benefit from the chance to store associated revenues in tax-friendly offshore accounts.

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Read More: How to Work with an Offshore Software Development Team?