Offshoring vs Outsourcing: Key Differences

17 Oct · 6 min read

Offshoring vs Outsourcing: Key Differences

Outsourcing and offshoring are frequently used interchangeably, but the terms have very different meanings and implications. When a company negotiates a contract with a third party to perform a specific function, this is known as outsourcing. It is critical to find a company or individual who specializes in the task at hand when outsourcing a process or operation. Most experts in outsourcing are chosen from all over the world, resulting in a large talent pool. Offshoring, on the other hand, occurs when a company sends in-house jobs to be performed in another country. Offshoring is when a company based in the United States produces its goods in Mexico. Offshoring and outsourcing both save companies money in the long run, but in very different ways.

What is Outsourcing?

Outsourcing is the process of 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.

Statista estimates that the worldwide outsourcing market was worth $85.6 billion in 2018.

According to Clutch, accounting and IT services are the two most outsourced business operations at small businesses. Specialist services are another popular niche. For many companies, the primary method of customer support is Live Chat outsourcing.

What is Offshoring?

Offshoring is defined as the relocation of business activities to a country other than the home country where resources are more inexpensively available, thereby 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.

Offshoring has emerged as a development factor for economically weak countries in recent years, increasing the country's Gross Domestic Product (GDP), and infrastructural development, and lowering the rate of unemployment. Despite several disadvantages such as language, communication barriers, and so on.

Difference Between Outsourcing or Offshoring

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 that you require.

Functions

Outsourcing typically entails the hiring of 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, and quality, as well as 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.

Time 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 an ideal solution 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 time to hire should be quite 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 manpower 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.

Control Requirement

If you want complete control over your operations and the quality of your products or services, offshoring is a great option. With an offshoring partnership, you can manage the team yourself 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.

Managing Uncertainty

Managed service offshoring enables businesses to scale up and scale 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 critical. 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. Because 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 performance of the employee. It is completely up to the service supplier to do so.

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, there is no need for you to fully 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 processes so that they are fully aligned with your business goals.

Confidentiality and Privacy

Outsourcing may not be the most secure option if your company must meet any personal legal requirements or if your team handles sensitive client information. Working with an offshoring partner, on the other hand, allows you to take extra precautions to avoid breaches and ensure that your offshore team follows the rules.

Final Thoughts

Since the last decade, using offshoring and even outsourcing activities for a call center has been widespread. Offshoring is the practice of outsourcing any business activity or operation to a location other than the firm's origin. The business or organization can choose whether to use those practices in combination or singly. Offshoring is often considered a subcategory of outsourcing.

Businesses with significant overseas revenue, such as Microsoft Corp. and Apple Inc., can take advantage of the opportunity to keep related profits in offshore accounts in countries with lower tax burdens.

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