In today’s globalized economy, businesses are constantly seeking ways to cut costs, increase efficiency, and remain competitive.
Two popular strategies that have emerged in recent years are offshoring and outsourcing.
While these two terms are often used interchangeably, they refer to two distinct approaches to obtaining goods and services from outside of a company’s own workforce.
So, let’s settle the offshore vs outsource confusion once and for all.
In this article, we’ll tell you the differences between these two business methods in terms of their definitions and processes. Then, we’ll go over the benefits and drawbacks of each method.
Offshore vs Outsource: Definitions
In a nutshell; offshoring is the relocation of a company’s business activities to another country, often for cost-saving purposes. The main reason why offshoring is different from outsourcing is that it specifically refers to the practice of moving a business process or task to a foreign country.
Here’s an example of what offshoring can look like: Let’s say you’re a business owner and you’re trying to save some money. You realize that your current operating costs are eating up a big chunk of your budget, so you begin to brainstorm ways you can save money while still scaling your business. You consider “offshoring” your operations– meaning, you’re going to move some or all of your business activities to another country where the labor is cheaper. But you don’t have to go where your business goes. You can be sitting on a beach in Puerto Vallarta while your business runs itself.
To continue explaining offshore vs outsource, we need to cover what it means when a business outsources work.
Outsourcing refers to the practice of hiring an external third-party company or individual to perform certain tasks or services that would otherwise be handled in-house by a company’s employees. This can be done within the same country or in a foreign country, but the location isn’t the defining factor.
So, say you’re a business owner who’s getting swamped with work. You’ve got an exhaustive to-do list and you’re starting to feel like you’re drowning in paperwork. So, you start thinking about outsourcing. You can hand off some of those pesky tasks to someone else, and focus on your business’s core tasks. For example, you might outsource your accounting to a firm that specializes in that area; or you could hire a virtual assistant to take care of your emails. You’ll have a whole army of employees at your disposal, without having to hire anyone full-time.
Offshore vs Outsource: The process
To fully understand the offshoring vs outsourcing difference, we need to cover the process for each business method.
How does the offshoring process work?
Offshoring involves hiring an external party located in a different country to perform tasks or services. The process starts with identifying tasks, choosing a suitable location, and selecting a partner based on expertise, cost, and negotiations. The company must monitor quality and timelines, and adjust communication as needed.
How does the outsourcing process work?
The outsourcing process involves hiring an external party to perform tasks or services that are usually done in-house. First, a business will need to figure out what jobs they need help with and then search for potential contractors. Once selected, the contractor (whether a third-party company or an individual) will complete the work, while providing progress reports to the business.
Now that you’re aware of the definitions and processes for these two business strategies, let’s go over the pros and cons of outsourcing and offshoring.
Offshore vs Outsource: The pros
The offshoring and outsourcing advantages and disadvantages are pretty similar, but for different reasons. We’ll go over their benefits first.
Pros of offshoring
The main advantages of offshoring are cost savings, increased productivity, and a greater labor pool.
Offshoring can help businesses save money due to lower labor costs and economies of scale. By setting up shop in a foreign country, businesses can capitalize on cost advantages for items like power, internet connectivity, and rent.
Specialized offshore teams can focus on core competencies instead of administrative tasks, like payroll and human resources management. As a result, this boosts the business’s productivity.
Access a wider pool of talent
Offshoring provides access to a wider labor pool. This is because offshoring companies have a global presence and can source talented developers wherever they are.
Pros of outsourcing
Like offshoring, the primary outsourcing advantages are cost savings, boosted productivity, and a larger pool of talent. And, as we mentioned before, the offshore vs outsource benefits are similar but vary in how they give businesses an edge against their competitors.
Outsourcing allows companies to pay only for the specific services they require. This helps them avoid overhead costs like employer payroll taxes and benefits packages. Likewise, paying for outsourced services helps seasonal businesses save money. For example, a property management company could avoid paying high salaries by outsourcing only during peak business months.
Outsourcing lets businesses focus solely on their core competencies. Thus, they’re able to free up time and resources. Likewise, outsourcing boosts productivity by leveraging time zone differences to provide round-the-clock work capabilities.
Access a wider pool of talent
Businesses that outsource work can hire top talent worldwide– thanks to the global reach of outsourcing companies. This offers the advantage of accessing a larger pool of labor and completing projects more efficiently.
Offshore vs Outsource: The cons
Outsourcing vs offshoring work comes with various potential risks. But, once you understand the risks, you can take measures to minimize their impact on your business. And, in turn, you’ll be able to make an informed decision regarding which strategy (offshore vs outsource) will work better for your business.
Cons of offshoring
Like any business strategy, there are a few drawbacks to offshoring. But, of the offshoring disadvantages, the one that businesses face the most is having to combat cultural barriers.
Offshoring tasks to another country can result in hurdles due to language and cultural differences. Typically, the offshore partner’s first language won’t be English. As a result, it can cause misunderstandings if they don’t fully understand the company’s requirements.
So, if you decide to offshore some of your operations, make sure you explain your requirements and expectations to your offshore partner. You can always use a translator to ensure there’s no miscommunication– depending on how severe the language barrier is.
Cons of outsourcing
We’ll complete our offshore vs outsource analysis by sharing the drawbacks of outsourcing work. The two main disadvantages a business can experience through outsourcing are a lack of control and a loss of company knowledge.
Lack of control
Outsourcing can result in a lack of control over the quality of work
produced; since business owners have less oversight over the work being done by outsourced contractors. As a result, it can lead to lower-quality work or delays in completion.
Loss of company knowledge
When a business outsources work, it can result in a loss of company knowledge over time, as the contractors may not have the same understanding of the company’s internal processes. On that same note, if outsourcing is continually used, the in-house staff can lose touch with that area of the business. This can cause a loss of skills, which may impact the business’s ability to innovate and adapt to changes in the market in the future.
But don’t let these potential drawbacks deter you from reaping the benefits of outsourcing. You can avoid the disadvantages by knowing the right questions to ask during your hiring process.
Offshore vs Outsource: Wrapping up
The main difference between outsourcing and offshoring is that outsourcing refers to contracting a third-party company, either domestic or foreign, to perform specific tasks; while offshoring refers to relocating business processes to another country.
Both of these strategies offer benefits for businesses looking to cut costs and increase efficiency. Choosing one over the other depends on factors such as your business’s needs, available labor, and risks.
As a business owner, you must weigh the pros and cons before deciding which approach to take to succeed in the global marketplace.
Now you have the knowledge of the difference between the two so you can own the decision and make the right call for your business.