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Outsourcing vs Offshoring: What’s the Difference? Exploring Advantages and Drawbacks
- We will tell you what is the goal of Outsourcing and Offshoring.
- We will also introduce the main Outsourcing benefits…
- …and the drawbacks of Outsourcing.
- What really Offshoring is?
- We will show the main advantages of offshoring.
- The drawbacks of Offshoring.
- Outsourcing and Offshoring are two effective business strategies, but which one is better?
The goal of Outsourcing and Offshoring
Both outsourcing and offshoring aim to improve operations. Multinational corporations and SMBs alike seek to employ either strategy or a combination of the two, to gain competitive advantage. The main drivers behind each approach are to:
- Increase productivity
- Reduce costs
- Obtain more qualified specialists
- Access advanced technological solutions
Depending on the business needs and type of operations, there are different recommendations for these two business strategies.
What Is Outsourcing?
Outsourcing means delegating a portion of business operations or a process to a third-party. Most outsourced processes revolve around non-essential, peripheral activities. While it’s often associated with commissioning work to an overseas partner, the location of the outsourcing company can be the same as the company looking to hire.
According to Statista, in 2018, the global outsourcing market reached $85.6 billion.
Accounting and IT services are the two most outsourced business operations at small businesses, as reported by Clutch.
Benefits of Outsourcing
Outsourcing is a tested strategy to improve operations. Big companies and small businesses turn to outsource to reap the benefits of this approach. A 2016 Deloitte survey found the main reasons why companies outsource:
- 59%—reduce costs
- 57%—free more resources to focus on core functions
- 47%—solve capacity issues
- 31%—improve service quality
- 28%—access to specialized talent
- 17%—manage business environment
- 17%—speed up business transformation
Let’s take a closer look at the most important reasons behind outsourcing.
Companies often seek to outsource to obtain cheaper services and still retain high quality. Hiring in-house specialists generate overhead and additional costs associated with the hiring process. With outsourcing, hiring costs, as well as workspace and equipment expenses, are decreased. A team can also be hired to perform a specific one-time task, which frees the human resources department from preparing the onboarding process for an in-house team.
Access to Specialized Talent
By outsourcing highly specialized tasks to a third-party provider, a company can gain access to innovative solutions and technologies at a fraction of the cost compared to setting up the process and technology in-house. Outsourcing activities that require skilled labor can also help the company focus on core functions.
By outsourcing work to experts, you’re eliminating the period necessary to train employees and familiarize them with the project. The production time is thus decreased, which can positively impact both the quality and quantity of the output.
Delegating non-core business activities to a third-party.
Relocating a portion of business operations to a different geographical location.
Can be the same as the hiring country.
Different than the parent country.
Less control over outsourced processes.
Higher control over the production.
Drawbacks of Outsourcing
Intellectual Property Risks
When companies outsource, they usually share proprietary information regarding business operations with a third-party provider. While there are measures that can protect companies from intellectual property fraud or theft, a possible disclosure of sensitive business information has to be taken into account.
Doing a due diligence check of a potential contractor it’s one of the necessary steps when considering outsourcing any business processes. Signing a non-disclosure agreement before commencing work is another prerequisite.
Depending on the location of the outsourcing partner, effective communication could potentially be problematic. If the contractor is located in a different time zone, time gaps can make real-time communication cumbersome. Also, language differences can sometimes lead to misunderstandings.
Because you’re delegating work to another company, you have less control over the execution, which can cause minor discrepancies in how the goals are reached.
What Is Offshoring?
Offshoring means relocating some business processes or operations to a different geographical location. While it’s unusual for companies to outsource their core activities, offshoring crucial operations are quite common.
One of the biggest perks of offshoring is that the work is still performed within one company, which holds sole control over how something is done.
Offshoring benefits companies by helping them save on labor costs while retaining access to qualified talent and high-quality resources.
Advantages of Offshoring
The main driver behind offshoring is reducing manufacturing costs. But offshoring also offers companies additional benefits:
- Lighter rules and regulations
- Access to cheaper specialized labor
- Easier introduction to new markets
- Lower taxes and tariffs
Offshoring offers companies an opportunity to hire specialized talent or to produce goods at a cheaper price. For example, when a United States company accesses resources in India or the Philippines, where labor costs are cheaper, the impact of that decision on cost efficiency can be considerable. At the same time, the quality of services received can be on par with what’s available domestically.
Some countries make it easier for manufacturers or companies to conduct business by having lighter regulations. Offshoring core activities can thus involve fewer production restrictions, allowing organizations to deliver services or products according to plan.
Taxes and Tariffs
Taking advantage of tax and tariff relief present in some countries offers companies significant cost-saving opportunities.
By choosing to offshore operations rather than outsource them, companies retain full control over their internal processes. Strictly adhering to the execution of critical business operations is often crucial to meet business objectives.
Disadvantages of Offshoring
The drawbacks of offshoring are somewhat similar to those of outsourcing, especially if the latter is done in a different geographical region.
Cultural and Social Differences
Cultural customs can have a noticeable impact on operations conducted in an offshoring location. For example, public holidays that occur on different days than those in a domestic country can result in days-long delays in production or delivery of services.
Companies offshoring their operations can usually expect to have more control over the production. However, many factors can still influence the quality of the finished product or delivered service, even if the offshore location follows guidelines and recommendations.
Outsourcing vs. Offshoring: Which One Is Better?
Outsourcing and offshoring are two effective business strategies employed by many internationally renowned companies. While each solution has its distinctive characteristics, both can help companies reduce production costs, improve business operations, and deliver higher quality to customers.
Businesses looking to delegate some of their operations or processes to either another location or business partner have to make an in-depth assessment to see if the benefits of implementing a strategy outweigh any possible drawbacks. Companies can also consider combining offshoring with outsourcing to build the most effective business strategy.
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