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Offshoring vs. Outsourcing Explained: Major Differences and Key Benefits
The debate of offshoring vs outsourcing might seem redundant to the average business owner. However, these two distinct processes are often conflated with one another despite not being the same. The main reason for this misunderstanding is that a lot of outsourcing is done through offshore firms. However, this does not mean that offshoring and outsourcing are the same.
What is Offshoring vs. Outsourcing?
Offshoring is when a business has a portion of its activities in a different country. Say for example that Apple makes a new factory in China. This is an example of an American company offshoring to China.
Outsourcing, meanwhile, is when a business hands over a portion of its workload to a third-party service provider. For example, Amazon, which is an American company, contracts customer service support providers from Asia. In the case of outsourcing, it does not even need to be an offshore third party. A business simply seeking help from another business for its operations counts as outsourcing. Disney, for example, outsources its graphical workload to various studios across America.
Offshore outsourcing is the reason for all the confusion. It is a common misconception among people that outsourcing refers to only offshore outsourcing. This is of course not the case, as there exist multiple outsourcing models like nearshore and onshore outsourcing. All of which we recently covered here at EA, and are a great bonus read to prime yourself for entering the world of outsourcing.
Offshoring vs Outsourcing: Key Differences
Ownership and Control
When we talk about offshoring vs outsourcing, the first conversation to be had is on ownership. In offshoring, most of the time control and ownership rests with the parent company. Apple opening a factory in China does not mean that the factory has Chinese leadership. It is still a subsidiary of the parent company, Apple, and must abide by Apple’s policies.
With outsourcing, this is not necessarily the case. Outsourcing offers far less control and ownership than offshoring. Since you are hiring a third party to do something for you, things are up to their discretion. You could include in your contract that you have direct control, but most firms do not offer that choice. Outsourcing firms are typically juggling tens and hundreds of clients at a time, and are results-oriented.
As a client business, you only need to be concerned with whether results are coming or not. How they manage and handle things internally is all up to them.
Required Investment
Another major discussion point in offshoring vs. outsourcing is the matter of investment. Not every business can just wake up and launch an accounting division in Pakistan, or a call center in Sri Lanka. The sheer investment and licensure required is a managerial nightmare. Only the big players like Glaxo-Smith Klein and Samsung can do offshoring with entire business functions.
It is common for businesses to hire offshore employees remotely, however. Especially in the case of E-commerce businesses, where there is no real office for employees. In such scenarios, business owners can hire marketing, accounting, and supply chain professionals and make a globally distributed team. Even so, the time and money commitment needed to form such a team is no small ask.
This is why the vast majority of businesses opt for offshore outsourcing. Instead of needing to directly get permits and spend money on infrastructure, they can simply commission the locals to help. Offshore nations realize the power of offshore outsourcing and have created dedicated industries to provide offshore services. Chinese moguls have built factories that tech companies contract for manufacturing, for example.
Risk
Offshoring is a much bigger business risk than outsourcing. When you are offshoring, you retain control as we mentioned. This is a double-edged sword, as you will need to directly intervene during any situation. Tense geopolitical situations, for example, can create friction that needs to be smoothed out. You as a US business may be disfavored in the event of a legal battle. There are simply too many places where your name on the offshore function is not ideal.
Outsourcing is far less risky. If an outsourcing firm makes a mistake, client businesses can simply terminate their contracts and dissociate. If an outsourced service does not fit the business, they can simply walk away. But if they are offshoring, then they have to shut down a division and deal with employee severance and myriad other issues.
Essentially, if things go south then offshoring ends up being way too much of a hassle. Outsourcing, on the other hand, allows for immense flexibility and maneuverability in almost any scenario.
The Benefits of Outsourcing
Swift Talent Procurement
The biggest reason for a business to opt for any kind of outsourcing is the potential for finding skilled professionals. Many business functions like IT and accounting have very specialized niches. Finding professionals to fill these niches at a reasonable cost is nearly impossible. Not to mention that the hiring cycle takes a solid 30-45 days and costs time and resources.
Instead, businesses can just dial up an outsourced accounting service or IT firm and ask them to find the needed professional for them. These firms and agencies have vast networks in their industry and access to curated databases filled with potential professional candidates. They can shortlist and interview the candidates for their client, and present them with the finalists to choose for their business. What would normally take months gets done in a matter of days with outsourcing.
Overhead Cost Reduction
Outsourcing typically is done remotely and is a splendid measure to reduce overhead. Outsourced professionals already have the infrastructure on their end to handle their responsibilities. This means that you as a business owner can save the overhead that would normally go to maintaining an onsite professional.
In the same vein, outsourced remote professionals demand way less than onsite professionals. You are not obligated to provide healthcare benefits or fuel expenses, as these professionals are working for you contractually for a project. You are not their boss; you are simply paying their outsourcing firm to get your work done. The outsourcing firm will shoulder the overhead instead.
Flexibility and Scalability
Outsourcing is an essential tool available to businesses that are scaling or downsizing. Given economic volatility and inflation, businesses are forced today to adapt on the fly depending on the market. A new product, for example, might end up a bigger hit than anticipated, leading to more personnel needed to fulfill every order. At times like these, businesses can outsource production, logistics, and customer service to third parties. This allows them to rapidly adapt to the situation and ride the sudden momentum as best as possible.
Similarly, your business may encounter a particularly unprofitable season for whatever reason, forcing you to downsize the team to cut costs. This is again an area where having outsourced help is perfect, as they can be flexibly moved onboard or off depending on needs. You can communicate to the firm that you do not need their accounting services for a period, for example, and they will simply move your accountant over to a different project. Such seamless transitions allow for stress-free employer-employee relations and help you keep the lights on in tough times.
The Benefits of Offshoring
Labor Cost Reduction
While outsourcing does reduce overhead costs, if you are not offshore or nearshore outsourcing then the cost savings are far less prominent. With offshoring, the whole point is to move a business function offshore to cut costs. A business may own its offshore business function, or outsource the work to an offshore firm. Either way, the cost savings are tremendous here, as talent in developing countries demands far less in wages for the same level of quality.
Thanks to how currency conversion works, the wage of a McDonald’s worker in the US ends up equal to a mid-level manager or accountant. The cost of living in countries like Pakistan and the Philippines is far lower than in the US. Even $1000 a month for them is enough to live lavishly. This means that businesses in the US can easily establish offshore operations and save a ton, without harming anyone involved. Everybody wins, so to speak.
Fostering a Global Business Community
Offshoring is a vital contributor to the ever-growing global business landscape. It creates millions of new jobs and gives talented people from developing nations a priceless opportunity. At this point, countries like the Philippines depend on it, with 9% of their economy built on offshoring.
Thanks to offshoring, every nation now has a chance to contribute to the global economy. Guaranteeing job security and financial growth to millions offshore is the crowning achievement of offshoring. Nations that do not have the infrastructure that the US has still have a fighting chance thanks to offshoring. Young men and women do not need to fight over employment opportunities, as there is enough work for everyone.
Conclusion
As you can surmise, offshoring and outsourcing and both amazing options for businesses. Deciding on one or the other is a matter of business capability and potential for returns. Offshoring is only really recommended for medium-large businesses, as they have the resources available to make it work. However, even for large businesses, outsourcing will likely be more than enough to meet their needs. Offshoring is simply too expensive with not that many returns unless you are Samsung.
Nevertheless, we have done our best to present both of these strategies as objectively as possible. There are minutiae that we have glossed over, and we encourage readers to research further before making a decision. Overall, this brief jaunt through the debate of offshoring vs. outsourcing should prove as a solid foundation for further exploration.