There is a great deal of confusion between outsourcing and offshoring recrutiment. While both methods aim to improve efficiency and cut costs, they are completely different services. The difference between outsourcing and offshoring comes down to who versus where. Outsourcing means hiring an external company to handle specific tasks or projects, regardless of their location, like using a third-party firm for payroll or customer support. Offshoring means moving your own business operations to another country, such as opening your company’s customer service center in the Philippines.
Outsourcing is typically flexible and project-based, while offshoring involves relocating entire departments as a long-term strategic move.
What is Offshoring?
Offshoring is when a company moves a portion of its operations to a foreign location. Offshoring is not defined by who does the work, like outsourcing, but by where the work is done, namely, in a foreign country. A company can set up its own facility or team in another country (maintaining direct control), or it might offshore via outsourcing by hiring a foreign third-party vendor. The primary idea is that the work physically takes place in a different country, to take advantage of cheap labor, simpler tax management, and many other benefits that come with the offshore practice. Companies use offshoring, for the most part, to access talent that would otherwise be inaccessible at the normal market price.
Offshore example
A tech company located in the United States opens a development center in India. This allows the company to access more talent and save money because it can pay Indian software developers lower wages than US-based ones. The Indian employees would be considered an extension of that company and be part of its operation.
What is Outsourcing?
Outsourcing is the practice of hiring external companies or contractors to handle specific business tasks or processes. The company is hiring an external entity to do the work of an internal operation. The outsourcing entity can exist within a company’s domestic region or outside of it, since outsourcing is defined by who does the work, not by where it is done.
Outsourcing claims to save money by outsourcing work to people with lower salaries. It also offers to remove all your hiring effort, saving your company time and space and allowing to focus on its core capabilities.
Outsourcing Example
For example, a US-based company might outsource its customer support service to a call center that could operate in its region, or it might choose to outsource it to the Philippines, one of the most popular call center countries in the world. A company can also hire an external accounting company to do its accounting or hire a factory to produce its products. The common denominator in all of these options is that an external company is responsible for carrying out the work.
What’s the Main Difference between Offshoring and Outsourcing
The difference between offshoring and outsourcing is that offshoring moves your in-house operations to another country, while outsourcing hires an external company, anywhere, to handle the work.
Here’s a table to showcase how they differ:
| Difference | Offshoring | Outsourcing |
|---|---|---|
| What it means | Moving your company’s work to another country | Hiring an outside company to do your work |
| Where work happens | Always in a foreign country | Can be local or international |
| Who controls the work | You maintain more control (it’s still your company) | Less control (external company manages it) |
| Setup costs | High upfront costs to establish overseas operations | Lower upfront costs – just pay service fees |
| Long-term costs | Lower ongoing costs once established | Costs depend on vendor rates and contracts |
| Legal requirements | Must follow foreign country’s laws and regulations | Handle contracts with vendor (simpler if domestic) |
| Examples | Opening your own call center in India | Hiring a local accounting firm to do your books |
| Time commitment | Long-term strategic decision | Can be short-term or project-based |
| Risk level | Higher risk due to international complexity | Lower risk, easier to change vendors |
Pros and Cons of Offshoring and Outsourcing
Both offshoring and outsourcing offer significant benefits, but each also comes with challenges and risks:
| Model | Main Pros | Main Cons |
|---|---|---|
| Offshoring | • Significant labor & operating cost savings• Access to large, specialized global talent pools• 24/7 “follow-the-sun” support and easy team scaling• Local presence that helps enter new markets | • Time-zone, language, and cultural barriers hamper communication• Harder quality oversight; travel costs for supervision• Exposure to foreign political, legal, and infrastructure risks• Possible backlash at home over exporting jobs |
| Outsourcing | • Lets staff focus on core business while experts handle non-core tasks• Instant access to vendor’s niche skills and technology• Converts fixed costs to flexible, pay-as-you-go fees• Rapidly scale services up or down to match demand | • Less direct control over day-to-day work and quality• Dependence on vendor performance and pricing• Misalignment or communication gaps with an external team• Hidden charges or change fees can erode expected savings |
Offshoring Advantages
1. Significantly Reduces Costs
Most offshoring destinations offer much lower labor and infrastructure costs compared to North American standards. Whether it be economically challenged countries or emerging markets in Europe or South America, India, the Philippines, and so forth, all these offshore countries offer much lower standard of living costs and therefore wages. Companies can therefore benefit by hiring or engaging services offshore significantly reducing their costs.
As an example, one major software company chose to hire software engineers from Bulgaria in Eastern Europe, because of the substantially lower labor costs compared to the average wages paid to software engineers based in California.
2. Access International Talent Not Available Locally
Occasionally local areas won’t provide the necessary pool of talent or professionals with the required expertise. While the lack of skilled workers may persist in the local area, searching offshore countries will likely result in an abundance of candidates with the right credentials ready to work immediately. This gives companies the great advantage of accessing and choosing from a highly skilled workforce.
As another example, we can look to the U.S. government, deciding to hire security professionals in the Middle East, not only for their expertise in the local security issues and environment but also for its cost-effective solution.
3. Access to Favorable Business Environments
Many companies outsource to offshore locations to also take advantage of their favorable business regulations and/or taxation practices. They may be more investor-friendly, more lenient when it comes to labor policies, or in general offer less taxing conditions.
Examples of such up-and-coming offshore locations include Singapore, a very business friendly destination with a growing number of companies setting up shop, as well as Dubai and other destinations offering their business friendly regulations.
Advantages of the Outsourcing Model
1. Frees Up Resources and Capital
When companies transfer their non-core activities to a third party, they free up valuable resources and capital. This capital can then be used for something more critical and/or urgent.
For example, in the situation described above, Apple has more to focus on the color of the flowers at its head office. By hiring gardeners based in Seattle, Apple can free up resources to focus on making better gadgets and computers.
2. Offers Access to Third Party Services and Products
No company can sustain itself by doing everything on its own. It will at some point in time need to seek the services of third party vendors. B2B transactions can also be viewed as outsourcing if the client company seeks services or products on an ongoing basis.
For example, Ford does not have the time nor the resources to maintain a customer care unit in its Michigan office. Thus, it decides to hire professional agencies that can efficiently offer customer care services to their customers. In this case, an Iowa company answers calls and addresses concerns of Ford car owners on behalf of Ford, for which in turn it receives compensation for its services.
3. Affords Companies the Possibility to Focus on Core Competencies
One of the main reasons companies outsource projects is to focus on other more pressing core competencies. It is simply not possible to build on one’s strengths when there are multiple projects requiring your attention.
Oracle hired a third party to do the purchasing homework and assess which computers and laptops were best suited for its productive employees. This way Oracle workers concentrate on its core competencies: developing and maintaining great software programs.
Get your Jargon Right!
Now that we’ve got the jargon right, know that outsourcing and offshoring are two different things. Both methods have their distinct advantages. Offshoring and outsourcing are powerful strategies in the modern business toolkit, each with distinct advantages, disadvantages, and ideal applications. Offshoring vs outsourcing is not about choosing a winner, but about selecting the right tool for the job.
If you need help identifying what method is best for you, get in touch with us. As a remote recruitment agency, we know what works best for companies seeking to hire IT professionals. In fact, we’ve been helping companies hire remote developers for more than a decade! We know the market from A to Z.
What is the difference between offshore and outsourcing?
Offshore refers to establishing operations in a foreign country, while outsourcing involves delegating tasks to an external entity, which could be local or international.
The superiority of offshoring over outsourcing depends on various factors such as cost, talent availability, cultural fit, and specific business requirements.
