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There is a lot of confusion about the words outsourcing and offshoring. In fact, most people use these two words interchangeably. In reality, both words have their own distinct meanings and they differ from each other in multiple respects. It is important to understand the difference between the two in order to make sure that we make the most of whichever business method we employ in our management strategies.
Both offshoring and outsourcing have their advantages and disadvantages and both methods have certain common features, for which people mistakenly use the terms interchangeably. In this article, let us take a look at what these two methods really mean and how they can help you focus on your core business activities and requirements.
So what is outsourcing?
Outsourcing is an option from which a client gets some of their work done by subcontracting it to a third party. The third party may be located on the same street, in the same city, a different city, or even a different country. Outsourcing claims to help companies save money by cutting labor costs. It aims to reduce the burden on client companies by freeing up their spaces, time and resources to focus on core competencies.
Companies have been outsourcing work for a very long time, though the word as a concept in and of itself ahs only taken root and entered our lexicon but recently. Companies and individuals have always employed the services of others to produce parts of their products to then sell by repackaging or assembling in-house. The same model is replicated now only in a more complex and refined manner.
What is offshoring?
Offshoring on the other hand, refers to the act of outsourcing work to a supplier located in a different country, or the establishment of a company’s offshore branch office or infrastructure in another country. Both offshore outsourcing and offshore infrastructures together refer to the practice of offshoring in general.
Offshoring aims to benefit from low cost labor, easier taxation and a host of other benefits that the offshore model can provide. For the most part, companies opt for offshoring in order to gain access to specialized talent at a lower cost. Offshoring is a more recent recruitment phenomenon fuelled by the internet and the information technology revolution. It is increasingly accepted and embraced as a valuable addition to existing business management strategies.
|Security||The U.S. government decides to hire security professionals in an undisclosed Middle Eastern country in order to combat violence against U.S. citizens in that region. The government officials decide that local security experts are more knowledgeable about local security situations and will likely be better able to guard embassy locations.||The U.S. government gets third party security agencies to patrol the streets of certain neighborhoods in New York City given the a greater pool of police officers availablethrough these agencies.|
|Software||Oracle decides to hire a team of software engineers in Bangalore, India. It wants to optimize its software solutions but it just cannot afford to hire full time Silicon Valley professionals. They have already setup an office in Bangalore and so begin hiring new software engineers there.||Oracle decides to upgrade all its computers at its Redwood City office. It purchases an undisclosed number of desktops and laptops from a retailer in San Diego, because the quality of those computers is very reliable.|
|Electronic||Apple decides to purchase its microchips from a company in Korea. It also decides to employ a company in China to work on certain software issues that have been troubling its iOS mobile operating system.||Apple decides to hire gardeners from Seattle to spruce up its Cupertino location in California. Gardeners in California are more expensive than those from Washington. Moreover, Seattle gardeners from a particular company X have great skills with respect to creating great flowerbeds.|
|Automotive||Ford decides to set up a manufacturing unit in China, in order to make use of lower labor costs and access certain raw materials.||Ford decides to hire a third party specializing in customer care in Iowa. Ford doesn’t want to hire full time call centre employees at its Michigan head office location.|
Now that we have understood what the terms mean, let us take a look at their advantages.
Some of the advantages of outsourcing are:
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 focuson than the color of their flowers at its head office. By hiring gardeners based in Seattle, Apple can free up resources to focus on making better gadgets and computers.
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.
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, known for its software products, and its management, for instance, understood that if it dedicated time to analysing and reviewing which hardware to purchase, it would essentially be utilizinf precious time and resources not dedicated to its core operations. Thus, they hired a third party to do the purchasing homework and assess which computers and laptops were best suited for its productive employees, freeing Oracle workers to concentrate on its core competencies: developing and maintaining great software programs.
Some of the advantages of offshoring are:
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 developer 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.
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.
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 destiantions offering their business friendly regulations.
Get your jargon right!
Now that we’ve got the jargon right, know that outsourcing and offshoring are two different things, granted with some overlap and commonalities. Outsourcing is engaging the services of a third party (a vendor, supplier, company) in order to focus on your core competencies. Offshoring, on the other hand, is engaging the services of a third party vendor or individual located in an offshore destination (a foreign country) or establishing a branch or unit of your business in an infrastructure located in an offshore country, both of which in either case will benefit the company in terms of the lower labor costs and the access to an abundance of skilled labor and workforces. Both methods have their distinct advantages, so its recommended companies consult with experienced professionals who can help distinguish which is better suited to their needs and particular situation.