If you look for someone to run a part of your business, are you really outsourcing or offshoring? Offshoring and outsourcing are two similar terms that people most often use interchangeably. However, they are completely different terms.
Offshoring vs. outsourcing debate isn’t a life or death situation. But are you looking to outsource your business (or offshore) it? We are going to take a look at the differences and see what exactly you need to do. Clearing up these two terms will make it more clear for you and you’ll know which solution is better for you.
What is Outsourcing?
Outsourcing means hiring a third party to do a portion of the work for you. These can be companies, organizations, agencies, freelancers, etc. You can outsource different tasks and even entire sectors. The location of the outsourcing partner doesn’t matter. They can provide services in the same country where you work, or anywhere in the world.
What is Offshoring?
Offshoring means that you relocate a part of your business to another country. The primary motivation behind offshoring your business is to lower costs as you can attract top-quality workers by providing them above-average salaries for their countries, but below-average for what you would pay if you opened an office in your home country or expanded your team.
Offshoring vs. Outsourcing: Key Differences
- Location: Outsourcing can involve delegating tasks to external parties, whether those parties are located domestically or internationally. Offshoring specifically refers to relocating tasks to a foreign country.
- Focus: Outsourcing is a broader concept that encompasses the practice of contracting out tasks or functions, whereas offshoring specifically involves the relocation of tasks to another country.
- Purpose: The main purpose of outsourcing is often to improve efficiency, access specialized skills, or reduce costs. Offshoring is primarily motivated by cost savings due to lower labor expenses in the target country.
- Impact: Offshoring can have a more significant impact on the workforce of the country where the tasks are being relocated to, as it involves shifting jobs to a different location.
Offshoring vs. Outsourcing: Key Similarities
- Third-Party Involvement: Both offshoring and outsourcing involve the engagement of external parties to handle specific tasks, functions, or processes. In both cases, a company contracts with another entity to perform certain activities on its behalf. When you offshore your company, you don’t have to send away your team.
- Cost Efficiency: One of the primary motivations behind both offshoring and outsourcing is often to save money. Although companies that outsource have other goals than just saving money, this is always in the top five reasons.
- Focus on Core Competencies: Both strategies enable companies to focus on their core competencies and main business activities.
- Access to Expertise: Offshoring and outsourcing can provide access to specialized skills and expertise that may not be available internally. It is always easier to find experts that are always working full-steam than creating one from scratch.
Benefits of Offshoring Are Manyfold
Offshoring has benefits for everyone involved. Firstly, the company that offshore its operations can cut costs of up to 70%. In addition, as a company, you get access to skilled workers that will perform specific tasks. You don’t have to worry about establishing infrastructure in your own company.
In addition, offshoring has benefits for the nations you offshore your business to. Usually, US companies offshore to Asian and developing European countries such as Serbia, Bulgaria, Romania, etc. This helps them work with top companies from the US, hire people and give them above-average salaries and provide top conditions.
Even for the US, this is a win. McKinsey study showed that every dollar offshored generates $1.45 in new revenue with $1.12 returning to the US.
Benefits of Outsourcing Help Your Business Thrive
Other than cost saving benefits, outsourcing provides access to specialized expertise and resources that may not be available internally. This is especially useful in IT sector and e-commerce, where companies can tap into the skills of specialized firms, resulting in faster project completion, higher-quality output, and innovation.
Moreover, outsourcing enables businesses to streamline their operations by delegating non-core functions to external partners. This empowers the company to focus on its core competencies and strategic goals, while leaving specialized tasks like payroll processing, customer support, or supply chain management in the capable hands of experts.
Just like offshoring, outsourcing has benefits for the company, the state where you outsource (if you outsource to a foreign partner) so that part is really similar.
Outsourcing and Offshoring Bear Some Risks
Neither offshoring or outsourcing are perfect. While they are definitely a go-to move for a majority of businesses, there are always potential issues that can emerge. Here are five potential risks that you must address before offshoring or outsourcing.
Loss of Control and Oversight
Both offshoring and outsourcing can lead to a reduced level of control and direct oversight over the tasks being performed. This can result in challenges related to quality control, adherence to standards, and alignment with the company’s goals and values. Find a company that will keep you updated with regular reports and meetings.
Communication and Coordination Challenges
Effective communication and coordination become critical when working with external partners, whether they are offshore or not. Miscommunication, delays, and misunderstandings can hinder project progress and negatively impact outcomes.
Dependency on Third Parties
Companies become dependent on the performance, reliability, and capabilities of external partners. If these partners face disruptions, financial issues, or other challenges, it can directly affect the outsourcing company’s operations.
Cultural and Time Zone Differences
While more acute in offshoring, even in outsourcing relationships, differences in culture and time zones can impact communication effectiveness, project timelines, and collaboration efforts. Unless you outsource in your own country, you can expect some cultural barriers. Sometimes, they are bigger and sometimes, they may not even be noticeable.
Employee Resistance and Morale
Both offshoring and outsourcing can lead to resistance and morale issues among existing employees who might fear job loss or feel uneasy about changes in their roles due to external involvement.
When to Outsource vs. Offshore?
By listing out benefits and downsides as well as comparing outsourcing and offshoring side by side, you can come to the conclusion what you need to do. If you are looking to save money and get some tasks done, you should offshore.
On the other hand, if you want to improve your business, provide better customer service or improve sales, you better outsource. Outsourcing companies will help you with onboarding, strategies and they will get invested in your business. In addition, you can save some money while you get better results.
Looking for an Outsourcing Partner?
Now that you know what you want to do, it’s time to take action. Morph provides outsourcing services to businesses from the US! Whether you are looking to outsource sales, customer service, gaming or moving services, we’ve got you covered. Don’t hesitate to contact us and we’ll provide you with all the information you need.