The Difference Between Offshoring vs. Outsourcing

Offshoring and outsourcing are often confused. Outsourcing simply means delegating business processes to another company or independent contractors. Meanwhile, off-shoring involves managing part of the business activity in another country. The business may own and operate the facility overseas (for example, if they are building a factory overseas) or they may outsource to a local business.

We’ll dive into the benefits and risks of these options, as well as staffing-related models.

The benefits of outsourcing

There are several reasons companies outsource services including:

• to reduce labor costs
• to access special services
• Focus on core business skills
• Provide short-term or seasonal projects
• To get skills that are hard to find
• To find talent faster

Special outsourcing services

One of the main ways outsourcing companies differentiate themselves is by providing specialized services that they can handle more efficiently than their clients can do themselves. There are many outsourcing sub-industries including:

• Outsourcing of production-Companies hire another business to manufacture their products
• Business Process Outsourcing (BPO) – Employing specialized companies for back-end tasks such as customer service and data processing
• IT outsourcing – The information technology infrastructure of the business is hosted and managed by a third party
• Outsourced software development-A contract with a company to build software products
• Outsourcing of projects– Special help is needed to deliver a complex project

Again, not all of these functions are outsourced offshore. for example:

• Medical device contract manufacturers build prototypes and production products in the US
• Accounting firms in the US audit companies traded on the US stock exchange
• US IT companies build and manage cloud-based infrastructures of other businesses

If the company whose skill set, availability and rates most closely match the needs of the business happens to be in another country, then it makes sense to go offshore as well.

Economics of offshoring

Companies usually offshore to developing countries where wages are low to reduce costs. These savings are passed on to the customers, shareholders and managers of these companies. Offshoring has been criticized for hurting the US economy by cutting jobs.

The idea that offshoring hurts the US economy has been challenged. A McKinsey study, “Offshoring: Is it a win-win game?,” found that every dollar abroad generates $1.45 in new income, with $1.12 of that income returning to the U.S. and 33 cents going to the foreign country. These 33 cents represent about $20 worth of spending power in a country like the Philippines.

The benefits of offshoring for businesses

The main driver of offshoring is cost reduction – 70% of businesses outsource services to reduce expenses. The second biggest reason for companies to outsource is to quickly access labor pools in countries with a much better ecosystem for specific business functions. As the Offshoring industries of India and the Philippines For example, countries’ educational and vocational systems have grown and adapted to create mature training infrastructures and talent pipelines. It takes an average of four months to hire a person in the United States, and with offshoring, businesses can get entire teams up and running in a matter of weeks.

Benefits for offshore countries

Off-shoring also benefits the economies of developing countries and can help stabilize countries. India’s $100 billion offshoring industry has made it the third largest economy in the world. The offshoring sector in India specializes in software development and IT services. The Philippines has grown to lead the world in BPO offshoring, with the industry generating $27 billion in revenue and supporting 1.3 million jobs.

India and the Philippines lead the world in offshoring due to their high English proficiency, growing literacy and education rates, and strong work ethic. The countries are ranked first and fifth in The Top 50 Digital Nations by the global consulting company Tholons.

Offshoring risks

Outsourcing (and outsourcing when used to describe offshore jobs) has been criticized. Companies located abroad face certain reputational risks due to the perception that they are moving “American jobs” overseas. As McKinsey found, the economics of offshoring are not black and white. There are other risks in offshoring:

• Failure of the project or missed deadlines and the guarantee of legal battles over the blame
• Communication problems that slow down projects
• Changes in the political and economic demands of offshore countries that disrupt business
• Lack of control over the results

While the benefits of outsourcing and offshoring overlap, they do not share the same risks. Outsourcing to the US does not risk alienating consumers because of lost jobs or the risk of political, social or economic unrest.

Offshoring vs outsourcing after covid

The covid pandemic and the shift to all or most remote work has blurred the line between outsourcing, outsourcing and direct employment of full-time workers. When everyone is remote, does it matter if the employees are down the street or on the other side of the world? In an increasingly digital economy, more services can be provided online and from anywhere. In the event, the gig economy Leads more workers to pursue independent contracting, whether in Silicon Valley or Manila, gives workers more agency and gives employers more flexibility to staff on demand from any geography.

New models of Offshoring

While field operations have traditionally meant setting up operations in another country, new models of outsourcing emerging accelerated during the pandemic. One is to hire people and teams from overseas and merge them with your local teams as virtual co-workers. Online marketplaces like Upwork make it possible to hire people for projects and day-to-day work.

Managed service providers like Prialto Hire, train and manage virtual administrative assistants in Guatemala and the Philippines to work with US managers and staff. Another managed service provider, Andela, hires, places and supports software developers from African countries to work with US technology companies.

Reduce uncertainty with a managed outsourcing model

Managed service offshoring gives businesses the ability to scale up and down as needs change. Companies also have more control over their operations because they bring offshore workers into their teams instead of outsourcing work to another company. This type of control is essential because customers have more power and more choices than ever before, and the quality of the customer experience is paramount. You can find the right employee for the right job, regardless of the location of your business.

The managed service model of offshoring also gives overseas workers more than a gig – the managed service provider trains, supervises, pays, provides benefits and career paths which are not available to independent contractors or market workers. The employees work for the service provider, so the risks associated with political or social disruption are with that company. The good news is that you don’t have to manage the employee’s performance. It depends on the service provider.

Offshoring vs. Outsourcing: Conclusion

The most significant difference between insourcing and outsourcing is the location of the business you engage with to provide services. The second biggest difference is that offshoring involves some risks that local outsourcing avoids. A third option, offshore managed service providers, augments your team with the specialized skills and oversight you need with little overhead and risk on your part.