By understanding the difference between the two, businesses will be able to figure out what works best for them.
What is offshoring?
Offshoring refers to the relocation of business operations such as production or services to a different country. For instance, producing goods in Western countries is usually expensive because of the costly labor and other production costs. However, developing countries have inexpensive labor pools that make production much more cost-efficient than in the west.
The process of offshoring takes advantage of such cost differences. Companies shift their production facilities to cheaper economies and sell the goods back to the western countries at a good profit. Besides advances in technology, productive offshoring has also been instrumental in reducing the cost of various consumer goods, such as electronics and clothing. Besides production goods, offshoring is also related to services. One of the prime examples is the Indian IT industry which is powered by waves of offshoring by Western tech companies.
According to industry experts, offshoring solutions have numerous financial benefits. It has the potential to save money for both the consumer and the seller. Offshoring can also stimulate wealth in poor countries and create jobs for those in need. However, critics feel that offshoring is a way to exploit vulnerable populations in poorer countries. Workers in the weaker economies need to work as much or more than those in the Western countries, and that too at a fraction of the price. They also have no legal protection and often work under harsh working conditions.
Benefits of offshoring
Minimizing the cost of certain business operations is one of the primary drivers of offshoring. There are several other benefits, including:
Cost reduction
Offshoring helps businesses cut down on labor costs significantly. Labor costs a lot less in developing countries than in Western countries. By offshoring labor-intensive processes such as manufacturing to developing countries, companies can save a significant amount of money on labor costs. Offshoring can also help companies cut down on many other operating costs.
Skilled workforce
When you offshore certain operations to a different country, you get not only a cost-efficient workforce but also a skilled and competent one. For instance, several technology companies have offshored their IT operations to India. Many companies have offshored their BPO operations to countries like India and the Philippines. These countries offer a highly skilled and competent talent pool that companies can benefit from.
Increased involvement of the management
In contrast to outsourcing, where work is contracted to a third party, offshoring ensures greater collaboration between the client and the service provider. During the process of offshoring, companies partner up with an offshore partner. An offshore partner is a local company that oversees operation setup until the launch date. Usually, such offshoring companies are registered with the local government regulating authority.
The foreign company usually appoints people from its headquarters or important offices to work in the offshoring country to manage operations. They are, thus, more involved in the day-to-day operations compared to outsourcing. Since the client is more closely involved, they have greater control over operations and better control over the quality of work delivered.
Enhanced productivity
Companies that outsource non-essential tasks can improve their productivity by focusing on their core functions. By saving on labor and other operating costs, companies can spend more on business development programs. Companies can also delegate tasks that require higher technical competencies without compromising on the budget.
Create a global presence
Establishing a global presence is yet another benefit of offshoring. Having a global presence means that you can sell your products and services to a foreign market, increasing your brand’s global reach.
Disadvantages of offshoring
Companies that are contemplating adopting offshoring solutions in a different country may encounter certain hurdles on the way. They should not overlook the following disadvantages of offshoring:
Communication barrier
Companies moving their operations to a developing country may face a communication barrier due to language and understanding differences.
Socio-cultural issues
Running operations in a different country means that companies need to acquaint themselves with the local cultural and social norms. Failing to do so could lead to potential socio-cultural problems.
Geo-political problems
Companies considering offshoring should carefully consider the country that they would like to move their operations to. Geo-political issues such as political instability, riots, or protests occurring in the country could have a serious impact on the business.
Ethical issues
Paying very low remuneration to the offshore team or making them work under harsh working conditions could lead to ethical problems. Ethics issues can create a negative brand image damaging the company’s reputation.
Safety and security issues
In the worst-case scenario, the company’s offshoring unit may face the threat of closure or lockout if the locals feel that it is unethical or harmful to their country.
What is outsourcing?
Outsourcing refers to the process of moving certain operations, such as accounting, IT, or customer service, to a third party. The idea behind outsourcing is that you transfer the transactional activities to a third party so that the company can focus on its core expertise. Companies may choose to outsource their services within their own country, to a neighboring country, or to a distant country.
The global outsourcing market is valued at $232 billion in 2020. It is expected to grow by 8.5% CAGR between 2021 and 2028.
Companies mainly use outsourcing services to cut down on labor costs, including wages, technology, equipment, and other overheads. Companies also use outsourcing to shiftless critical operations to an outside organization so that they can focus on their core functions. The outside organization has a different compensation structure for their employees compared to the outsourcing company. So, they can get the work done at a lesser cost than the client.
Although outsourcing solutions have many financial benefits, critics believe that outsourcing causes the loss of thousands of jobs in the domestic economy. Privacy has been another controversy that outsourcing companies have been struggling with recently.
Benefits of outsourcing
Besides reducing operation costs, outsourcing has several other benefits, including:
Saves time
By outsourcing non-critical and back-end operations to a third party, companies can free up valuable resources. They can focus more on the core functions rather than supporting ones. Companies get more time and resources to improve and strengthen core processes that support business growth.
Expertise
With outsourcing, companies get access to skilled resources, which means that businesses get the right talent, ensuring a higher quality of the outsourced tasks. When companies outsource certain tasks, they can often significantly improve their performance by drawing in on the expertise of skilled people in certain fields.
Reduced costs
By outsourcing non-critical work, companies can save on labor and other operating costs. They not only save time and money on recruitment activities for hiring permanent staff, but they also save on overhead, equipment and technology costs.
24/7 operations
Outsourcing overseas means that companies can face substantial differences in time zones and holidays. However, it also means that your business can run around the clock even when you are not present.
Targeted efforts
Outsourcing allows you to plan and execute targeted, more effective projects and campaigns that may not have been possible earlier. It allows your business to take on more risks and experiment with different methods of exposure.
Disadvantages of outsourcing
In addition to its many benefits, there are also some downsides to outsourcing that companies should be aware of.
Less management control
Once you contract the work to a third-party organization, the managerial control belongs to them. You lose control over how the tasks are being monitored or performed. Companies should only outsource to trusted contractors and pay attention to the terms and conditions of their contracts.
Quality concerns
The outsourcing contractor may not share the same passion as you for your service and products. Like all businesses, even they would want to make a profit from the services they provide you. Sometimes, that could lead to quality concerns. To ensure quality, you should have a formal set of quality standards that the contractor must meet.
Security risks
Companies need to be very careful about the tasks that they outsource. If the outsourcing company has access to confidential information such as medical records or payroll, it could be a threat to security. Evaluate the outsourcing company carefully to ensure the safety of your data.
Communication issues
Regardless of whether you outsource your tasks overseas or within the city, there could be potential communication issues. If you are handing out remote work on the phone or through email, important points could get lost in translation. Companies need to ensure that there are no communication barriers between them and the contractor.
Which is better?
Both outsourcing and offshoring have their advantages and disadvantages. Companies must thoroughly understand the pros and cons of each approach before deciding on which is the right course for their business. Some companies may benefit from setting up an offshore team, while others may find that outsourcing is more beneficial. For instance, if you are not in favor of entrusting your business operations to a third party, you may consider setting up an offshore team.
Unfortunately, there is no clear winner. However, companies that are looking to create a global presence and have access to a larger talent pool may benefit from using one of the approaches or even combining the two.
