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June 08, 2021

The Difference Between Offshoring and Outsourcing

Outsourcing or offshoring? As entrepreneurs, we always need to make conscious decisions for our business, ones that will keep us in the game while improving our bottom line.

Outsourcing refers to hiring an outside company or independent contractor to carry out some of your business processes or special projects. For example, a company might hire an outsourcing company to complete a time-consuming data entry project so they could spend their time on more critical tasks that will increase revenue. 

Offshoring and outsourcing can occur at the same time. Although, they are not the same thing. Outsourcing is hiring a third party to complete tasks just within the same country, and offshoring is having the work done overseas. Both are aimed at reducing costs while improving business efficiency and productivity. 

It’s safe to say—the trend of relocating business processes overseas will continue, with thousands of companies reaping the sweet benefits. Cutting costs while maintaining quality is attractive to savvy business owners, so it’s becoming increasingly popular.

Companies such as Apple and IBM are some of the big brands that have profited immensely by implementing these business strategies. By choosing to offshore some of their tasks, they have cut costs, increased productivity and efficiency, and, best of all – improved their bottom line.

Outsourcing and Offshoring Objective

The driving force of outsourcing either nationally or internationally is to increase productivity and efficiency and improve the bottom line. By passing off some essential activities, businesses can focus on the core activities while cutting costs. Having access to skilled talent that is experienced, affordable, and flexible is a smart business decision for many organizations. 

Both outsourcing and offshoring objectives are to improve business operations for company growth, which is why many sharp businesses today are implementing either strategy or a combination of the two, so they could gain a competitive advantage.

Main benefits for outsourcing or offshoring:

  • Reduce costs and improving the bottom line
  • Increase efficiency and productivity
  • Affordable access to highly skilled expertise
  • Access more advanced technological solutions

Offshoring

Offshoring simply means moving business functions to a foreign country. Most companies don’t outsource their core activities but do other essential tasks—offshoring benefits companies by saving on labor costs while retaining access to qualified talent and high-quality resources. 

Main Reasons Businesses Turn to Offshoring:

  1. Cost savings

One thing is for sure; companies save a substantial amount on labor and production costs when hiring skilled talent from developing countries. As we all know, many counties’ labor rates are considerably lower than in the U.S., while they still have the experienced and reliable skilled talent ready to tackle a new project at any time. 

Sharp business owners are always looking for ways to cut costs while increasing efficiency and maintaining quality, and many are realizing offshoring is the answer. It not only lowers labor costs, but offshoring also reduces overhead costs by not requiring businesses to expand their current office and operations to accommodate added employees as they grow. 

  1. Tax relief

Offshoring processes to different countries offer certain tax reliefs to reduce operational costs. Keep in mind, each country will have its own tax requirements and regulations, so it will vary depending on where you decide to offshore.

  1. Access to skilled talent

Having access to higher-skilled professionals at an affordable cost is a huge benefit to offshoring. One thing is certain, to run a successful business, it takes staying up on technology and providing exceptional customer service while also offering competitive pricing. So when a business turns to offshoring, they gain access to experts to complete vital tasks at a much lower rate if they tried to hire local talent giving them the competitive advantage. 

  1. Lighter Regulations

Some countries have lighter regulations making it easier for companies to conduct business. For example, offshoring tasks can involve fewer production restrictions, allowing companies to deliver services or products according to plan.

Quick history lesson: Offshoring dates back to the 1960s when U.S. semiconductor industries started offshoring labor-intensive manufacturing work. Then, with the development of the Internet, other industries began using the proven strategy to lower their costs. Now, offshoring is commonly used by many businesses, both start-ups, and large corporations. And countless companies have grown rapidly since jumping on the offshoring bandwagon. 

Disadvantages to Offshoring:

  1. Cultural and Language Differences

Cultural differences can have an impact on operations and business relationships. A language barrier could be an issue as well. To save frustration and miscommunication, the ability to speak and understand the same language is high up on the importance list. It helps if there are similar cultures as well. You also want to keep in mind the difference in holiday schedules. Other countries celebrate different holidays at different times, resulting in delays in the production or delivery of services.

  1. Quality Check

Companies offshore usually have fewer regulations and checkpoints regarding production quality.

  1. Time Difference

When working with a team overseas you likely have a time difference making it challenging to make contact during your normal business hours. However, many offshore organizations offer 24/7 service, which helps with being able to communicate when needed.

Outsourcing

Outsourcing is the process of a company contracting work to a third-party entity. A company will hire an external party to perform tasks or handle certain business functions to save them time and improve efficiency. Outsourcing can also be a part of offshoring when a company hires an international third party.

Key Factors That Draw Businesses to Outsourcing:

  1. Reduce Costs

The truth is, a third party could complete some products and services for less money than it would cost to do in-house. As a result, business owners find they can maintain high quality while cutting costs and improving their bottom line. In some scenarios, the quality of the service or product is not the same, but the cost savings still draws a business owner in.

  1. Skilled talent

Without a doubt, some business processes are very specialized and need experienced, skilled individuals to complete. Outsourcing to another provider enables companies to access the skilled talent they need without hiring the full-time professional in-house, which is a huge cost saving. 

  1. Flexibility

A big benefit to outsourcing is a business can pay for the exact service they need, only when they need it. Basically, it’s project-based, so you only pay for the product or services you need, and when it’s complete, the contract ends. It’s a pretty simple way to get tasks completed quickly for less money.

Disadvantages to Outsourcing

  1. Data Security Concerns

An issue with outsourcing tasks is the increased risk of data security breaches. As you share essential project and company-related information with third parties, you are no longer keeping all of your data in-house. Therefore, the outsourcing organization you work with must have the correct data security standards in place to protect your confidential information. 

  1. Less Control

Part of outsourcing is giving up some control over how things are handled. You could give instructions, recommendations and, but ultimately it’s in the hands of someone else that you need to trust will handle it as planned. For example, when a company outsources their manufacturing, they may sacrifice quality since they’re not there to oversee the operations.

Outsourcing vs. Offshoring­ – Key Differences:

  1. 1. Outsourcing is the act of hiring a specialized third party to complete certain business activities. In contrast, offshoring refers to moving business activities or processes to another country.
  2. 2. Outsourcing can be carried out nationally and internationally. While offshoring is only performed internationally.

Outsourcing vs. Offshoring: Which is One Is Better?

Outsourcing and offshoring are both effective business strategies for many organizations. They help reduce costs, improve business operations, and grow. With offshoring, you could move your operations to another country and maintain control, or you could hire a third party to complete the work successfully. If cost savings is top on your list, then offshoring is the way to go.

To Sum Up

Both outsourcing and offshoring send off duties to be completed elsewhere. After passing off some tasks, a business can focus on its core duties, including growth strategies. When a certain skill is needed to complete a task, but the skilled talent is not currently on staff, it typically costs less money to pay an experienced professional to perform that exact task than to hire one full-time. The common driving factors for outsourcing are reducing labor and production cost, expediting transactions, improving efficiency, increasing production, and maximizing resources.

Offshoring and outsourcing both have their own benefits. Businesses should look at the advantages and disadvantages of each to decide which method is best for them and which tasks they want to outsource. Some companies will choose to outsource some duties offshore and others locally. 

Are you ready to follow the movement and outsource some of your business processes? For critical tasks such as customer service, back-office support, web/software development, Awesome OS is your solution! Contact us today to start improving efficiency and take your business to the next level!

 

Sources:

IBM Now Has More Employees in India Than in the U.S. (Published 2017) | New York Times

Offshoring: The Next Industrial Revolution? | Jstor.org

How to Build a Better Business with Outsourcing | Entrepreneur

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