What is the difference between outsourcing and offshoring?
, studied at Lovely Professional University- LPU
Outsourcing and offshoring are two terms that I am sure every businessman is aware of whether you outsource any function of your business or not. Most of the times, these two terms are interchanged in conversation or even confused by some to think they are one and the same. However, there are some fundamental differences between the two. In this blog post, we shall explore these differences and get a clear sense of what both these terms actually mean for a business.
In simple terms, outsourcing refers to the act of contracting a third party company to carry out certain functions of your business. Outsourcing can be done for the sake of reducing operating costs as outsourcing is more cost effective than hiring an in-house team. Another reason why companies outsource services is to avail expert or specialized skills that their own team does not possess.
Here are some benefits of outsourcing for businesses –
As stated above, outsourcing provides cost-effective services to businesses. When a company sets up a department in-house, apart from the salaries, they have to bear other expenses live electricity, internet, furniture, computer systems, employee benefits, paid leaves etc. Outsourcing saves the business these costs.
- Access to specialized skills
Instead of going through the time-consuming process of finding and training staff members with certain skill sets needed for the job, it is easier to outsource the functions to an Indian outsourcing company that already employs staff members with those skill sets, who are already well trained.
Outsourcing offers companies the flexibility to scale up or down according to their business requirements. If seasonal hiring has to be done, its better outsource this than conduct this in-house. This will save you the inconvenience of constant hiring and firing.
- Focus on Core Functions
No matter what your company does, it has many non-core functions like customer services, billing, hiring, training, accounts etc that need to be handled. Outsourcing these functions to a third party helps your company focus its resources on the core objectives.
Offshoring refers to a company getting their various services handled in a different country to make the most of the cost advantage. Offshoring is usually done by finding a country where the exchange rate gives your business a distinct monetary benefit. Companies based in western countries like the U.S or U.K offshore their business to countries like India, Philippines, and China etc.
Now, this is where we cannot confuse outsourcing with offshoring. A company can offshore their particular department but not outsource it at the same time. For example, companies based in the U.S can offshore their customer service to their Indian captive units. This way, they are not hiring any third party company and still getting cost reduction benefits.
Offshoring has the following benefits for businesses –
- Reduced Cost of Operations
Whether it is help desk service or manufacturing, when any service or function gets offshored, it is usually for the benefit of cost reduction. Cheap labor or workforce is a big driving force for western companies to offshore. Through offshoring, work can get done with just a fraction of the cost of doing it in your own country.
- Capitalizing on Skills of the Locals
Due to various reasons, there are certain geographical areas where the locals have developed skills in a particular industry or sector. For example, India has been for long considered the hub for offshoring help desk services or tech support services. The reason for this is that India produces well educated and tech-savvy workforce that is perfect for the tech support processes for some of the biggest technology companies in the west.
I hope that this blog post has clarified for you the basic differences between outsourcing and offshoring. It is important to remember that you do not have to outsource in order to offshore. There are several captive units of companies set up across different countries that can be used for offshoring. When work is contracted to a third party that is set up in a different country, then it can be called offshore outsourcing.
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, CEO cloudemployee.co.uk | Outsource | Tech Startup at Cloud Employee (2011-present)
Outsourcing and offshoring are two terms that are often synonymously used, but there’s actually a key point differentiating them.
Outsourcing refers to obtaining certain services or products from an external third party. The location of the contracting company is not important—outsourcing can be done between different parties located anywhere. On the other hand, Offshoring refers to obtaining services or products strictly from companies based in another country.
Outsourcing has three types of occurrence:
Offshore, as its name suggests, means outsourcing “beyond the shore”—the contracting party could be in another region or another continent, far from the client.
Onshore, which means that the contracting party is located in the same country as the client.
Nearshore, wherein a company outsources to a neighboring country within the same region. These countries usually have a time difference of not more than two hours.
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, CMO at Existek, Custom Software Development Company (2016-present)
This is pretty easy. Outsourcing is passing of some part of the work or even complete project to the external third party organization, while offshoring is just an outsourcing but to the remote country.
So, offshoring is a kind of outsourcing with the notion of the distance between the client and the contractor organization. In general, there are three types of outsourcing according to the physical distance between two parties.
Onshore – outsourcing of some of the business process to the contractor located in the same country with the client.
Nearshore – it is an outsourcing to a neighboring country or to a not very distant location or within the same region with the time difference not more than two hours. For example, when organization located in England passes some work to the third party contractor located in France it’s a nearshore outsourcing.
Offshore – it’s and outsourcing to the very distant location with the significant difference in time and all the related pros and cons of such choice like lower price and culture difference. A very standard example is an outsourcing from US to India.
Also, I think that you might be interested in reading following articles to better understand outsourcing and offshore outsourcing in particular.
Offshore Outsourcing: 3 Examples of Successful It Outsourcing
It’s three good examples of companies like General Electric and IKEA who have outsourced their IT to the offshore locations and its turned into a major success.
How to Manage Dedicated Software Development Team
This is the article about best practices in the management of the remote teams including offshore teams. Also, I am pretty sure that this advice will work for everyone who somehow engaged in the projects with remote teams for whatever industry.
Hope this helps.
If you’ll need any consultation regarding outsourcing and offshoring in particular, don’t hesitate to visit our custom software development company website or contact us directly.
, Expert in Dedicated IT Staffing @ software-developer-india.com
As Alika has already written, Outsourcing refers to the general act of giving some work to a third party company.
Whereas Offshoring refers to giving the work to a company, which is usually far away and in another country. Actually it needs to be correctly called Offshore Outsourcing, as Offshoring itself refers also to offshore drilling of oil, i.e. drilling of oil in the deep sea.
Outsourcing has some advantages, which are mentioned below:
Advantage 1) Expertise by the outsourcing company
A company might not have specific knowledge in a specific area. One example could be the development of software, in the case of an industrial manufacturer. In this case the company may approach a specialized IT Outsourcing company, who would help them in that area.
It might not be possible for the manufacturing company to acquire that knowledge by themselves, because of the following reasons:
a) Not enough work to employ a team of developers for years
The industrial manufacturer might not need to have a software development team for years, so therefore it is also not possible to acquire the knowledge, which a specialized IT Outsourcing company will acquire over the span of several years, which employs a specialist team.
b) No need to be specialized in this field
A Tyre manufacturer might not feel the need to become an expert in ASP.NET or another software development language. Their specialization is tires, and they want to focus on that.
Advantage 2) More flexibility
The manufacturing company can be more flexible. They might need to change the software teams from time to time, or they might want to stop the development for some time. This is all possible, when working with an outsourcing company.
Offshore Outsourcing also has some advantages, which are mentioned below:
Advantage 1) Cost advantage
The world has not developed equally in wealth and knowledge in the last few decades and centuries. Due to this, there is still a huge wealth gap between the different countries. Therefore it makes sense, to produce in a low wage country (for example, China) and sell in a high wage country (for example, USA).
It has also to be considered that knowledge becomes more and more equally distributed around the world, as the internet is providing knowledge into every corner of the world and is connecting people of all walks of life.
Advantage 2) Greater labor force
The west is fighting with a low birth rate and a very high demand for service and products of all kinds. Countries like Germany and Japan are exporting at the same time a huge amount of goods and services. All these goods and services need to be produced somehow, and if these resources are missing in those countries, it is a good idea to look elsewhere, where there is a large labor force.
China and India are two nations, where these large labor forces can be found. They also have the added advantage that a good part of their populations are very highly educated.
I hope I was able to help you with your question.
Disclaimer: I run an IT Outsourcing company.
, IT, Accounting & Legal Project Manager at Cogneesol – Outsourcing Company
Things to Consider While Selecting an Outsourcing Service Provider
Outsourcing is a common practice that businesses use to cut expenses, gain access to employees with a special skill set, and obtain other benefits. Offshoring is sometimes referred to as a subset of outsourcing. The biggest difference is that while outsourcing can be (and often is) offshored, offshoring may not always involved outsourcing. Both may save company money, but only offshoring specifically means sending jobs out of the country.
Outsourcing has numerous benefits for businesses. Contracting external agencies or professionals can help them complete processes and tasks faster, reduce their costs, and run a more effective and profitable operation. Ultimately, the best solution for your business depends on your needs. If you need a high level of quality and communications, outsourcing may be best. If you need low costs and a systematized business, offshoring is often a better solution.
, worked at Nascenia (2018)
Outsourcing is giving contract to a third party to perform a specific business function. It can be done both domestically and internationally. Moreover, international outsourcing can be separated into nearshoring and offshoring.
The companies which need outsourcing are generally looking for personnel for a specialized activity which is either too costly to perform internally or they dont have the workforce skilled enough to undertake the job. Outsourcing is often less costly and less time consuming.
Offshoring means using a third party from distant, foreign countries to outsource business processes. Outsourcing within home country and nearshoring give the parent company geographical, temporal, cultural, linguistic, social, political and economic benefits. Offshoring gives mostly cost benefits.
In a nutshell, offshoring is a part of outsourcing which is done in a distant country for greater cost benefits.
If you have any further query, please go through “ What is Outsourcing? ”.
Also if you want to outsource quality software development, you can go for Nascenia . Nascenia is handled by professional management and a team that is competent enough to handle sensitive data. We have been delivering world class web and mobile applications for clients across the globe since 2010. If you are interested in building customized applications, give a heads up here .