The terms ‘Offshoring’ and ‘outsourcing’ are often replaced with each other, but having a clear and deep understanding of these terms is crucial for businesses. Ultimately business operations and decision-making are affected by these two factors.

This blog covers the comprehensive definition of offshoring and outsourcing and the key differences among them. So that before deciding you will know what’s right for your next move.

Learn more: Why do more and more companies choose to outsource?

What is Outsourcing?

The term outsourcing entered business vocabulary in the second half of the 20th century when the global recession was faced across the world.

Many companies found it easier to employ an external team to do their work faster and at a lower cost than to hire an in-house staff. As a result, firms began to outsource numerous business activities that required specialized talents.

However, outsourcing is defined as the process of assigning certain corporate functions to an external service provider, usually to save money. The contracting company's location may be within the country or abroad.

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What is Offshoring?

On the other hand, offshoring is different from outsourcing as it is defined as entirely shifting a company’s department or business task to a country located “off-the-shore” and employing a devoted team to work on the business processes in another country.

If we take an example here it’s just like you delegated a marketing department of your business to the third team that is distant from your business location.

With advancements in technology around the end of the 20th century, several businesses found it cost-effective to consider repositioning an entire department from developed to underdeveloped countries to obtain high-quality services.

The biggest advantage of offshoring as compared to outsourcing is that you tap into the global talent pool and can easily complete the corporation-assigned work in less time

Now that you have an overview of the main difference between offshoring and outsourcing. It's time to dive into the key differences.

Outsourcing VS Offshoring: Understanding the Key Differences

The terms offshoring and outsourcing are usually thrown around in the same context in the business world.

However, both of them have different strategies to implement into the business operations.

Businesses need to know the difference between offshoring and outsourcing as they can impact business strategies in the long run. 

Let's get down to the core.

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How Outsourcing is different from Offshoring?

Location: The first key difference between outsourcing and offshoring is location. In outsourcing, the provider can be domestic or international.

Control: However, your control over the tasks remains the same as you are the manager of the vendor and you can set your goals and expectations before proceeding.

Examples: 

IBM outsources various IT services, including software development and maintenance, to third-party vendors globally.

Amazon outsources its customer service operations to call centers in countries like India and the Philippines to handle customer inquiries and support services.

Pros: The benefits of outsourcing to any business are worth considering. Access to specialized skills, cost savings, improved efficiency, and focus on core competencies are major things that everyone wants.

Cons: If we compare outsourcing vs offshoring, both have their own minuses. Outsourcing includes challenges like communication, potential quality issues, vendor dependency, and lack of control over internal processes. However, if you are a good manager then these hurdles can be easily overcome.  

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Offshoring is a subset of outsourcing

If we think about the actual difference between offshoring and outsourcing, it can be defined as “Offshoring is a subset of outsourcing”. Because it’s the outsourcing of business tasks to foreign countries.

Location: As told earlier the main difference between offshoring and outsourcing is in terms of location. Offshoring typically involves establishing a new facility or affiliate in a foreign country.

Control: In offshoring, you can still maintain control over the offshored operation, because you own the company, and your ownership can’t be challenged. Moreover, you can retain control by hiring a manager over the setup or the service department you established in a foreign country.

Examples:

Let’s understand the difference between Outsourcing and Offshoring with examples.

The big technology giant Microsoft offshores its software development and technical support to countries like India and Ireland to capitalize on skilled IT professionals.

Oracle offshores software development and testing to countries like India and China to enhance product development capabilities.

Pros: Cost savings, access to specific talent, potential tax benefits, proximity to new markets. One of the major benefits of offshoring is that your business is introduced to the new worlds and it can become an international brand.

Cons: High initial investment, cultural and language barriers, logistical challenges, regulatory compliance issues, and potential quality control difficulties are the main challenges of Offshoring.

However, the beginning is always challenging but before offshoring consider the factor that your service or product can also benefit the country or region in which you decide to offshore the business operations.

By considering this factor, companies can not only mitigate risks but also potentially increase revenue in the long run by tapping into new markets and leveraging local resources.

Outsourcing VS offshoring: Choosing the Right Path

After knowing the differences between offshoring and outsourcing, it’s time to choose the right one for your business. However, opting for the best choice depends on various factors.

Cost considerations: If you are seeking to save money for your business, Then, both offshoring and outsourcing can be attractive options, but carefully assess the total cost, including potential hidden costs like logistics and communication.

Skills and expertise: To choose the right option between Offshoring and Outsourcing consider the level of skills and expertise you need.

If you are looking for specialized and global skills or talent that is not domestically available, then Offshoring may open doors to specific talent pools, while outsourcing allows you to tap into the expertise of specialized service providers.

Control and security: Before implementing the strategy between Offshoring and Outsourcing Consider the level of control you require.

How important for your business is maintaining control over your operations and data security? Both outsourcing and offshoring can be processed by controlling and considering the NDA and documentation before closing the deal.

Outsourcing vs Offshoring: The Final Views

Whether you choose outsourcing or offshoring, you can benefit from having access to a larger talent pool while also saving money compared to hiring directly.

Some businesses receive major tax incentives, financial aid, and government grants to keep workers in their home nation. Companies that outsource work, on the other hand, can profit from tax breaks.

All business owners must understand the benefits of outsourcing. Book a meeting with us to learn more about these benefits and how to properly use outsourcing to your advantage.