Outsourcing and offshoring are two buzzwords one often hears in the business industry. Even though the terms have different meanings, they are used interchangeably. In order to know whether your company should opt for outsourcing or offshoring, it is essential to know the difference between the two. The outsourcing process started in the 1950s and gained importance as a business strategy in the 1980s. However, with the development of remote work technology, offshoring became another business strategy for growth. Let us now dive in to understand the difference between outsourcing and offshoring.
Outsourcing refers to the process when a company hires another company or agency and hands over the responsibility of the entire activity. For example, when a company outsources the digital transformation process, including good internet connectivity, which it can verify on , it gives the new company activity control. The hired company will now take the responsibility of delivering digital transformation.
Offshoring is the business strategy where a company hires employees from other countries. In this scenario, the company controls the hired staff and further, the hired staff report to the company. Having good internet connectivity is a must to ensure that offshoring works. Use to check the internet speed if you plan to do offshore work. Sometimes, offshoring is also known as staff outsourcing.
Now that we know the difference let us analyze its benefits and disadvantages.
Firstly, outsourcing allows companies to focus on what they are good at or their core competencies. When companies focus on what they are good at, they can leave their weak points to other specialized teams. Access to superior expertise is the primary reason why businesses prefer to outsource particular tasks. Outsourcing can also help the company to save money; however, it may only sometimes be the case. For example, suppose the company needs to pursue research and development of a particular project instead of buying the required inventory; it can outsource the work to other companies with the needed infrastructure.
The primary advantage of offshoring is that it helps businesses save costs. The labor cost of the foreign country may be comparatively lower than the country where the business runs. Offshoring can reduce both the labor and operational cost for the companies. In addition, it also provides the firm with access to a large pool of talent.
In outsourcing, the company has little control over the quality of the work. Also, the risk of data breaches increases when a company outsources their work, as sometimes the sensitive data goes to third parties. Finally, miscommunication is a common issue for both outsourcing and offshoring.
The major drawback of offshoring is that a company might require to hire legal and taxation experts. However, it is acceptable for many established businesses as they already have a legal team. The primary problem of offshoring comes in the form of collaboration and communication issues.
A company should choose to outsource when it is looking for specialized help. In addition, only the tasks which require little input should be outsourced. For example, companies that want to invest in research and development but need the necessary infrastructure can also consider outsourcing. A company can also outsource an activity when it does not have a core competency in the job. However, while outsourcing work, the company must ensure that it does not affect the clients directly and does not require strict control.
If a company operates in a country with a high standard of living, it should consider offshoring to cut back on labor costs. Also, if a company is having trouble finding a suitable candidate for a particular position, it should again consider offshoring. As stated above, the company can access an immense talent pool when offshore work. It can give the company a much-required competitive advantage.
Ultimately, whether a company should outsource or go offshore depends upon the activity it is dealing with. Many companies prefer to engage both in outsourcing and offshoring to meet their requirements. In contrast, the other companies can use one of the two business strategies. Therefore, it is essential to identify the goal the company is trying to complete. It is because the right strategy often depends upon the needs and goals of the business.