Offshoring vs Outsourcing

Offshoring is mostly replaced by the term outsourcing, while the two are unconditionally different from one another. When in offshoring the business or the company is set up in a new cross border location; in outsourcing, the partial business process or tasks are assigned to a third-party under a contract.

However, there is a term, ‘offshore outsourcing’ which is understood as hiring a third-party entity operating in a foreign country.

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Comparison Chart – Difference Between Offshoring and Outsourcing

Let us enlighten upon the distinctness between these two terms:

BASISOFFSHORINGOUTSOURCING
MeaningOffshoring is the act of relocating the enterprise to a different country.When a company hands over its certain business process or activities to a third-party, it is termed as outsourcing.
ObjectiveSave on labor cost (skilled or unskilled)Concentrate on core business activities
IdeologyCost cutting and entering new marketHanding over task to experts
ShiftingBoth, offices and business operationsOnly business operations
Control parameterBetter command on operationsMinimal control over outsourced activities
Activities executed byEmployeesNon-employees
LocationCross boundary or outside the countryEither inside or outside the country

Examples

A leading American networking company, CISCO has widely offshored its technology development unit to India, with an investment of more than $150 million to set up the business.

Google outsource its most of the business operations across the globe, like AdSense’s email support is an outsourced process.

What is Offshoring?

Offshoring refers to shifting of the business to a completely new location outside the national borders of the country. The purpose is to take advantage of the minimal operational expenses, lenient legal compliance and more efficient resources prevailing in the offshore destination.

Many of the limited liability companies resort to offshoring while expanding business in other countries.

Pros of Offshoring

When the new markets and cross border locations pose better opportunities, then the organizations shouldn’t overlook the offshoring option.

Given below are some of its advantages:

Pros of Offshoring
  • Tax Relief: A company steps into a new country to avail tax liberties and relaxations allowed by its government.
  • Cost-Efficient: Offshoring is a means to acquire cheaper human resource when domestic labour is highly expensive.
  • Exposure to New Market: The organization gets the opportunity to capture the markets in the offshore country.
  • Limited Regulations: In some countries, the offshore companies are welcomed through minimal legal compliances or regulations to establish and run the business.
  • Specialized Labour: Many offshore destinations not only provide economical but also highly proficient manpower to the organizations.
  • Scalability: When the cost of raw material and labour are comparatively low, the company can scale up its production.

Cons of Offshoring

Offshoring seems to be quite fascinating however, its following drawbacks make the companies rethink about their decisions:

Cons of Offshoring
  • Different Time Zones: When a company offshores in more than one country, it needs to cope up with their respective time belts.
  • Social and Cultural Differences: Taking the business cross border, means getting exposed to an entirely different social, cultural, economical and political environment.
  • Hiring Legal Experts: The company needs to spend a handsome amount on hiring chartered accountants and legal representatives since it is completely new to the laws of the offshore destination.
  • Language Barriers: The organization may face communication barriers being unfamiliar with the regional and national language of the offshore country.
  • Quality Issues: The raw material is usually procured from the local markets even in offshoring, which may not meet the corporate standards leading to quality degradation.
  • Excessive Supervision: An offshore company needs a dedicated team of supervisors, administrators and managers to have an eagles eye over the business operations.

What is Outsourcing?

Outsourcing is a strategic decision of handing over a part of business operations or process to a third-party entity (whether domestic or foreign). It is done to unload the company from the non-productive operations. Also, the activities which require specialization or advanced technology are outsourced by the companies that are unable to fulfil such essentials.

Benefits of Outsourcing

Outsourcing helps companies to get rid of unnecessary activities. Let us confer the multiple benefits it has for the company:

Benefits of Outsourcing
  • Reduces Cost: The labour, infrastructural and material expenses made on unproductive or insignificant activities can be saved by outsourcing such tasks.
  • Focus on Core Competencies: The companies can assure commitment to its mainstream business process when the secondary operations are outsourced.
  • Flexibility: The organization enters into a contract with the third-party to pay only for the projects outsourced, rather than paying off the salaries regularly even when there is less work.
  • Resource Optimization: The material and human resources can be put to more significant tasks when the non-essential operations of the business are given out to an external party.
  • Saves on Infrastructure: If the extensive load of secondary operations are managed by the company itself, it would have to incur the heavy cost of engaging the premises, amenities and labour for the same.
  • Improves Competitiveness: The management and the team can contribute more time on framing strategies to deal with the market challenges.

Drawbacks of Outsourcing

An organization have to beware while selecting the third-party for outsourcing its operations.

Some of the prominent outsourcing limitations are as follows:

Drawbacks of Outsourcing
  • Communication Barriers: Due to different time zones and languages in case of cross border outsourcing, lack of proper business communication is common.
  • Lack of Control: Being performed by the third-party personnel, the outsourced business process cannot be regulated or examined by the organization at each step.
  • Hinders Customer-Centric Approach: Outsourcing is not a good option for the company that nurtures and prioritizes customer experience at every stage of the business.
  • Data Security Threats: The organization have to share its credentials and crucial data with the third-party. This increases the risk of fraud or security issues.
  • Cultural Barriers: The organizational culture varies between the company and the external party leading to a difference in opinion.

Summary

The above comparison chart is unfolded below to guide you in differentiating the two terms clearly:

Offshoring can be seen as the process of relocating the company or the business to a foreign country i.e., outside the geographical boundaries of the nation. While outsourcing refers to assigning of certain non-fundamental business operations to an external party.

The prior aims at reducing the cost of skilled or unskilled manpower. However, the latter is carried out to focus on core business operations.

The former is done with the idea of saving on labour expenses and penetrating a new market. But, the latter is major of the view that some business operations should be delegated to the professional organizations handling such work.

In offshoring, the companies prefer to shift itself physically and in operational terms outside the nation. Whereas, in outsourcing, only few business operations are allocated to an external firm.

In the prior case, the management remains unchanged, therefore, superior control over the business activities can be experienced. While, in the latter, the corporate command over the outsourced operations is limited.

The tasks or activities are accomplished by the offshore company’s internal human resource. On the contrary, in outsourcing, the outsourced operations are executed by the third-party employees.

Offshoring, as the name suggests, the business is carried out in another country. However, outsourcing can be done inside or beyond the geographical boundaries of the domestic country.

Conclusion

Offshoring is a great option for long-term establishments to avail better business opportunities in offshore countries. Outsourcing is though a sensible idea for short-term projects requiring expertise and also for the business operations which are non-essential, tedious and resource consuming.

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