Outsourcing and Offshoring are two words that are often misunderstood and confused. There are some overlaps between them but they are two completely different business strategies, each with their own advantages and disadvantages, so let’s begin to clear up all this confusion.
Both Outsourcing and Offshoring, work towards improving the company’s operations. You can seek to employ either one or a combination of both strategies to gain a competitive advantage against other companies in your field.
There are two main focus to each strategy:
- Outsourcing helps you increase productivity and reduces costs.
- Offshoring helps your company obtain more qualified specialists and access advanced technological solutions.
Now let’s take a more in-depth look at each strategy’s benefits and drawbacks.
Outsourcing means delegating some of your business operations and processes to an outsourcing partner. Most of the outsourced activities are non-essential or peripheral activities. Location it’s not an issue, the company you are outsourcing with can be overseas or in the same location as your company.
Accounting and IT services are the two most outsourced business operations at small businesses, another popular area is specialist services, for example live chat, which nowadays is for many companies a basic method of customer support.
Outsourcing is a tested strategy to improve operations, small and big companies rely on outsourcing to take care of some functions and processes and even to improve their customer service department.
Some benefits of outsourcing are:
- Cost reduction
- Free resources to focus in core functions
- Improve service quality
- Solve capacity issues
- Access specialized talent
- Speed up business transformation
- Manage business environment
Let’s take a closer look at the most important reasons why outsourcing is a proven strategy to help your company.
Companies usually seek to outsource to obtain cheaper services and retain or increase their quality level.
Hiring and training in-house specialists generate an additional cost associated with the hiring and training process, but with outsourcing, hiring costs, as well as workspace and equipment expenses are decreased, because your outsourcing partner will actually be in charge of providing all these for your company.
Access Specialized Talent
By outsourcing highly specialized tasks to a third-party provider, a company can gain access to innovative solutions and technologies at a fraction of the cost if you compare the process to setting up the process and technology in-house.
Outsourcing activities that require skilled labor can also help the company focus on core functions.
By outsourcing work to experts, you’re eliminating the period necessary to train employees and familiarize them with the project.
If we assign specialized agents to a task, the process or production time is decreased, which will positively impact both the quality and quantity of the task made.
Drawbacks and Limitations of Outsourcing
Intellectual Property Risk
When companies outsource, they share important information regarding business operations with the chosen outsourcing partner. There are measures that can protect companies from fraud or theft. Possibly a disclosure of sensitive business information will have to be taken into account when you close the negotiation and set the deal.
A good research to your possible outsourcing partners it’s one of the necessary steps when considering outsourcing any business processes. And signing a non-disclosure agreement before commencing any work is another necessary step.
Independently of the location of the outsourcing partner, effective communication could potentially be problematic. This is why in your research you need to take into account the way you obtain information regarding the outsourcing company to establish a clear view of how easy to access this company is and the importance they take in communicating with their customers.
Now, if the outsourcing partner is located in a different time zone, time gaps can make real-time communication hard to achieve.
Your company is delegating work to another company, so you will have less control over the execution of the processes and tasks, which can cause minor discrepancies in how the goals are reached.
Offshoring means relocating some of your own business processes or operations to a different geographical location.
It is unusual for companies to outsource their core activities, but offshoring crucial operations is quite common practice in large companies.
One of the biggest differences between outsourcing and offshoring is that with offshoring the work is still performed within the company, therefore the company holds sole control over how and when something is done.
Offshoring benefits companies by helping them save on labor costs while maintaining access to qualified talent and high-quality resources.
Advantages of Offshoring
The main benefit behind offshoring is achieving a manufacturing cost reduction. But it can also offer some additional benefits to the companies that choose this strategy, like:
- Lighter rules and regulations
- Access to cheaper specialized labor
- Easier introduction to new markets
- Lower taxes and tariffs
Now let’s take a deeper look into the most important benefits of offshoring.
Lower Production Costs
Offshoring offers companies an opportunity to hire specialized talent or to produce goods at a cheaper price.
If a company moves its operations to another location with a lower cost of living, the impact of that decision on cost efficiency can be considerable and at the same time, the quality of services received can be on par with what you have available domestically.
Some countries make it easier for manufacturers or companies to conduct business by having lighter regulations, allowing organizations to deliver services or products according to plan.
By choosing to offshore operations rather than outsource them, companies retain full control over all the internal processes.
Disadvantages and drawbacks of offshoring
Some of the disadvantages and drawbacks of offshoring are similar to those of outsourcing, especially if the outsourcing is done in a different geographical region.
Cultural customs can have a noticeable impact on operations conducted in an offshoring location. For example, public holidays that occur on different days than those in a domestic country can result in days-long delays in production or delivery of services.
The companies that offshore their operations can usually expect to have more control over the production, but many factors can still influence the quality of the finished product or delivered service, even if the offshore location follows guidelines and recommendations.
So which of these two strategies is the best one?
They are both effective business strategies employed by many internationally renowned companies. While each solution has its distinctive characteristics, both can help companies reduce production costs, improve business operations, and deliver higher quality to customers.
If your company is looking to delegate some of their operations or processes to either another location or business partner, you have to make an in-depth research to see if the benefits of implementing a strategy outweigh any possible drawbacks.
Another great solution is to consider combining offshoring with outsourcing to build the most effective business strategy for your company.