Outsourcing and offshoring are two of the most common terms you will hear in these days. Jobs are either outsourced or being offshored. What do these terms mean? Are they interchangeable in their meaning? Or they refer to two completely different aspects of the business world?
Well, outsourcing is moving operations – non-core business functions – to another person or company. This can also be another company in your own country. Offshoring specifically implies moving your work to another country. That does not necessarily have to be a different company. Or you could just offshore to a foreign branch of your company.
Outsourcing is when a company contracts with an external provider for services or a particular function that might otherwise be performed by in-house employees. These services can be delivered on-site or off-site. Typically, the decision to outsource stems from a desire for efficiency and cost savings for the company.
Outsourcing achieves a threefold result. It helps the company achieve a competitive advantage in the market by leaving it free to concentrate on its core competencies. They rope in the expertise of a third party for its non-core activities; and, finally, it reduces the organization’s total operating costs while making company enjoy benefit from talented but cheap workers from the outsourcing vendor.
In today’s global scenario, almost every organization spends in a certain way. Typically, the function being outsourced are the non-core business. For example, an electronics products company decides to outsource its customer care operations to those companies that specialize in these types of job outsourcing. Many large companies now outsource jobs such as call center services, e-mail services, and payroll for better business efficiency.
You can also call Offshoring as a kind of outsourcing. Offshoring simply means that the outsourced business functions are carried out in another country. The biggest motivating factor here is that the work is outsourced to reduce labor costs.
While large multinationals such as Dell or IBM are actually setting up an offshore office in a new country, offshore also means a large number of small and medium enterprises that spend part of their business to a third party service provider in a new country with a view to cost savings.
Agreements between outsourcing and offshoring
- Both outsourcing and offshoring cause a third party to handle their non-core business processes.
- In both cases, the primary motivating factors are low labor costs, technological bright workforce, and higher profits.
Differences between outsourcing and offshoring
Outsourcing may or may not be outside the country of residence, but offshoring always involves a foreign country for the performance of the outsourced functions. A company can outsource one of its non-core business processes such as payroll, customer service and similar functions to a third party service provider who can work within the same country or abroad if they prefer. However, offshoring particularly refers to taking the post from the country of residence to one where costs are comparatively low.
Either the employees of the company can perform the task of offshoring or the company can hire any other vendor. To simplify, a large company can decide to set up separate offshore operations in a foreign country but should pay its activities to a third party per se. It can only physically set up an extension of the head office in a new country, spurred mainly by low cost and high-profit potential of the latter.
I hope after reading the post, you now have a clear understanding of what is Outsourcing and what offshoring means. We recently did a post on Outsourcing a key for startups to grow quickly. If you have any project to outsource or offshore, contact us. We will be happy to help you!