What’s the Difference Between Offshoring and Outsourcing Labor?

If you’re confused about the difference between offshoring and outsourcing, you’re not alone.

This is one of the most commonly misunderstood aspects when leveraging global talent because they’re often used interchangeably. While they are similar in some ways, they are distinct concepts with their own unique pros and cons.

You might be wondering what the differences are, and whether offshoring or outsourcing (or a combination of the two) is the best fit for your business? How do you choose and what should you consider before using either of these options?

If you want to learn more about offshoring and outsourcing and how you can apply these strategies to your company, here’s a guide to help you figure it out.

The Quick Run-Down

First of all, let’s have a simple explanation: what is outsourcing and what is offshoring?

Outsourcing is when a company negotiates a contract with a specific third party to perform a certain function on their behalf.

Offshoring is when a company sends in-house jobs to be performed in another country.

These strategies are not mutually exclusive, and they can be combined. For example, Offshore Outsourcing is a combination of both of these approaches. It involves hiring a specialist vendor to do the work offshore.

Also, it is possible to offshore work without outsourcing it. An example of this would be a company customer service center built in Manila, Philippines that is managed directly by the company and while serving its domestic clients. This is a way for businesses to leverage the benefits of offshoring without having to “take your hands off the wheel” by outsourcing to vendors.

What About Business Process Outsourcing?

You may have heard of this type of outsourcing, but how does it work and what advantages does it offer?

Business Process Outsourcing (also known as BPO) involves contracting a specific work process or processes to an external service provider. These services can include accounting, payroll, telemarketing, data recording, customer support and more.

This can be broken down into “back office” and “front office” operations. Back Office BPO refers to the core processes of running the business operations, such as payment processing, accounting, human resources and IT services.

In contrast, Front Office BPO refers to any services that are customer-facing. This might include sales, marketing, tech support and customer service.

For example, a call center is a type of BPO. However, business process outsourcing isn’t limited to call centers and the same company might also use BPO to outsource their accounting and payroll. There are also other forms of BPO that include legal process outsourcing, knowledge process outsourcing and much more.

The Main Differences Between Offshoring and Outsourcing

Now that we know what each option is, what are the major differences between offshoring and outsourcing?

There are several areas in which these two business practices differ from each other in a meaningful way. Let’s take a look at some of the main aspects that divide these two different practices.

Amount of Control

One of the main differences between offshoring and outsourcing is the amount of control you have over your team.

With offshoring, the offshoring firm hires the talent for you. The talent is dedicated to one company and the firm partners with them to manage their performance. This means that your company has control over every step of the process. You’ll have a say in who works for your company and how they do their work.

When it comes to outsourcing, you’re working with a third party agency and you have less control. You may not even interact with the workers, so you don’t have any say over their processes and systems.

In other words, with offshoring you’re working with an extension of your own office, while with outsourcing you are shifting the work to someone else’s company. You’ll always have less control in that situation and in most cases, you won’t even know how the work is getting done.

Dedicated Talent Vs. Non-Dedicated-Talent

One of the main differences between offshoring and outsourcing is whether or not the talent employed is dedicated to your project.

In both offshoring and outsourcing, the company you partner with will employ workers. The main difference is that when you outsource, the firms will have talent who they rotate between projects.

However, when it comes to offshoring, you’ll be working with a dedicated team who will get better over time. They are in the trenches day in and day out, so they will learn the ins and outs of the task and be continuously improving their skills. The longer these employees work for you, the more valuable they will become.

Freelancers Vs. Employees

When you are outsourcing a task, the person performing the activity is not an employee of your organization. They may be a freelancer, or they may work for an agency or some other company. When you are offshoring, the person performing the tasks will be an employee of your organization.

This is important, because the difference between employees and non-employees is significant. Employees receive a wage or a salary, while a freelancer or an agency will usually be paid a fixed fee per project.

When you are offshoring and you hire employees at your overseas location, you’ll need to handle their salary, benefits, sick pay and paid time off. When you are outsourcing work to a third party vendor or a freelancer, you are not responsible for their sick pay, benefits or salary.

Also, employees are generally restricted to one company, while contractors, agencies and freelancers work for multiple clients at once. They usually set their own hours and work to their own schedule.

Freelancers are not exclusive, and you may be paying for time that isn’t actually being used. Also, they may be more likely to leave faster if they find other opportunities. They don’t have the same benefits and support as employees, so there are not as many reasons for them to stay.

If you choose to offshore in the Philippines, employees there are protected by the laws if they are regularized – which means they have stayed in the same workplace for at least 6 months. For this reason, many employees don’t like to jump between jobs because this stability and protection is important to them.

Specialized Skills

Another one of the main differences to keep in mind is whether you are hiring for specialized skills.

Outsourcing works well when you have high volumes of repeatable tasks that need to be done. For example, you might outsource for data entry, or telemarketing. You will look for an agency that specializes in this particular task and can take over all aspects of it for your business.

This is especially valuable for large companies who already have strong, defined processes that are easy to transfer elsewhere. Most small and medium-sized businesses have not yet developed these clearly defined processes. So, it can be a burden to teach the outsourcing company how to do the work.

Small and medium-sized businesses are generally looking for team members with specialized skills or team members who can perform more than one role. In this situation, offshoring can be a better option because it will allow you to hire workers who have a more multifaceted skillset and aren’t so siloed.

Potential Benefits

When we look closely at offshoring and outsourcing, we also have to compare the potential benefits of either of these two practices. This is another area in which they differ significantly.

With offshoring, one of the most obvious benefits is the access to cheaper labor cost in different countries. By operating in a country with lower wages, the company can save money on labor and have more capital to invest in other aspects of the business.

When you are offshoring, you’ll have more visibility and control over the work being done. The work won’t be done behind a curtain, you’ll be able to see every step of the process. Plus, all process mapping and task costing will be yours even if you leave.

An offshoring firm may even help you create more efficient processes, which can help you reduce your dependency on them long term. In contrast, an outsourcing firm would keep that information and increase your dependency on them long term.

Plus, the company benefits from the economy of scale whenever it expands to operate in larger international markets. It allows even small businesses to have the infrastructure, tools and resources to compete with larger organizations at scale.

When we look at outsourcing, we can see that the main benefit offered is the value of the specialized services. When you outsource to the right provider, they can offer you an expert-level service that has the potential to drive revenue, build your brand, reduce your operating costs and much more.

Plus, when a company outsources to a vendor, they share a bit of the risk while also reducing their operational and recruitment costs. We’ll look more closely at the benefits of both options when we compare pros and cons below.  

Key Objectives

Another way to look at the difference between outsourcing and offshoring is by understanding the key objective to either of these two business practices. What is the main goal most companies are aiming to achieve when they choose to outsource or offshore their labor?

When it comes to offshoring, it seems clear that the key objective is to access specialized talent at a more affordable labor cost. The company may be asking their employees abroad to do mostly the same tasks, but these tasks can be performed at a lower rate due to the difference in local wages. At its core, offshoring allows a company to extend their team while taking advantage of geographic cost arbitrage.

In contrast, the key objective of outsourcing is to access talent to complete a high volume of repeatable tasks and business processes. In this situation, direct involvement in the management of these tasks is not necessary.

Common Industries Associated With Global Talent

What are some of the common industries or roles associated with global talent? Here are a few examples:

  • Bookkeeping and accounting.

  • Digital, email and social media marketing.

  • CAD and graphic designers.

  • Customer service and call centers.

  • Legal administrative work.

  • Software engineering.

  • Data and analytics.

Pros and Cons of Outsourcing and Offshoring

What are the advantages and disadvantages of these practices? After all, every business practice has its positives and negatives and this is no exception. Let’s take a closer look at the pros and cons of outsourcing and offshoring, so you can be fully informed.

Here are some of the pros and cons that apply to both outsourcing and offshoring.

Pros

  • Contracting work out to a third party can be cheaper than doing it domestically.

  • Outsourcing other business functions such as payroll, accounting, marketing, transportation and security allows your business to allocate more resources to core activities.

  • Your business may not have enough in-house expertise for certain activities. In these situations, it is more efficient to outsource.

  • Outsourcing offers more flexibility. Your company will be able to ramp up when needed, then part ways with the third party vendor when the contract is over.

  • Outsourcing a project can be faster and more efficient than recruiting, interviewing and hiring in-house staff to do the job.

  • When you hire employees in developing countries where wages are low, this results in significant cost savings. These savings are passed on to the customers, managers and shareholders of the company.

  • Some countries or regions have a particularly excellent ecosystem for generating talent in certain types of industries. For example, the Philippines and India both have a large talent pool of college-educated, English-speaking people. This makes it ideal for offshoring business functions such as customer support call centers.

  • Some countries have favorable business policies that make it easier and more affordable to operate there. For example, they may offer grants and incentives to companies that invest in their economy.

Cons

  • It can be challenging to deal with the different schedules and time frames of the third party vendor you are outsourcing the work to.

  • Other countries have different public holidays, which may conflict with days when you need to get work done.

  • There may be an unstable political climate in the country where you are offshoring, which means that political unrest can flare up without warning and disrupt business operations.

  • If you need to send products or supplies back and forth, the cost of shipping and other duty fees can really add up.

  • If your offshore employees are located on the other side of the world, coordinating with time zones can be difficult. (You can schedule your offshore staff to work evening or night shifts, but this causes its own problems too.)

  • There’s always a risk of miscommunication when working with employees whose first language is not English. 

Other Pros and Cons To Consider

There are a few advantages and disadvantages to consider that don’t necessarily apply to both options. The real differences come down to cost, control and the security of your business practices.

When it comes to cost, there can be hidden costs within the contracts of an outsourcing agreement with a third party company. Plus, every time you outsource work out to an external contractor or vendor, you lose control over how those tasks are monitored and performed. And, you may face security risks when allowing a third party to access your customer data or other confidential company data. Offshoring provides you with more control, and will also be less expensive because you’ll be able to train the team and oversee the work. As you train your team and improve their skills, you’ll get a future return on investment for this training (rather than a freelancer or agency who can apply everything they have learned to future work with your competitors.

While you will need to navigate cultural and social differences when working with an overseas team, (especially since you’ll have direct interaction with them), the key advantage is that you’ll have full management oversight of the work. And the offshoring firm should provide tremendous support and optimization opportunities along the way. And, your team will start to adopt your culture and your way of working..

This is different than working with an outsourcing agency, who will likely be serving multiple clients at the same time and won’t be able to give your work the focus it deserves.

Which Type of Outsourcing is Right For You?

You might be wondering, “which is better, outsourcing or offshoring?” The answer isn’t really about which practice is better, but rather which is better for your particular business.

In order to answer this, you’ll need to think about what you aim to achieve by either outsourcing or offshoring. What are your most important priorities and what does success look like for you?

These are a few questions you should ask yourself, before deciding whether offshoring or outsourcing is best for your business:

Is your goal to reduce overhead costs such as office space, labor and supplies?

If that’s the case, offshoring is probably your best bet. By offshoring your operations to a less expensive country, you’ll have lower wages, lower setup costs, get to market faster and potentially even fewer taxes.

Do you need to have a 24/7 workforce? 

Ask yourself whether you will need support around the clock and whether a third party vendor will be able to provide you with the 24/7 help you need.

Do you need particular knowledge and expertise to help you with a project?

Before you decide whether you should go with outsourcing or offshoring, you should have a clear idea of the type of work that needs to be done. Does it require specific skills, knowledge and expertise? Does it involve one type of repetitive task, or a variety of different tasks.

Do you want to maintain full control over your business operations?

Would you rather be able to have control over people, processes and systems at all times? If the answer is yes, you should consider offshoring. When you choose offshoring you are creating an extension of your office, rather than sending to work to someone else’s company.

Are you aiming to free up your local staff so they can spend more time on complex, high-value tasks?

Consider Business Process Outsourcing, so that you can find someone else to handle the day-to-day tasks of operating your business such as accounting, tech support, customer service, etc. That way, your most essential team members can focus their attention on the core activities that really make you stand out from the competition.

What is the size of your business?

If you are a small-to-medium-sized business, you might want to consider offshoring. It will allow you to hire skilled workers to support your need for flexibility – they can cover more than one job junction. This will give you the infrastructure, tools and resources to compete with larger organizations at scale.

Conclusion

Offshoring and outsourcing are different processes, and they can offer real advantages for your business. When you understand how each of these options functions and the pros and cons they offer, you can make an informed decision about which is the best fit for your company.

Offshoring and outsourcing can overlap in many ways and they can even be combined. The key to choosing the right option for you relies on asking the right questions, having a clear business strategy and understanding what you want your team members to focus on.

If you’re interested in learning more about building profitable growth by harnessing the power of high-performing, scalable, global teams, contact us at Doxa7. We can have a chat to discuss your needs and find the right solution for you.

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