Is Outsourcing or Offshoring Better for Your Business?

What is the difference?

Key takeaways:

  • Outsourcing and offshoring are terms that are commonly used interchangeably but the practices have distinct differences.
  • Offshoring involves employing workers in foreign countries but outsourcing might not. 
  • Small and medium-sized businesses usually find greater value in outsourcing.

Offshoring and outsourcing are two widely misinterpreted practices of the global supply chain. They are often used interchangeably by the public but they are actually separate concepts aimed at business owners with specific needs. 

Outsourcing involves simply signing a contract with someone else to perform a job. Offshoring is the process of sending jobs to another country, such as manufacturing a product in a foreign country to sell in America. Offshoring and outsourcing both offer ways for companies to save money but the way they reduce costs differs.

It is possible to outsource work without going overseas or offshoring. A company can hire a law firm to review contracts, for example, instead of keeping a staff of in-house attorneys. Companies can also offshore work without outsourcing. An example of this is employing customer service agents in India for British customers. 

There are risks and rewards to both but the route that’s best for your business might surprise you. Read on to find out the pros and risks of these oft-misunderstood business practices.

The pros and risks of offshoring

Companies offshore to find the best talent at competitive prices. The best talent isn’t always local and it’s often necessary to look beyond borders. Offshoring allows a British or American company to hire a factory of workers or a team of developers for decreased labour costs with the same quality of work. 

Offshoring’s primary difference from outsourcing is that it requires a separate geographic location from the company’s base. It is usually used more by larger businesses.

Offshoring has some definite advantages and also a few risks. These all include:

Pros:

Lowers production and service costs

Moving a business department to a country with a lower cost of living passes the savings onto the customers. It also lowers costs by providing extra time and resources to devote to core business functions. 

A large pool of skilled workers

The shortage of skilled American workers is an often-cited reason businesses offshore. This shortage has led to problems such as failing interstate infrastructure.

Creates a global footprint for your business

Younger generations using technological advancements are slowly phasing out the traditional nine to five work dynamic. Many people prefer the freedom of freelance work. This new work dynamic opens up a significant opportunity to expand a business into the global economy

Risks:

Contributes to unemployment

Businesses that offshore may have to lay off employees whose jobs are restructured to an offshore services provider. This could contribute to unemployment but this does not always happen.

Quality control can be an issue

Offshoring can sometimes create quality control issues. Ensuring the product is built in compliance with the parent company’s guidelines can be challenging when constructed offshore, for example. As long as the businesses communicate clearly and directly, however, there shouldn’t be an issue. 

Cultural problems can arise

Cultural and societal issues that are challenging to maneuver can crop up periodically. American business executives may speak more bluntly than those in other countries, for example. With the world becoming increasingly global, however, many people all over understand particular customs and ways of speaking. Workers in the Philippines have an advantage when dealing with American businesses, for example, because the cultures are similar and most workers there speak English.

The pros and risks of outsourcing

The most basic way to describe outsourcing or Business Process Outsourcing (BPO) is that it involves moving internal operations to a third-party vendor. Businesses outsource work to free up valuable time to concentrate on core necessities. 

One big reason businesses outsource is to take advantage of employing those with specialized skills without hiring an in-house professional. Outsourcing for services you only need once in a while makes good business sense. It’s an efficient way to increase profit margins by lowering overhead costs. Small and medium-sized businesses usually find the most value in outsourcing.

Outsourcing offers many advantages but, as with offshoring, there are still a few risks. 

Pros:

Cost efficiency is exemplary

To say offshoring provides cheaper labour is only revealing a glimpse of its cost-effectiveness. Not only can a business find talented staff at lower wages by outsourcing but they are free to put their in-house workforce to more productive use. 

Improves business function

Outsourcing work to someone with skills so specialized a company can’t find them anywhere in their location is a smart business move. It allows them to offer their customers superior service because they went the extra mile for them. 

Provides flexibility

A company’s needs are always changing. To adjust and expand in a changing economy, businesses have to be flexible. Outsourcing helps a business take on staff for as long as necessary without permanently hiring new employees. It also helps free up funds for other expenses. 

Risks:

Third-party risks are possible

There is a risk with using a third party. Handing over payroll information, employee data, or intellectual data can make anyone nervous but rest assure, there are many ways to keep yourself safe. 

Time and scheduling issues may arise

Working with someone in another country can pose a problem for scheduling if you are in different time zones. The key to avoiding scheduling issues is good communication and picking a time that works for both parties.

Sharing control can create an issue

Sharing the control of a work project can cause problems if communication isn’t clear. Some business owners also have issues letting other people take the reins.

Offshoring and outsourcing may sound a lot alike to the public but there are distinct differences with pros and risks. Offshoring may not make sense for a small business but outsourcing has many of the same benefits and then some. 

BPO professionals who can answer your questions

Outsourcing can elevate your brand in some very unexpected and beneficial ways. Doxa7 helps small to medium-sized businesses build high-performing, scalable, global teams. Doxa7 is a global business services firm structurally aligned to deliver better results for small businesses. Contact us today for a free consultation.

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