When we talk about business terminology, it is very important to use it carefully and with knowledge on a fine degree of differentiation. Quite often, the general public and young entrepreneurs misunderstand the difference between outsourcing and offshoring.
In fact, this two terms are quite different. Both of them have their pros and cons, and both of them are widely used business activities not foreign to SMBs or large corporations. In this article we are going to answer questions: “What is outsourcing?”, “What is Offshoring?” and “How do they differ from each other?”.
So, what is Outsourcing?
Simply put, outsourcing is a process of placing one or more of internal operations into the hands of a third-party company. In some stage of operations, a company can determine that it will gain more from outsourcing than from completing specific operations in-house. The cause of this may be the high cost of having professionals on the payroll or the high cost of investing in new infrastructure or software.
By outsourcing to reliable and experienced outsourcing partner, companies make sure that their operations are handled by professionals with plenty of experience in the field. For the fraction of the price companies are able to tap into the resources of outsourcing partners and have their operations handled by top notch talent in the industry.
There are basically two common outsourcing practices in the industry. One is when companies outsource to a company that directly handles their back-office operations. The other is when companies partner up with an outsourcing partner who has experience in finding 3rd party companies that are capable of getting the job done.
The practice of outsourcing has generated a lot of money for the global economy, since there are more and more companies that outsource their operations to their partners.
What is offshoring?
In order to help you understand this better, let's look at the nature of the activity. While outsourcing falls into the category of a business activity, offshoring is essentially a geographic activity in its nature.
Offshoring is motivated by only one goal – maintain the level of productivity at a lower cost. If there is a geographical region where labor costs are significantly lower than the ones in the company’s location, there is a great chance that offshoring will happen.
Here are some of the examples: Apple’s smartphone factories in China, the Fiat automobile factory in Serbia, Nike footwear factories in China, and the list goes on. By relocating their factories from countries with high labor costs to the ones with cheaper economies, these companies have made sure that their products have high margins.
Offshoring is also happening in the SaaS industry. Instead of paying very expensive labor costs in developed countries, the software development firms are moving their operations to the developing countries and getting the top talent on their payroll for the fraction of the price. The Indian IT industry is the best example of this.
Many critics of this business strategy say that offshoring sometimes seems as a sort of exploitation strategy, because it is designed to use the cheap workforce in the third-world countries.
These two strategies are not mutually exclusive, and there are many companies in the world who combine outsourcing and offshoring to cut down expenses, and improve the quality of their products and services.
These are the main differences between outsourcing and offshoring. As you can see, these are quite different business strategies, and both are viable strategies for businesses of all sizes.