The Differences Between Outsourcing and Offshoring

In business today, it pays to specialize. While global conglomerates exist, they also have specialized divisions responsible for a specific product or service. Only in very rare exceptions do businesses try to do every themselves.

With an understanding that specialization is the norm, it only makes sense that businesses choose to outsource or offshore some of their work to others. The reasons why they do it are fairly obvious and include:

1. Allows companies to focus on their strengths – all companies have different areas in which they are strong. For example, a manufacturing company will not have often not have the in-house talent to create and deploy advertising campaigns on television or print. By using a specialist marketing company they are in a more powerful position versus their competitors.
2. Reduce costs – when it comes to cost, outsourcing and offshoring companies are a huge win for businesses. As an example, companies often have a specific pool of internal IT resources that are able to address the most common issues. However, if there are older (or newer) technologies that are in the field, hiring internal resources to work on these systems can be expensive. An IT outsourcer has all of these resources available and ready ensuring little to no time is wasted.
3. Adding more resources on-demand – resources within a business are not infinite. Often requirements for a project change on the fly and adding a new body is a time-consuming and expensive option. Using outsourcing services helps alleviate these capacity issues quickly and easily.

For many businesses, how they choose to delegate work can vary based on the work and requirements. We are going to compare two of the most popular options – outsourcing vs offshoring – so you can best understand which is the right solution for you.

What is Outsourcing?

Outsourcing simply put is the use of another company to perform operations that would otherwise require internal resources. 

Whether you are using a call center to provide support to your customers or a software development company to create an app, outsourcers come in all shapes and sizes and you can find them in every industry and vertical.

What is Offshoring?

Offshoring is different from outsourcing. With offshoring services, it’s not necessarily a question of skills but rather location-based costs. 

With an offshoring scenario, you’re looking for lower-cost countries where labor is generally cheaper. In these locations you can expect the teams to do the same work as your local teams but at a reduced rate. This differential goes directly to the bottom line helping make companies more profitable.

Offshoring vs Outsourcing – Similarities and Differences

While the two do share some similarities in that work is being done outside of the home office, they are also very different in terms of execution.

Some of the key differences are that outsourcing is the transfer of specific business activity, services, or function to another party while offshoring is more about the relocation of a part of the business itself. Another key point to note is that offshoring is done internationally while outsourcing can be both inside or outside of the country. 

*poor communication refers to time zone difference and geography.

Outsourcing vs Offshoring – Pros and Benefits

When considering outsourcing vs offshoring pros and cons let’s look at the pros first.

Outsourcing Benefits

• Cost Savings – companies try to avoid actions that cost them more money which is why outsourcing makes sense. In almost every case, outsourcing work to another organization is cheaper helping companies increase their profits.
• Core Strengths – a company is formed of many different teams and departments. In most organizations, these include functions like HR, Marketing, Finance and Operations. However, core strength is the specific “thing” that a company does better than anyone else. This is why the company gets clients and how it beats competitors. Clients can be focused on their business while the outsource partner handles product development and other operations.
• Quality and Capability – the skills within a company are finite yet new technologies are continually being developed and older technologies being put to pasture. For businesses that are impacted in this way outsourcing is a great way of gaining access to the right skills at the right time. Having the right skills also has a knock-on effect on product quality as teams are able to find and resolve issues faster. 
• Labor Flexibility – projects grow and shrink in terms of resources and requirements as business needs change. Outsourcing lets company’s scale up or down quickly without any wasted time or effort in hiring and training.

Offshoring Benefits

• Cost Savings – when companies offshore, they look for locations where the cost of living is lower and also where salaries and wages are lower. Using resources from these locations helps companies realize significant cost savings.
• Skills – in some cases, specific regions and locations in the world have greater skills than others. Eastern Europe for example is known for having highly skilled resources with good English skills which make the region ideal for offshoring support and service teams. The Atlantic provinces in Canada and Ireland demonstrate a similar cost and skill benefit for organizations.
• Flexibility – with offshoring, companies are able to pick and choose the functions that they would like to relocate. This lets them keep critical functions inhouse and onshore, and allows them the flexibility to offshore less critical functions.

Offshoring vs Outsourcing – Cons and Risks

While there are many benefits to offshoring and outsourcing, like everything in life there are also some risks that need to be understood and accounted for.

• Hidden Costs – with projects it is at times impossible to plan for the unknown. The impact of COVID is a perfect case in point. While companies can make projections and budgets based on the expected norm, a contingency should be included to account for the unexpected costs that might arise.
• Missed Deadlines – when offshoring work, time zones matter. It is very easy for deadlines to come and go when teams are not in close proximity so this is an area that needs diligence and attention.
• Confidentiality – outsourcing means giving work to another company. At times this company could also be providing support to some of your competitors based on your industry. Take your time to develop a rigorous NDA. This can protect you from the situation when your vendor shares confidential info both internally and externally.
• Communication Skills – having the right language skills is critical with some business functions. Service and support calls that are outsourced need to be answered – fluently – in the language of the country of origin. Failure to do so will only lead to customer frustration and disillusionment negating any financial benefits to the company. 
• Culture and Work – in most cases offshore teams will structure their hours to your local business hours, but in some cases, this might be possible. Local/regional holidays will impact their schedules and these need to be accounted for. 
• Location – good leaders try to make themselves available to their teams and while you might be offshoring resources they are still part of your organization. However, based on their location, travel might not be possible so alternatives like video conferencing need to be a consideration.

What is the Best Option, Outsourcing or Offshoring?

While outsourcing and offshoring services do share some similarities there are also some definite differences between them. Choosing the right option does depend on your needs and objectives as both options are growing in popularity for businesses worldwide. 

Many businesses are looking at a combination of both outsourcing and offshoring. An example of this is moving manufacturing to an outsourcer in an offshore location. Companies that traverse this path are able to accrue the benefits of both outsourcing and offshoring, however, it is important to realize that the risks are still there.

NIX is an outsourcing tech company that has successfully helped businesses for over 25 years. With experience working with the largest tech organizations, the NIX team is able to become a natural extension of your own in-house team offering both mobile and web development services, IoT integration, Blockchain, Big Data, AI solutions, and more. This true partnership helps you realize significant cost savings, while at the same time seeing massive efficiency and productivity improvements. 

Contact us to find out how we can help you and your organization navigate the current economic climate in the best way possible.