Outsourcing Vs Offshoring
Outsourcing and Offshoring are two of the most commonly confused terms. Did you know that you could outsource your work without offshoring it? For instance, you can hire an external accounting firm to take care of your books instead of hiring an in-house staff to do it for you.
Outsourcing refers to contracting work to an external organization while offshoring means getting work done in a foreign country. The latter is usually criticized for sending jobs to other countries. The other risks of offshoring include language differences, poor communication, and geopolitical risk.
On the other hand, the risks of outsourcing include increased 3rd party reliance, lack of in-house knowledge about critical business operations, and misaligned client and vendor interests. The benefits of offshoring include lower costs, getting work done quicker by utilizing a global talent pool, and better availability of skilled people. Outsourcing also has its benefits, including labor flexibility, specialized skills, and cost efficiencies.
Reasons to Outsource
Cost advantage – as previously mentioned, contracting third parties to handle your repetitive and menial tasks is more efficient and cheaper in the long run.
Quality and capability – the company that will handle your work is very qualified and this will maximize efficiency.
Focus on core competency – your core activities are the ones that offer you a competitive advantage in the market. Once your other burdens are lifted, you can focus on your core activity.
Improves productivity – when you outsource some business processes, it can improve productivity as your company starts to focus on the core functions.
Increases flexibility – your company can increase its flexibility through outsourcing by taking advantage of zone differentials. When you change work shifts, it is possible to have the company managed for sixteen hours by an outside agency.
Reasons to Offshore
Skills – the competitive advantage among nations means that there are countries or regions that develop better ecosystems in some industries.
Cost savings – some companies usually outsource their services to countries where the wages are lower, leading to savings. Offshoring reduces cost of operation by capitalizing on the existing comparative cost advantage.
Greater involvement of management – unlike with outsourcing where tasks are assigned to a 3rd party, there is closer collaboration in offshoring between the client and service provider.
Establish a global presence – brands such as Nike set up offices in foreign countries to build their global presence. In global economies, offshoring will give you the opportunity to lower your costs of operation and take your products and services directly into a foreign country. Basically, you will be promoting and marketing your products in the host’s economy.
Improve profitability – when your company outsources to a foreign country, you will be lowering the total cost of production. Once it goes down, this can reduce the cost of your finished products through promos and price rollbacks and still make great profit margins. The comparative cost advantages are not just limited to labor; direct costs such as internet, rent, power, and telecommunications will also be lower.
Repercussions of Offshoring and Outsourcing
When looking at outsourcing versus offshoring, they have both faced their fair share of criticism. People blame offshoring for stealing their jobs yet most agree that it lowers costs for companies and these benefits are passed onto the shareholders and consumers.
On the other hand, outsourcing does not have the same risks. The only risk it faces is the vendor’s lack of familiarity with your business and lack of alignment on business objectives.