Have you ever wondered what the difference is between outsourcing and offshoring? There are not two words for the same action.
Offshoring, unlike outsourcing, doesn’t include a third party taking over the delivery and responsibility of services on behalf of another business.
Outsourcing is not location dependent like offshoring. For example, a business can use an outsourcing service in the same building or location or located somewhere else within the same country or another country entirely.
Offshoring is as the word describes – it’s not within the same country as the business – it’s offshore.
In this business blog, we consider the similarities, outsourcing versus offshoring including what commonalities they share, and some of the obvious pros and cons of each operating model.
How IT Companies Got Here
Today tech firms are comfortable using contractors, aka freelancers, on isolated projects and alongside their staff on both development work and operational tasks.
The IT sector is a leader in using non-employees and outsourcing departments, services, development, and operations management to third parties under contract and SLAs (service level agreements). Offshoring is also popular, and a variation of it could be called ‘yourshoring’.
Pros and Cons
What influences the pros and cons of outsourcing versus offshoring?
With outsourcing and some offshoring, the business still owns its service.
Offshoring is when a business takes advantage of more favorable operating conditions like reduced costs for labor, property, and taxes to manage a part of their operations – in another country.
Sometimes, an independent third-party supplier delivers the service offshore for the business but not consistently. It’s now standard practice for the business to own or have a majority share in the offshore entity supplying the product or service.
What can happen is the business may call its offshore operation by another name and registered entity.
Outsourcing is where the business pays a fee to have the service provided on its behalf by a third party – and it could terminate the agreement and get another outsourcing provider or bring the activity in-house – aka insourcing.
Offshoring must be cost-effective to do it. Due to higher populations, some regions have lower labor costs, so they’re prime for manufacturing, software development, and back-office activities.
Outsourcing is not solely driven by cost, as it may have to happen for the business to be in a position to provide the service to its customers.
For example, a startup with no expertise in an area can outsource it and usually with no interruption to service delivery, so the customers often don’t know the business is not delivering it. Helpdesk and customer service areas are frequently outsourced, and the provider may or may not be onshore.
Collaboration tools make online communication relatively straightforward – when you can navigate timezones to catch people when they’re working. Language barriers can be a challenge if your outsourcing or offshore team speaks the same language as your core team.
However, with offshoring, you can afford to work with top-ranking professionals in their field that can really boost your business in many ways. If you are just outsourcing the task, sometimes the high-ticket contractors might not be within your company budget.
Software development outsourcing and offshoring are an excellent fit for tech firms with lots of projects. Software developers command varying hourly rates depending on their location. When your staffing needs are project-based, you can hire contractors, outsource to a development team or assign the project to the offshore business.
Continuity can speed up the delivery; hence one challenge for the business is getting a commitment from the outsourcing provider to always assign the staff familiar with the business’s projects. There is no downtime when the business has its own offshore operation as its staff is only on their projects.
You’ve handed the operational control and delivery to the provider with outsourcing. Who is hired and how they are managed while working on your service is out of your control. Plus, you don’t have a say n the provider’s tech, security, and processes.
Depending on what you’re outsourcing, team and company culture may also concern you. Suppose the provider’s culture is vastly different from your own, and it has the potential to damage relationships with customers. That could splinter relations that may end in terminating the agreement and securing services elsewhere.
With offshoring, where you have a stake in the entity or your business is a substantial percentage of all the work done by the outsourcing party, you do have a role and some control in everything relating to the service provided for your business. Product manufacturing and supply chain are different as they’re offshore outsourcing, and often the factories are located near the materials used in production.
Apple is a good example where all its production of devices is offshore in factories that have 200,000 or more workers.
The Best Of Both Worlds
For the need of a better word, how about calling the meeting of offshoring and outsourcing – ‘yourshoring‘. Confused? You soon won’t be – keep reading. 🙂
Yoursharing is a term coined by Turnkey Labs – you may call it something else. Still, it’s quite catchy for a solution that marries the best outsourcing with offshoring without any investment from the business (the client).
Instead of setting up your own software development team in another country, you can engage a business to exclusively do your software development.
This service does involve creating a development team in another country that is entirely focused on the needs of one company. So it’s your team, but you have none of the responsibility for HR, e.g., hiring, management, and payroll. You’d get the same outcome with your own offshoring operation, but you’d need to hire an HR team and finance and accounting professionals.
The challenges still remain are company culture, mission, vision, values, and rules.
That said, services providers are motivated to ensure they provide seamless integration with the business. Without it, the service is really just offshore outsourcing. Watch this space – yourshoring a word we’re all familiar with soon.