Offshoring vs Outsourcing – Key Differences

Are you willing to expand your business without any excess price? Well, in today’s times, diversification is common. One of the easiest ways to grow your business is by outsourcing or offshoring. 

Over the years, offshoring and outsourcing have been commonly misunderstood terms  The main objective of both outsourcing and offshore software development is to enhance business processes and operations. Both concepts turn out to be beneficial in several ways such as enhancing productivity, offering solutions at a lower cost, connecting you with qualified specialists, and access to advanced technological outcomes.

As the title implies, the following blog focuses on what is outsourcing, what is offshoring, why one must consider hiring a reliable outsourcing or offshore software development company in today’s times, and the key differences between the two, i.e. Offshoring vs Outsourcing.

Before spotting the difference, let us discuss each one in detail.

1. What is Outsourcing?

Outsourcing involves assigning certain business operations or procedures to a third-party provider. Until now outsourcing was considered more like a backup option, chosen when only needed. 

After the COVID hit, things changed significantly. Due to this, companies changed their working culture to remote expanding beyond non-essential and peripheral activities. As a result, outsourcing has strived its way to the core company’s operations.

The global business process outsourcing market size was valued at USD 261.9 billion in 2022 and is projected to expand at a compound annual growth rate (CAGR) of 9.4% from 2023 to 2030 according to Grand View Research.  Overall, outsourcing is a tried and tested strategy. For example, IBM can be considered for managing IT services and FedEx supply chain for third-party logistics services. However, this is not the only option several multinational corporations tend to outsource from individual independent contractors, temporary office workers, and freelancers.

Before proceeding further with why companies outsource; it’s important to understand how outsourcing works. In simple words, outsourcing is all about managing relationships to a great extent. It may interest you to know that this is more serious than service-level agreements or partnerships. The entire relationship between the business and offshore outsourcing companies is based on pure trust.

Another aspect of outsourcing your business process in developing countries is that companies may choose different ways to outsource IT services. For example, onshore – you can choose to outsource within your own country, nearshore – you can outsource to a neighboring country, we are referring to a country in the same time zone, offshore outsourcing – is somewhere to a different country. Especially in developing countries such as India, the Philippines, Vietnam, etc where you can fully utilize cost reduction benefits. 

2. Benefits of Outsourcing

If you aim to maximize your business productivity and reduce development costs, outsourcing is the best decision to make.  Over the years, the hiring process has become the new normal so that many companies can focus on their core business model instead of unnecessary business activities. When a company outsources, it gains access to high-end expertise. Unlike in-house teams, here you don’t have a workload. You will make the decision and assign tasks to others. 

Furthermore, let us see the benefits offered by outsourcing.

2.1 Cost Savings

Of course, the price has remained one of the major concerns for businesses to consider outsourcing and offshoring.  Isn’t it appealing to produce goods or acquire services at much lower costs? You may ask how.

Situation 1 – Generally, startups or small to medium-sized businesses lack technical expertise. Hiring an in-house team of experienced and skilled programmers could be a costly venture for them. By outsourcing to an experienced software development company, you can be assured of receiving the best possible outcomes without having to spend a hefty price.

Situation 2 – Many of you ask me about hiring seasoned programmers instead of outsourcing. Now, what happens is when you do that, you may not realize it initially, but you could eventually discover significant costs involved. Right from recruiting and training in-house staff, to providing salaries, and incentives – all add up and turn out to be quite expensive. With outsourcing, you just have to pay a fraction of the amount.

2.2 Gain Access to World-Class Talent

Another crucial advantage of outsourcing business activities not in the same country is you get access to a world-class pool of talent. Distance is no longer a barrier as long as you have access to the best team with specialized expertise available to you. If you have the entire world to explore then why compromise? Plus, when you outsource developers, it can bring some pleasant surprises. Developing countries like India tend to offer 24/7 support. All you have to do is provide your requirements and see how they come up with a better product.

You no longer need to worry about staying connected or experiencing poor communication as you have a variety of options available,  including video chat, and project management tools. Any breakthroughs or potential issues, such as cultural or language differences, can be quickly addressed.

2.3 Core Business Focus

As we mentioned before, you can focus on your present and future business strategies. Expanding and surviving in the competition doesn’t necessarily mean you have to shift from your core objectives and focus on diversification. With outsourcing, it is possible to achieve two goals with one strategy. 

This, in turn, streamlines your business processes and helps to free up and allocate more resources to other processes that help make the business tick.

3. Drawbacks of Outsourcing

While this strategy has many benefits, you should be aware of the following outsourcing risks:

3.1 Less Control

When you hire a service, you join their client base and may not have as much input or control over the final product as you would with in-house coworkers.

3.2 Communication Challenges

Good communication can be difficult to achieve if the outsourcing partner is located in another country. Time differences could make real-time communication difficult if the hiring party is in a foreign time zone. Sometimes, misunderstandings could arise due to linguistic barriers.

3.3 Risk of Data Breaches

Your company’s confidential information is at risk whenever you outsource a service or procedure to another party. The client company’s security measures may be insufficient, which poses a risk to your data.

4. What is Offshoring?

Offshoring is the practice of moving services or projects of an entire business operation to a different country than yours. The primary objective of this strategy is to access a labor market with cheaper costs, while also potentially providing access to a larger pool of talented workers.

Imagine the potential cost-effectiveness of relocating workspaces from expensive countries to developing nations, where everything will become so cost-effective right from telecommunications infrastructure to offshore development costs. 

Saving money is essential here. Offshoring has benefited a wide range of U.S. enterprises, from small to medium-sized firms operating locally to huge multinational organizations with a global reach. Even offshoring has its types such as:

• Services Offshoring – As the name implies, here companies tend to set up units to carry out service-related operations such as information technology, customer care, marketing, accounting, sales, human resources, and many more. For example, offshore third parties move their R&D departments to a nation where the technical human resources are both highly qualified and relatively cheaper than the local staff.
• Production Offshoring –  Another type of offshoring is production-based offshoring. Production offshore is the process in which a business sets up a unit in another nation to import final products for local sale. establishing an external company may lead to lower expenses, a skilled workforce, 24/7 operations, improved processes, and a lot more.  

5. Benefits of Offshoring

Since we have covered what is offshoring, it’s time to focus on why companies consider an offshore development partner. What are the actual business benefits of offshoring? Let’s find out!

5.1 Access to Niche Talent

A wider range of potential candidates is one of the main benefits of outsourcing to a foreign country. Offshoring means you may search for labor all around the world, not only in close distance to your headquarters. Employees from other countries can also provide valuable perspectives on business operations. These fresh perspectives encourage creativity and provide you with the tools to expand your company in their nations.

5.2 Tax and Tariffs

Another reason why offshoring is considered one of the leading industry trends is the location in developing countries. Taxes in developing countries are lower than compared to most developed countries.  And the economic policies of these countries are attractive to businesses looking to outsource. Apart from low taxes, availability is a significant factor here. Working in a different time zone with a 24×7 operational workforce creates additional business opportunities for the companies.

5.3 Competitive Advantage

Poor infrastructure and a limited number of skilled professionals nearby can never give you a competitive advantage. It can result in project failure. Even with huge time zone differences, if you can find a reliable company among other countries that excels when it comes to competing on a global stage then it’s worth the risk. Also, one shouldn’t avoid the fact that the constant demand for efficient customer service makes it more challenging for companies across different industries to stay relevant.

6. Disadvantages of Offshoring

Offshoring can have certain benefits, but it also comes with some drawbacks that companies should be aware of. Among these drawbacks are:

6.1 Communication Difficulties

The time difference and cultural variations may make communication with overseas workers challenging. Because of this, misconceptions and difficulties in managing offshore staff could be possible outcomes.

6.2 Distance

Coordination and cooperation may be difficult to manage when team members are in a different time zone.

6.3 Quality Control Complexities

In most cases, when businesses outsource their activities, they have less control over the final result. Even when the offshore site follows all the rules and regulations, various factors could still impact the quality of the final product or service.

7. Key Differences Between – Offshoring and Outsourcing

The confusion between “ offshoring ” and “ outsourcing ” is one of the most commonly misunderstood aspects of the global supply chain. So what exactly are these two terms? Time to spot the key differences between outsourcing and offshoring. Let me elaborate on this in the form of a table. Take a look!

Factors	Outsourcing	Offshoring
Define	Outsourcing can be done both ways either within the same country or overseas.	Offshoring can only be done overseas or at least outside the onshore country.
Benefits	By getting the required expertise and cost-effective labor, you can concentrate on your core activities	As for offshoring, you can easily surpass certain rules and regulations, cost-effective labor, and a fast way to enter new markets.
Objectives	To focus on the key business activities and operations.	To find labor at a low cost.
Activities performed by	People who can handle these tasks must not be your employees.	Only employees of the company can handle offshoring tasks.
Quality Control	Here the quality of the work may fluctuate depending on who is working on your project.	Here work will be delivered according to a specific quality standard.
Approach	Quick solution to accomplish tasks – ideal for ad hoc or per-hour projects	A long-term approach to scaling your business
Action	Handing over responsibilities to a third-party provider.	Taking a business or a position abroad.
Workforce	Employees not associated with your company (but employed by your BPO vendor).	Staff members who work remotely form a committed team.
Location	Both inside and outside of your nation.	Outside of your nation.
Differences	Handing off tasks that aren’t essential to the project’s success.	Whole business operations are being moved.
Meeting Possibilities	Compared to offshoring, setting up a meeting is much simpler.	Arranging becomes more challenging when there are seven to 10-hour time zone disparities.
Reliability	When it comes to outsourcing, you may have problems with credibility.	You can trust offshoring.
Project Security	Problems with safety might arise if teamwork is lacking.	Some contracts are not applicable.

8. Tips for Choosing Between Offshoring and Outsourcing

Your company can benefit from both offshoring and outsourcing. What follows is a list of things to think about to choose the right one:

8.1 The Duration of Your Service Requirement

Outsourcing has several advantages. As an example, it provides a great opportunity to utilize outsourced labor if your firm only deals with production requests on occasion. Faster responsetimes and lower overhead costs are two benefits of outsourcing.

8.2 Finding the Desired Level of Control

Offshoring is an option for businesses that maintain full operational control, as opposed to outsourcing. If you value full authority over your business processes and ensure the final product’s quality, offshoring might be the preferred option. Working with an offshore partner allows you to take the lead. Although an offshore project may require a larger initial expenditure, the long-term savings more than makeup for it.

8.3 Think about Confidentiality

Companies can find outsourcing difficult if it deals with sensitive customer information or must comply with confidential legal obligations. This implies that offshore and outsourcing may not be an option for certain companies due to the sensitive nature of the information they manage. If a company decides to outsource any of its tasks, it must closely monitor its expenses and take measures to prevent any breaches or misbehavior by a third party.

9. Conclusion

Both outsourcing and offshoring can be beneficial for companies that choose any kind of external provider to conduct their internal projects. However, if it suits their business strategy and operations, they can even consider combining offshoring and outsourcing. Also, focusing on your core competency becomes easier. The following post on offshoring vs outsourcing will help you simplify the onboarding process, making it easier and hassle-free. That concludes our discussion for now. If you still have any doubts or queries, feel free to share them in the comment section below.