Although offshoring and outsourcing often have less than positive images in the minds of many, both practices are growing at increasing rates in the modern world. This makes understanding the differences between them as well as their pros and cons more important than ever.
Offshoring vs. Outsourcing: The Difference
While they share some similarities, they are very different processes and should not be confused.
Offshoring: This is the process in which a company moves part of its work to another country. It may be building factories or establishing some other presence overseas, but the company will still be doing the work in-house. However, the work will instead be done partially or entirely by people in the country the work has been offshored to.
Outsourcing: When a firm or even an individual outsources work, they are simply hiring an external organization or contractor to do the work rather than doing it in-house. The entity that is contracted to do the work may or may not be in another country. It could be a firm next door or on another continent.
Driving forces behind offshoring and outsourcing
Although they have an image of being a new force in the world, both offshoring and outsourcing have been around for a long time. Firms have long established presences across national boundaries and made deals with others to do jobs for them without taking those contractors on as employees. The lower costs and other advantages this offers have always been present. However, with the instant and cheap communications, fast travel and ever more integration of the modern world, the increased ease in which offshore and outsourcing can be done has contributed to their popularity.
The pros and cons of offshoring vs. outsourcing
Any firm or individual considering offshoring or outsourcing needs to think about the pros and cons of each before deciding which, if either, is the best course of action.
Offshoring: When companies offshore, they can take advantage of labor or natural resources that may not exist in their home countries. While sometimes more skilled labor is the goal, more frequently it is the access to cheaper labor to lower unit costs and help them compete. The regulatory environment in another country might also be more favorable. Furthermore, becoming established in another country through offshoring often brings the kinds of contacts and experience that allow a company to begin marketing there too.
Since the work is still technically being done in-house, the offshoring company is keeping more control over the production process. When the company is in another time zone, this allows production to continue around the clock.
On the other hand, operating in different time zones can also bring administrative headaches, and other factors to include supply chains becoming more fragile as well as complicated. These kinds of problems are often exacerbated by language and cultural differences. Furthermore, there is the potential of political or other problems suddenly causing unexpected difficulties or the negative publicity that sometimes comes with offshoring.
There is also the question of intellectual property. With offshoring, the need to share processes and other knowledge arises. Generally, companies that do not have strong patents need to tread very carefully if they outsource at all. Even those companies that do not have secrets stolen may find themselves training their future competitors.
Finally, there can be extra legal headaches if disputes arise. For this reason, how and where legal deputes will be handled needs to be specified in the contract and be a fundamental part of any outsourcing strategy.
Outsourcing: The major advantage of outsourcing is the flexibility it offers. Companies and even individuals often need things done but not have the time or expertise to do it themselves. With outsourcing, anyone with the money to hire someone to do such a job can get it completed. Since companies are not taking on new employees, it can be a short term or one-time projects. This gives companies great flexibility and the ability to experiment.
Furthermore, outsourcing brings access to specialized skills wherever they may be and offers companies ways to concentrate on core activities. For example, a manufacturer of computer parts will probably not do a particularly good job performing payroll functions. They may be better off leaving that to companies that specialize in such tasks and concentrate on making the best parts.
On the downside, when outsourcing, there is a greater loss of control, and third parties need to be relied upon. These parties are not going to have the same kinds of loyalties as employees often have, and the danger of missing deadlines or exposing company secrets increases.
If the outsourcing is performed in another country, there is also the possibility of facing the same kinds of coordination, supply chain and language problems encountered in offshoring (as well as its benefits). In addition, while there are costs of having employees, there are benefits benefits are benefits Having skilled employees in an organization often brings returns that are difficult to quantify.
The future of offshoring vs. outsourcing
With the different needs of varied companies, both offshoring and outsourcing will likely be around for the foreseeable future. A combination of factors to include increasing competition, technological change and trade deals are all pushing to make these practices more prevalent than ever.