Outsourcing vs offshoring: what’s the difference? Which is better for my business?
Many business owners use the terms “outsourcing” and “offshoring” interchangeably, but there is a big difference between the two models.
So, what’s the difference between outsourcing and offshoring? Is one better than the other?
It’s important to understand the distinction so you can make the best decisions for your business.
Here’s a quick overview of the difference between outsourcing and offshoring.
Outsourcing vs Offshoring: What’s the Difference?
Outsourcing
Outsourcing refers to the practice of contracting with an outside firm to handle certain business functions.
Commonly outsourced processes are typically non-core business functions or certain skilled roles that are difficult to recruit for in-house positions.
The location of the third-party service provider can be in the same location as the hiring company or in another country.
Examples of outsourced functions include manufacturing, customer service, payroll, accounting, and IT support.
Offshoring
Some companies want more control hence the birth of the offshoring model.
Offshoring is when a company opens a division in another country.
This requires incorporating, hiring local management, finding office space, and recruiting staff.
Unlike outsourcing, companies that offshore are more likely to relocate crucial operations to these offshore offices.
In addition to having direct control over the product or service, companies that offshore take advantage of lower labor costs in other countries and access to the global talent pool.
So, which is better?
There is no one-size-fits-all answer when it comes to deciding whether to outsource or offshore.
It depends on your specific needs and business requirements.
Advantages of outsourcing
Cost Savings: Outsourced teams work when needed.
Employees need to be paid regardless of the volume of business.
Also, outsourcing service providers cover the indirect costs associated with employees like IT, facilities, HR, and payroll.
Scale up or down: Third-party vendors only work when needed, based on your volume or requirements so if your business has big fluctuations in volume outsourcing is a great option.
Focus on core functions: Outsourcing is a hands-off approach for the client which frees up the in-house team to focus on the important core business functions that move the company forward.
Disadvantages of outsourcing
No control: When you outsource to a contractor you lose a certain amount of control over timing and quality.
It can be hard to ensure SOPs are in place and being followed and the quality of service or products delivered by the vendor may not meet standards.
Correcting performance issues can take longer because you don’t directly manage the team.
Lack of customer focus: Vendors have many clients they serve simultaneously so it can sometimes be challenging to make sure your concerns are a priority.
Unexpected Costs: Scope creep is quite common in outsourced projects. Vendors end up billing more than initially expected and these hidden or unexpected costs can cause you to be over budget.
Advantages of offshoring
Significant Cost Savings: Salaries and the cost of living in many other countries is far lower than in the West. Lower-cost talent doesn’t mean inferior talent. In countries like India, the talent has advanced education degrees and exceptional experience.
Control: When you open a division overseas you maintain complete control of the business. If done correctly you can operate the offshore team as a seamless extension of our onshore teams.
Talent pool: Since offshoring to certain countries like India and the Philippines has been happening for so long there are a lot of talented people available.
Scalability: Having access to such a large talent pool enables companies to quickly scale their business initiatives. Offshore teams work varied hours so expanding your hours or operations to 24 hours is easy.
Disadvantages of offshoring
Location: Even with the modern communication technology available today, the geographic location of your offshore team can still be challenging.
Time changes and the inability to be in person on a regular basis are something that has to be factored into your decision process.
Large upfront cost: Incorporating overseas comes with a lot of upfront costs. Facilities, IT, telecom, and recruiting to name a few are all expenses with a large upfront cost, so offshoring is really only beneficial at scale.
Significant effort to set up: There is a lot of work and local knowledge needed to set up an office overseas and hire all the team.
Lack of customer focus: As in the outsourcing model, your service provider is most likely servicing multiple clients at a time so you have to make sure that you are a priority.
This requires a lot of effort on the client’s part since they don’t have a representative in the country to ensure standards are being met.
Outsourcing vs Offshoring: Is there a better model?
Outsourcing and offshoring are two effective options used by many companies to reduce costs, improve their operations and deliver higher-quality products and services to their clients.
The decision to outsource or offshore your business is a difficult one, but it all depends on the needs of you and your company.
It’s important to evaluate each option based on your specific needs and circumstances.
Forma’s Managed Operations approach to outsourced staffing offers the best of both models.
We hire dedicated offshore teams per our client’s specific needs. We manage the headache of HR, payroll, IT, facilities, and labor laws.
Our clients have direct control over their dedicated teams. They are a complete extension of your in-house team.
So they get the benefits of having an outsourced team with all the control of having them in-house.
If you are interested in hearing more about how Forma’s managed operations staffing solutions can help your business, contact us now!
