Offshoring vs Outsourcing

Meaning:

-Offshoring means getting work done in a different country.
-Outsourcing refers to contracting work out to an external organization.

Benefits:

-Benefits of offshoring are usually lower costs, better availability of skilled people, and getting work done faster through a global talent pool. -Usually companies outsource to take advantage of specialized skills, cost efficiencies and labor flexibility.

Risks and criticism:

-Offshoring is often criticized for transferring jobs to other countries. Other risks include geopolitical risk, language differences and poor communication etc.
-Risks of outsourcing include misaligned interests of clients and vendors, increased reliance on third parties, lack of in-house knowledge of critical (though not necessarily core) business operations etc.

Outsourcing Benefits

Why do companies outsource? There are several reasons why a company might outsource. While this can be a politically sensitive topic, management experts generally agree that outsourcing - when done right - increases competitive advantage with a natural division of labor that evolves in any society. Reasons for outsourcing include:

Cost advantage: Costs are arguably the chief motivation behind outsourcing. Often companies find that contracting work out to a 3rd party is cheaper.

Focus on core competency: There are a lot of business functions in a company. For example, human resources, information technology, manufacturing, sales, marketing, payroll, accounting, finance, security, transportation and logistics among others. Most of these are not "core" to the company. A "core" activity is one which offers the company competitive advantage over its competitors. It is an activity that the company does better than the competition, which is the main reason its customers do business with the company. Having to handle non-core functions is a distraction, so many companies outsource them.

Quality and Capability: Often companies don't have in-house expertise for certain activities. In these cases, it is more efficient to outsource, and resulting products and services tend to be of higher quality when provided by outsourcing vendors.

Labor flexibility: Outsourcing allows a company to ramping up and down quickly as needed. For example, a company may need a large number software programming experts for 6-8 months to develop an application. It would be infeasible to hire people for only 6 months. Outsourcing, however, can provide flexibility so the company does not have to worry about hiring and firing.

Benefits of offshoring

Offshoring provides many of the same benefits as outsourcing, including:

Cost savings: Companies usually offshore manufacturing or services to developing countries where wages are low, thus resulting in cost savings. These savings are passed on to the customers, shareholders and managers of these companies.

Skills: The competitive advantage of nations often means that some countries or regions develop a much better ecosystem for certain types of industries. This means there is better availability of skilled human resources in that region for specific types of tasks. For example, India and the Phillipines have a large pool of English-speaking, college educated youth; as well as a mature training infrastructure; that makes it ideal for business process outsourcing. Therefore, many companies choose to offshore certain business functions (e.g. call centers for customer support) to these locations. These can either be captive or outsourced.


Note that you do not need to outsource in order to offshore. Captive offshore units are set up to leverage the benefits of offshoring without having to outsource to vendors. This is usually done when companies believe that their offshore centers for production/service will provide them with an edge over the competition.