Outsourcing Vs. OffshoringComparison of Differences along with Examples
Outsourcing refers to a company contracting some of its non-core business activities to a third-party, essentially subcontracting.
This is often done to allow the company to focus on its core business activities.
In contrast, offshoring is the relocation of a company’s business functions to another country in order to lower costs.
Outsourcing and offshoring are both common practices in business today as ways to make companies more efficient and lower costs.
Outsourcing and offshoring are often done together.
Although, they can be done separately.
If a company chooses to outsource a product or service, it indicates the company will not be producing that product or service itself but will instead purchase it from another company.
Outsourcing allows a company to concentrate on its core business.
Offshoring occurs when a company moves the location in which it produces a service or product to a different country in order to save money.
In addition to saving money, offshoring can give companies better access to skilled workers and benefit from economies of scale by operating in a larger market.
When companies use offshore outsourcing, they contract work out to a third party, and the work is performed in a different country.
This is a common practice for companies and is generally done to take advantage of the benefits of both outsourcing and offshoring.
Outsourcing as a term has its origin in the 1980s referring to resource outsourcing; however, the basis of this concept, specifically contracting out a business function to an outside provider.
Throughout the mid-20th century, businesses added several new layers of management as they aimed to gain economy of scale.
As this occurred, companies grew larger and more complex, and by the 1970s and 1980s, they became aware that by focusing on their core competencies, they could streamline their operations and increase profits.
This began a movement toward outsourcing non-central functions such as IT support and administrative functions to outside providers.
Following improvements in telecommunications and shipping in the 1990s, it became increasingly possible to outsource functions to other geographical locations.
This practice which came to be known as outsourcing offered the ability to take advantage of cheaper costs of products available in different countries.
This can include lower transportation, raw material, utilities, and labor costs.
Key Differences Between Outsourcing and Offshoring
The terms outsourcing and offshoring are often used interchangeably, but they are different practices, and the terms do have different meanings.
Here are some of the main differences between these two business activities.
- Outsourcing occurs when businesses shift part of their work to a third party that specializes in the work. In contrast, offshoring refers to the business practice of having work done in another country.
- Companies use outsourcing as a way to concentrate on their main line of business rather than having to spend time on products or services that are not their main source of revenue. In contrast, offshoring is done primarily to cut costs and not necessarily to improve the company’s efficiency.
- When a company outsources a task, it is performed by non-employees. The task is no longer part of the company’s operations. Conversely, with offshoring, the location of the business activity changes, but it is performed by the company’s employees.
|Definition||Outsourcing is hiring a third party to perform part of a company’s operations.||Offshoring is moving the production of a service or product to a different country.|
|Location||Outsourcing can be performed in the same country the company is located in or in a different country.||Offshoring is always done outside of the country in which the work is currently being performed in.|
|Benefits||Outsourcing allows a company to concentrate on its core competencies, lower costs, take advantage of increased expertise, and save on hiring costs.||Offshoring allows companies to decrease costs, access specialized skills, and take advantage of economies of scale by operating in a larger market.|
|Objective||The primary objective of outsourcing is generally to concentrate on the business’s key business activities.||The primary objective of offshoring is to cut costs.|
Outsourcing and offshoring are common business practices because they do provide companies with a number of benefits.
Here are some of the benefits of outsourcing and offshoring.
- Costs are one of the main reasons businesses outsource. In many cases, a company can find a third party that will provide a product or service at a lower cost than they can produce it themselves.
- Outsourcing certain products or services, such as information technology, human resources, sales, payroll, security, marketing, transportation and logistics, and sales, as well as many others, can allow a company to concentrate on its core competency, which is the activity it has a competitive advantage in. For some companies, having to deal with non-core activities just takes attention away from its core function, so it makes sense to outsource the function.
- There are times when a company lacks expertise in some of its business activities. In these cases, a business may actually increase the quality of its product or business by outsourcing.
- Outsourcing gives companies more flexibility as they can obtain the products or services they need without having to worry about hiring or firing workers.
- As with outsourcing, offshoring can help companies to cut costs, especially labor costs. Companies often offshore services or manufacturing to countries in which labor costs are low. When companies offshore to these countries, they can pass the savings they obtain to managers, customers, and shareholders.
- Offshoring also allows companies to access skilled human resources that may not be readily available in their own country. This can permit companies to offshore certain functions to locations with high availability of the talent they need.
- Offshore outsourcing combines the benefits of streamlined operations from outsourcing functions with the benefits of reduced costs of factors of production and access to skills that may be in short supply in the outsourcing company’s own geographical region.
Though outsourcing and offshoring can offer businesses significant benefits, there are drawbacks as well.
Here are some of the significant downsides to consider for both of these practices.
- A vendor may not be familiar with the outsourcing company’s business, and this can lead to difficulties in providing an equal level of function relative to the outsourcing company.
- The long-term objectives and growth potentials of the outsourcing company and vendor may not align. This could lead to diverging interests and an inability to remain with a given vendor.
- Offshoring has gained criticism from politicians for causing a loss of domestic employment regardless of the benefits it can offer consumers and businesses alike.
- Offshoring to a developing country can place a company at risk of political unrest, poor infrastructure, or unexpected changes in economic policy.
- Offshoring can require significant work in navigating the laws and regulations in place in another market. This can require a significant upfront investment of time and money.
- Offshore outsourcing requires considerable communication between a company and the vendor it outsources a function to. This can be particularly difficult due to the large geographical distances that can occur through outsourcing to another country, as well as potential language gaps. Insufficient communication can result in a failure to achieve equal or greater performance relative to performing the function directly.
- In cases where a function is being offshored to a developing country, poor infrastructure, unexpected changes in economic policy, or unrest can result in production or delivery difficulties as well as impact the quality of the product or service.
A business must consider whether the benefits of outsourcing or offshoring business functions outweigh the disadvantages associated with the practices.
For a large and growing number of businesses, the answer is yes.
Outsourcing non-core functions can allow companies to streamline their activities and reduce expenses.
This is particularly true in cases where offshoring functions can allow a company to take advantage of reduced costs of production.
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