What Is Offshoring? What Is Outsourcing? Are They Different?

At its most basic, outsourcing is about moving internal operations to a third-party. This can come in the form of selling physical plant to a ... BETAThisisaBETAexperience.Youmayopt-outby clickinghereMoreFromForbesApr11,2022,04:38amEDTShanghaiEasesRestrictions,Non-EssentialTravelBannedInGuangzhouAsChina’sCovidSurgeIntensifiesApr10,2022,11:37pmEDTTwitterSharesFallAfterElonMuskTurnsDownOfferToJoinBoardApr10,2022,10:13pmEDTSunday,April10.Russia’sWarOnUkraine:NewsAndInformationFromUkraineApr9,2022,03:49pmEDTSaturday,April9.Russia’sWarOnUkraine:NewsAndInformationFromUkraineApr8,2022,08:59pmEDTFriday,April8.Russia’sWarOnUkraine:NewsAndInformationFromUkraineApr8,2022,05:03pmEDTTrumpJr.ReportedlyTextedPlansToOverturnResultsJustAfterElectionDayApr8,2022,04:40pmEDTJudgeLetsTrumpKeepRunningNYCGolfCourseAfterCityTriedToCancelContractAfterJan.6RiotApr8,2022,02:25pmEDTTwoAcquittedInWhitmerKidnappingPlotTrial,MistrialDeclaredForOtherTwoEditStoryBusinessWhatIsOffshoring?WhatIsOutsourcing?AreTheyDifferent?JonathanWebbContributorOpinionsexpressedbyForbesContributorsaretheirown.BusinessJul28,2017,07:05pmEDT|Thisarticleismorethan4yearsold.SharetoFacebookSharetoTwitterSharetoLinkedin Shutterstock Oneofthemostcommonlymisunderstoodaspectsoftheglobalsupplychainisthedifferencebetweenoffsourcingandoutsourcing.Asurprisinglylargeproportionofthegeneralpublicconfusetheseterms.Buttheyaredistinctconcepts. ProcurementLeadersresearchfindsthatconsumersoftenusebusinesstermswithoutafinedegreeofdifferentiation.Inthemain,theyareviewednegativelyandallrepresentativeofthemalignantcampaignofcorporationsto'screwoverthelittleguy'.Often,theydon'tseethedifferenceatallbetween'outsourcing'or'offshoring'.ForoneAmericanrespondent,theywereallpartofthesamemalaise: Businessesdoitformoneyanddon’tcareaboutconsumers.Theyarenothonestabouttheirproductsmostofthetime.” Thisisanunfortunatemisunderstandingasknowingthedifferencebetweentheseconceptscanenrichourknowledgeofbusiness.Fromhere,wecantrulyappreciatethepositivesandnegativesofbusinessactivities,andcutacrossthepoliticalverbiage.Sowhatisoutsourcing?Andhowdoesitdifferfromoffshoring? Outsourcing Atitsmostbasic,outsourcingisaboutmovinginternaloperationstoathird-party.Thiscancomeintheformofsellingphysicalplanttoasupplier,tobuybackgoodsorservices,orshiftinganentirebusinessdivisiontoathird-partyandagainbuyingtheserviceback.Thebasicphilosophybeing:Tomovetransactionalactivitiestotheexpertsinordertogiveanorganizationthecapacitytofocusonitsexpertise. Thepatternofdecadesworthoftradehasbeenbaseduponthisideal.Almosteverycompanyhas'spunoff'itsfunctionsandsortgreaterspecializationontheareaswhichearnsthemostprofit.Inturn,outsourcinghasgeneratedfantasticwealthfortheglobaleconomy. Therearedown-sides.Althoughacompanycanexpecttoseeareducedcostprofile,itdoesloseitsowncapabilities.Onceyoumoveyourproductivefacilitiestoasupplier,youalsooutsourcealltheknowledgeandhumancapitaltomakethosegoods.Suchcapabilitiesmayhavetakendecadestocreate.Oncelost,theyarehardtoreturn. Criticsalsoarguethatoutsourcingequatesjoblosses.Theactofoutsourcingis,generally,laying-offanumberofpeople(aswellassellingproperty).Theseworkersfaceanuncertainfutureofpossiblyretainingtheirjobswiththenewsupplier,orperhapsbeingmadecompletelyredundant. Offshoring Unlikeoutsourcing,offshoringisprimarilyageographicactivity.IntheWest,goodsareexpensivebecausethestaffrequiredtoproduceanddistributethemarecostly.Inthedevelopingworld,bycontrast,vastinexpensivelaborpoolsprovideaneasybedrockforalow-costeconomy. OffshoringtakesadvantageofthesecostdifferentialsbyrelocatingfactoriesfromcostlycountriestothecheapereconomiesinordertosellthegoodsbackintheWestataheftydiscount(andprofit).Alongsidetechnologicalimprovements,ithasbeenthedecadesofproductiveoffshoringthathasloweredthecostsofconsumergoodssuchasclothingandelectronics. Offshoringdoesnotonlyrelatetotheproductionofphysicalgoods,butalsoservices.TheIndianITindustry,forinstance,hasbeenpoweredbywavesofoffshoringbytechnologicalcompaniesintheWest. Aswithoutsourcing,theactivityhasthepotentialtosavemoneyforbothsellerandconsumer.Advocatesalsoarguethattheseactionscanstimulatewealthinsomeoftheworld’spoorestcountriesandprovidejobsforthosewhoareinthedeepestneedofaid. Criticscontendthatthisismerelyself-servingrhetoricandthatoffshoringisadevicetoexploitsomeoftheworld’smostvulnerablepopulations.Workersfromsuchcountrieshavenolegalprotectionandfaceeitherharshconditionsorhunger.ExamplessuchasApple’ssupplierFoxconn,whichexperienceaspeightofsuicidesatitsChinesefacilitiestestifiestotheseverityoftreatment. Combiningoffshoringandoutsourcing Theultimatemeanstosaveasignificantamountofmoneyistocombineoffshoringwithoutsourcing.Thatismoveproductiontoathird-partythatisbasedinanoverseaslocation.ThishasbeenanactivityinwhichAmericancorporationshavebeenengagedformanydecades.LastswatchesofUSindustryhasbeenrelocatedundertheproductionofoverseasentities,mainlyinChina. Althoughdoublethesavingsmaybeenjoyedhere,soaredoublethecost.Opponentsarguethatthecostsarenotonlyfeltbycompanies,butbyentirenations.ThedramaticchangeintheAmericanpoliticalclimates,forinstance,ispartlyattributabletotheenormouspublicoppositiontooutsourcingtooffshorelocations. Itisimportanttoknowthedifferencebetweenthesetermswhenengagedinthepoliticaldebateonbusinessstrategies.Therearebothmoralandeconomicimplicationsofoffshoringandoutsourcing,buttheyaredistinct. Andanenricheddiscussionwillbemindfulofthesedifferences. Followmeon Twitter or LinkedIn. Checkout my website. JonathanWebbEditorialStandardsPrintReprints&Permissions