Offshoring vs Outsourcing - Difference and Comparison | Diffen

Offshore outsourcing is the practice of hiring a vendor to do the work offshore, usually to lower costs and take advantage of the vendor's expertise, economies ... Health Science Tech Home Food Business Insurance CompareAnything›› vs. Offshoringvs.Outsourcing Diffen›Business›Management Outsourcingreferstoanorganizationcontractingworkouttoa3rdparty,whileoffshoringreferstogettingworkdoneinadifferentcountry,usuallytoleveragecostadvantages.It'spossibletooutsourceworkbutnotoffshoreit;forexample,hiringanoutsidelawfirmtoreviewcontractsinsteadofmaintaininganin-housestaffoflawyers.Itisalsopossibletooffshoreworkbutnotoutsourceit;forexample,aDellcustomerservicecenterinIndiatoserveAmericanclients.Offshoreoutsourcingisthepracticeofhiringavendortodotheworkoffshore,usuallytolowercostsandtakeadvantageofthevendor'sexpertise,economiesofscale,andlargeandscalablelaborpool. Comparisonchart OffshoringversusOutsourcingcomparisonchart OffshoringOutsourcingDefinitionOffshoringmeansgettingworkdoneinadifferentcountry. Outsourcingreferstocontractingworkouttoanexternalorganization. RisksandcriticismOffshoringisoftencriticizedfortransferringjobstoothercountries.Otherrisksincludegeopoliticalrisk,languagedifferencesandpoorcommunicationetc. Risksofoutsourcingincludemisalignedinterestsofclientsandvendors,increasedrelianceonthirdparties,lackofin-houseknowledgeofcritical(thoughnotnecessarilycore)businessoperationsetc. BenefitsBenefitsofoffshoringareusuallylowercosts,betteravailabilityofskilledpeople,andgettingworkdonefasterthroughaglobaltalentpool. Usuallycompaniesoutsourcetotakeadvantageofspecializedskills,costefficienciesandlaborflexibility. OverviewandHistory Outsourcingreferstothecontractingoutofanentirebusinessfunction,aproject,orcertainactivitiestoanexternalprovider.Thetermenteredthebusinesslexiconinthe1980s.Inthesecondhalfofthe20thcentury,ascompaniestendedtogrowlargerandskillswererequiredtobemoreandmorespecialized,companiesfoundthatexternalproviderswereoftenabletogetworkdonefasterandmoreefficientlyowingtoskillstheypossessed.Thisledtomorehiringofexternalproviderstomanagebusinessfunctionsandprojectswherespecializedskillswererequired. Towardstheendofthetwentiethcentury,withimprovementsinshippingtechnologyandtelecommunicationsinfrastructure,itbecameincreasinglyefficienttogetworkdoneinothergeographicallocations,especiallyindevelopingcountrieswherewagesarelower.Thispracticecametobeknownasoffshoring.Notalloffshoreworkwasoutsourced,however.Captiveoffshorereferstomultinationalcorporations(MNCs)establishingsubsidiariesinseveralcountriesandgettingdifferenttypesofworkdoneindifferentcountries.FactorsthatMNCsconsiderwhenoffshoringincludecostsoffactorsofproduction(wages,rawmaterial,transportationcosts,utilitiessuchaselectricity),taxes(manycountriesoffersubsidiestoenticeMNCstosetupshop)andskillsavailableamongtheworkforce. Benefits Thereareseveralreasonsforcompaniestobothoffshoreandoutsource. OutsourcingBenefits Whydocompaniesoutsource?Thereareseveralreasonswhyacompanymightoutsource.Whilethiscanbeapoliticallysensitivetopic,managementexpertsgenerallyagreethatoutsourcing-whendoneright-increasescompetitiveadvantagewithanaturaldivisionoflaborthatevolvesinanysociety.Reasonsforoutsourcinginclude: Costadvantage:Costsarearguablythechiefmotivationbehindoutsourcing.Oftencompaniesfindthatcontractingworkouttoa3rdpartyischeaper. Focusoncorecompetency:Therearealotofbusinessfunctionsinacompany.Forexample,humanresources,informationtechnology,manufacturing,sales,marketing,payroll,accounting,finance,security,transportationandlogisticsamongothers.Mostofthesearenot"core"tothecompany.A"core"activityisonewhichoffersthecompanycompetitiveadvantageoveritscompetitors.Itisanactivitythatthecompanydoesbetterthanthecompetition,whichisthemainreasonitscustomersdobusinesswiththecompany.Havingtohandlenon-corefunctionsisadistraction,somanycompaniesoutsourcethem. QualityandCapability:Oftencompaniesdon'thavein-houseexpertiseforcertainactivities.Inthesecases,itismoreefficienttooutsource,andresultingproductsandservicestendtobeofhigherqualitywhenprovidedbyoutsourcingvendors. Laborflexibility:Outsourcingallowsacompanytorampingupanddownquicklyasneeded.Forexample,acompanymayneedalargenumbersoftwareprogrammingexpertsfor6-8monthstodevelopanapplication.Itwouldbeinfeasibletohirepeopleforonly6months.Outsourcing,however,canprovideflexibilitysothecompanydoesnothavetoworryabouthiringandfiring. Benefitsofoffshoring Offshoringprovidesmanyofthesamebenefitsasoutsourcing,including: Costsavings:Companiesusuallyoffshoremanufacturingorservicestodevelopingcountrieswherewagesarelow,thusresultingincostsavings.Thesesavingsarepassedontothecustomers,shareholdersandmanagersofthesecompanies. Skills:Thecompetitiveadvantageofnationsoftenmeansthatsomecountriesorregionsdevelopamuchbetterecosystemforcertaintypesofindustries.Thismeansthereisbetteravailabilityofskilledhumanresourcesinthatregionforspecifictypesoftasks.Forexample,IndiaandthePhillipineshavealargepoolofEnglish-speaking,collegeeducatedyouth;aswellasamaturetraininginfrastructure;thatmakesitidealforbusinessprocessoutsourcing.Therefore,manycompanieschoosetooffshorecertainbusinessfunctions(e.g.callcentersforcustomersupport)totheselocations.Thesecaneitherbecaptiveoroutsourced. Notethatyoudonotneedtooutsourceinordertooffshore.Captiveoffshoreunitsaresetuptoleveragethebenefitsofoffshoringwithouthavingtooutsourcetovendors.Thisisusuallydonewhencompaniesbelievethattheiroffshorecentersforproduction/servicewillprovidethemwithanedgeoverthecompetition. RisksandCriticism Offshoringandoutsourcinghavebothbeensubjecttoalotofcriticism,especiallyfromapoliticalstandpoint.Politiciansandlaid-offworkersoftenblameoffshoringfor"stealingjobs".Mosteconomists,however,agreethatoffshoringlowerscostsforcompaniesandpassesonbenefitstoconsumersandshareholders. Thereare,however,risksassociatedwithoffshoring.Theseincludeprojectfailureduetopoorcommunication;civilorpoliticalunrestimpactingproductionorservicedelivery;arbitrarychangesineconomicpolicyofgovernmentsmayforceunncessaryrestrictionsonMNCs;andpoorinfrastructureinthedevelopingcountrymayaffectqualityortimeliness. Whilethebenefitsofoutsourcingandoffshoringlargelyoverlap,theydonotfacethesamedisadvantages.Outsourcing,whendonewithinthecountry,doesnotfacethesamepoliticalcriticismoflossofjobs.Risksassociatedwithoutsourcingcanlargelybeattributedtothevendor'slackoffamiliaritywiththeclient'sbusiness.Anotherriskisalackofalignmentoflong-termbusinessobjectivesoftheclientandthevendor. OffshoreOutsourcing Whenoutsourcingiscombinedwithoffshoring,notonlyisworkcontractedouttoathirdparty,butitisalsoagreedthattheworkwillbeperformedinadifferentcountry.Thereasonsareusuallytotakeadvantageofthebenefitsofoutsourcingandoffshoringboth. Benefitsofoffshoreoutsourcing Offshoreoutsourcingcombinesthebenefitsofoutsourcing,suchaseasierresourcerampupandrampdown,andmorespecializedskills;withthebenefitsofoffshoring,suchaslowercostsandhigherproductivity. Inthepastdecadeandahalfofincreasingglobalization,offshoringhasbeenthefastestgrowingsegmentoftheoutsourcingmarket.Thisisespeciallytrueinthecaseofmanufacturing-withChinabeingaleader-andinformationtechnologyservices,withIndialeadingthatspace.Businessprocessoutsourcingisanotherareaofoffshoringthathasgrowntremendously. Risksofoffshoreoutsourcing Justasoffshoreoutsourcingcombinesthebenefits,itisalsosusceptibletotherisksofbothbusinesspractices.Criticsclaimthattheserisksaremagnifiedbecauseofthecomplexitybeingmultiplied.Forexample,whileitcanbechallengingtoworkwithanexternalorganizationforprojectsthatrequireknowledgeofyourbusinessoperations,thesechallengescouldincreasemanifoldwhenmembersoftheexternalorganizationarelocatedinadifferentcountry.Risksincludepoorcommunication,incorrectsettingofexpectationsanddisconnectedcontrolstructures. BestPractices Thereareseveralbestpracticesthathaveevolvedoverthepasttwodecadestomitigaterisksandimproveoutcomesofprojectsthatareoffshoredandoutsourced.Manyofthesepracticesarerelatedtobusinessprocesses.ProcessmaturitymodelslikeCMMiandSix-sigmameasurenotonlythequalityofprocessesthatoutsourcingvendorsemploy,butalsohowwellcompaniesmonitortheirprocesses,measurekeymetricsandhowtheycontinuallyimprovetheseprocesses. IndustryTrends Onthewhole,bothoutsourcingandoffshoringareontherise.Theworldwideeconomicrecessionhasforcedcompaniestoexplorealloptionstoincreaseefficienciesandcutcosts.Companiesaregettingincreasinglycomfortableoutsourcing(aswellasoffshoring)largerpartsoftheirbusinessesastheyrealizetheyarenotcore. Anothertrend-especiallyininformationtechnology(ITservices)outsourcing-isindustryconsolidation,withlargercompaniesacquiringsmallervendors.Forexample,HPacquiredEDSin2008. Politicalbacklashhasalsobeengrowingwithunemploymentrisinginthedevelopedworld. ReferencesandFurtherReading wikipedia:Outsourcing wikipedia:Offshoring RelatedComparisons AccenturevsIBMforERPServices MergervsAcquisition LeadershipvsManagement CEOvsPresident CorporationvsIncorporation EmployeevsIndependentContractor Follow Share Cite Authors Sharethiscomparison: Ifyoureadthisfar,youshouldfollowus: "OffshoringvsOutsourcing."Diffen.com.DiffenLLC,n.d.Web.1Apr2022.<> Comments:OffshoringvsOutsourcing RelatedComparisons AccenturevsIBMforERPServicesMergervsAcquisitionLeadershipvsManagementCEOvsPresidentCorporationvsIncorporationEmployeevsIndependentContractor ContributetoDiffen Editorcreatenewcomparisonsinyourareaofexpertise. Login» AccenturevsIBMforERPServices MergervsAcquisition LeadershipvsManagement CEOvsPresident CorporationvsIncorporation EmployeevsIndependentContractor AboutDiffen HowtoCite Login/Register RequestaComparison SubmitFeedback Stayconnected ©Allrightsreserved. Termsofuse|Privacypolicy share