Many people often confuse outsourcing and offshoring to be the same thing, however, it is not so. In outsourcing a company, contracts a third party for doing the work. On the other hand in case of offshoring the company establishes its own center in another country for getting the work done.
Difference between Outsourcing and Offshoring
In outsourcing the work is allotted to a different company which might be within the same country or in a different company. On the other hand, if the work is being offshored then it means that the project will be handled in a foreign country.
An example of outsourcing would be a situation where an organization uses services of a law firm for reviewing contracts rather than keeping in-house lawyers. This helps the company make full use of economies of scale, expertise, lower cost and scalable labor pool.
On the contrary, offshoring would involve a situation where a company establishes its own service center in a foreign country to service customers in the home country with the aim of cutting cost.
Companies generally outsource the certain project, business functions and activities to outside firms. This concept started during the 1980s when many companies were growing at a fast pace with lack of skilled employees to meet the growing demand.
In such situation, it was noticed that external firms had better efficiency and were able to do the job much faster due to the specialized skills they had.
Advantages of Outsourcing
The main aim of outsourcing is to gain competitive edge over others and achieve performance, as well as quality standards in a cost-effective manner. Let us have a closer look at some of the main benefits of outsourcing.
- Cost Reduction: The main reason behind outsourcing any work is to reduce costs. Most often than not, it is a lot cheaper to get the work done by a third party instead of doing it in-house.
- Core Competency: There are many different activities which are carried out in a company ranging from manufacturing, human resource management, marketing, finance, logistics, payroll, security and many others.
Many of these do not fall in the category of core competency of the company. Core competencies are tasks which the organization does better than others and these tasks provide the company its leading edge over its competitors. Thus by outsourcing non-core activities, the company can focus more on activities it is best at.
- Skill Set: Many times an organization lacks manpower with required skills for performing a task. In such situation, it is much better to outsource those tasks and achieve better performance.
- Flexibility: Outsourcing allows a company to easily scale up or scale down its manpower requirements. As for instance, if suddenly a company requires 7-8 web developers for a period six months then outsourcing is the right option since it will not be feasible to hire developers for only six months.
In the late twentieth century due to the improvements in telecommunication infrastructure as well as transportation the popularity of offshoring started rising. It was now more feasible to get a task done in a different geographical location such as in a developing nation where wages are pretty low.
Many organizations make use of what is called as captive offshoring where subsidiaries are set up in different countries for getting separate tasks done. The aim is to reduce production cost which includes the cost of raw materials, wages, facilities like electricity and expenditure of transportation.
The other consideration consists of taxes since many developing nations offer tax subsidies to companies establishing factories or shops in their country.
Advantages of Offshoring
Apart from advantages similar to those offered by outsourcing, offshoring offers other benefits like:
- Cost Cutting: Organizations offshore activities such as manufacturing to underdeveloped countries since wages are comparatively lower in such countries. This in turn helps such organizations in making considerable cost savings.
- Human Resources: In many countries there is better infrastructure and manpower for certain activities. As for example, if any country has English speaking educated manpower then such country will become the preferred choice for outsourcing of business processes.
Thus organizations select to offshore activities such as customer support call centers to such countries. Many organization set up captive offshore centers to capitalize on available manpower in a cost effective manner.
To conclude, we will say that despite their similarities, outsourcing and offshoring are quite different. However, both are beneficial for organizations and help them in reducing operational costs and increasing efficiency.