Offshoring vs Outsourcing: What’s the difference?
The best thing about outsourcing or offshoring? Either which saves you tons of money! Entrepreneurs always have to make conscious decisions for our businesses: ones that will always be cost-effective. For outsourcing vs offshoring questions, you’ve come to the right place. Let’s discuss the differences below.
Outsourcing and offshoring are often confused with each other in discussions. Though some of their goals and methods overlap, the two are distinct strategies with their own sets of mutually exclusive benefits and pitfalls.
Considering both are aimed at improving business efficiency and productivity, there is an ongoing debate between them. One thing is certain—the trend of relocating business operations overseas would continue. Thousands of companies reaping immense benefits from either system.
IBM and Apple are just some of the big names that have profited greatly by employing these business strategies. But of course, this is no guarantee that all businesses will strive to use these methods. It all depends on how these are set in your business operations. Weigh in the pros and cons to determine which practice will work best for your company.
Outsourcing engages the services of a third-party provider to complete internal operations. It entrusts the completion of a certain business process to another company. By spinning off non-essential operations, the company can direct its focus on its core competencies. This business model claims to reduce labor and production costs. It expedites transactions, improves service efficiency, and maximizes the use of external resources.
How it’s used in business
Outsourcing has been around since 1989 and became a widespread trend in the nineties. And to this day, most large corporations continue to practice it. According to Plunkett Research, it has ballooned to a $587-billion global industry in 2018. However, despite its popularity, there are cases in that outsourcing also causes a setback for companies. Employing outsourcing in operations led to varied outcomes; some companies succeed while others failed to meet their goals.
- Apple, one of the most successful brands in the tech industry today, barely does its own manufacturing work. Yet the brand’s profits are consistently skyrocketing. They outsource most of the labor-intensive work to China and numerous other countries. By doing so, they significantly save up on production time.
- IBM receives criticism from The New York Post for its outsourcing activities. They hired more foreign workers while the local labor market was in convulsion. Along with the negative public perception, the company’s performance had deteriorated significantly due to outsourcing. The company’s profits were set on a steady decline for decades due to exposure to currency fluctuation. Although it never accurately reflected the company’s entire business revenue. Recently, IBM’s consecutive declining quarters have started recovering. Their revenues have grown by 4% annually since they’ve steered their focus on software development and services.
The greatest disadvantage of outsourcing is the need to share critical and proprietary information with outsiders. Although it helps companies save up on labor and production cost, there are underlying risks. Giving third parties access to intellectual property can pose security threats. Even with powerful restrictions in place, trade secrets and proprietary information are still at risk for infringement.
Offshoring moves a business process of a company to a foreign location. Unlike outsourcing, offshoring lets you retain control of the business process.
A company can save up on labor and production costs when it hires talent and buys resources from developing countries. For example, factories can relocate to a country with a lower upkeep cost. This way, the product will be available at a cheaper price in developed nations.
How it’s used in business
The practice of offshoring dates all the way back to the 1960s. This was when the US semiconductor industries began offshore labor-intensive manufacturing works. And with the development of the Internet, other industries gradually started using the strategy to cut down on cost. Nowadays, offshoring is a common option in the IT industry because of the shortage of developers in the US. For decades, IT professionals have been one of the hardest-to-fill positions. It’s been difficult for large corporations to keep up with client demands. Therefore, most tech companies prefer to offshore their teams.
- Full Scale, itself, is run by a software development team from the Philippines. The company has grown rapidly since it employed the help of professionals from abroad. Now, it has even extended its software development services to other tech companies like Stackify and GigaBook.
- Microsoft has one of the most profitable overseas operations, second only to Apple. The software giant has strategically divided its subsidiaries in multiple foreign locations to leverage tax incentives. But a court battle with the Internal Revenue Service in 2015 eventually held them accountable for tax avoidance. But despite the higher tax liability, Microsoft’s profits continue to grow at an impressive rate. The company, along with other multinational corporations, have set up similar offshoring structures to decrease taxes.
Although offshoring has significantly helped large corporations flourish, it also brought on problems. It became the reason brands received a negative hit from the public. Just like outsourcing, offshoring also draws criticism as a contributor to job loss in the country. Favoring foreign resources and manpower draws a negative response from the public. They drew criticism for the large amount of profit they’ve accumulated overseas.
Which one is better?
In the end, it’s all about finding the right balance between distributing critical and non-critical parts of your operations. Offshoring is most ideal if you want to enhance your operations while retaining full control of the process. It is far safer than handing over important information about your business to outsiders.
Furthermore, by directly collaborating with your overseas team, you can implement an efficient workflow without compromising output quality. When done right, offshoring offers an inexpensive way to assemble a strong and solid team from abroad. It helps you enhance and expand your company’s services.
But before you start with offshoring, you must know the correct ways of integrating the method into your business. You need guidance from experts who have first-hand experience in offshoring talents. This is exactly what Full Scale offers.