Offshoring vs Outsourcing: What’s the difference?
“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, with thousands of companies reaping immense benefits from either system. IBM and Apple are just some of the big names that have profited greatly employing these business strategies. But of course, this is no guarantee that all businesses will strive using these methods. It all depends on how these are implemented in your business operations. The best way to decide which practice will work for your company operations is to weigh in their pros and cons.
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 cost, expedite transactions, improve service efficiency and maximize use of external resources.
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 had been cases that outsourcing also caused 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 profits are consistently skyrocketing. They outsource most of the labor-intensive work to China and numerous other countries around the world to save up on production time.
- IBM has been criticized by The New York Post for their outsourcing activities, hiring 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, with revenues jumping 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 about your business to an outsider. Although it helps companies save up on labor and production cost, there are also underlying risks that come with giving third-parties access to intellectual property. Even with draconian restrictions in place, trade secrets and proprietary information have been infringed and traded by unscrupulous external contractors.
Offshoring moves a business process of a company to a foreign location but unlike outsourcing, offshoring lets you retain control of the business process.
A company can save up on labor and production cost when it hires talent and buys resources from developing countries. For example, factories can be relocated to a country with a lower upkeep cost, so the product can be sold at a discounted price to developed nations.
The practice of offshoring dates all the way back to the 1960s when US semiconductor industries began to 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 most commonly used in the IT industry because there is an increasing shortage of developers in the US. For decades, IT professionals have been one of the hardest-to-fill positions making it 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 offshored to the Philippines. The company has grown rapidly since it employed the help of professionals from abroad and 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.
But as much as offshoring has significantly helped large corporations flourish, it’s also one of the reasons their brand has taken a hit with the general public. Just like outsourcing, offshoring has also been criticized as a contributor to job loss in the country. Companies have been condemned not only for favoring foreign resources and manpower but also for a large amount of profit they’ve accumulated overseas.
Listen to Episode 47 of the Startup Hustle Podcast – Offshoring, 10 Tips
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 the most ideal option if you want to enhance your operations while retaining full control of the process. Although it has its own fair share of challenges, it is far safer than handing over important information about your business and entrusting service fulfillment to outsiders. Furthermore, by directly collaborating with your overseas team, you can implement a more efficient workflow without compromising output quality. When done right, offshoring offers an inexpensive way to assemble a strong and solid team from abroad that can help you enhance and expand your company’s services.
But before you start with offshoring, it’s imperative that you fully know and understand the correct ways of integrating the method into your business. You need guidance and assistance from experts who have first-hand experience of offshoring talents, which is exactly what Full Scale offers.
Full Scale has helped numerous startup businesses to extend their operations and assemble their own offshoring teams. Learn more about our services and find out if we’re the right fit for you.