To Outsource or to Offshore?
Our business needs drive our decisions and our course of action. Where there are problems, there are also solutions. We’ll focus on two business solutions disrupting the IT industry: to outsource and to offshore. Both share their own unique advantages. That said, you must also know which venture to sail to meet your demands. But what are their differences? Let’s find out.
Outsourcing and offshoring are two terms that are synonymous with each other. As prevalent as the two are in many service and business processing industries, offshoring is still often confused as outsourcing and vice versa. At some point in the growth of a company, requiring additional manpower to supplement the business process operations becomes essential to move forward. So, not only do the two pose conflict in definition but also in each business decision.
Outsourcing & Offshoring: What is the difference
Although several parts of the system and processes of outsourcing and offshoring are similar, the two can be very much defined as separate and different models. From this perspective, these two processes’ main concern is to increase the output value and productivity of a company by expanding its pool of resources.
By definition, outsourcing is the acquisition of third-party service and/or business process provider to supplement the internal operations of the company. It deals with the completion of operational areas that the company cannot process on its own by engaging with services supplied by non-company-owned service providers. Basically, it is the process of taking a piece of what a company does and forwarding it to another company regardless of whether they are in the same country or not.
Meanwhile, offshoring is mainly an extension of the business operations and processes of a company to another country. One thing to note about this type of business model is that THERE IS NO THIRD-PARTY service provider involved. It is a business strategy that enables your company to facilitate business activities and build a team of equally skilled individuals from other countries at a much lower cost.
What makes one better than the other?
Each one of these comes with their own traits that separate them from the other. These are also traits that people often confuse the two items with.
The advantage of outsourcing is that it works well for short-term services that a company might need. In the case that your company only needs extra manpower to supplement the requirements of your client for a short amount of time, it is better to outsource the production to other companies. This makes your company accommodate faster to the needs of the client and avoid the cost of time for the additional discovery period for supplying the requirements.
It is also ideal to outsource certain processes that your company doesn’t specialize in. The idea of having a third-party service provider is that they have their own specialization on the production or process that your company will source out from them.
One thing to look out for is the business relationship with the outsourced company. This area may pose a threat to your business since it is very risky to share confidential information and requirements to outside companies. The proper legal requirements should be ironed out and detailed very well in order to avoid breaches and misconduct from the third-party service provider. Thus, this makes outsourcing not completely trustworthy and requires additional monitoring expenses.
Not being in the same organization may also affect the behavior of the business relationship since the outsourced company may not have the same values as your company. Since both are operating externally from each other (though having a business-related connection), this deal is subject to vulnerabilities between the ties. That said, there could also be a risk in quality control since there is no representation of your company in the production of the required service.
Listen to Episode 26 of the Startup Hustle podcast – How I Ended Up in Cebu City
Offshoring, on the other hand, gives you control over all of your company’s operations and decisions in the supply of services for your clients regardless of where your offshore facility is located. This way, it is easy to monitor the business activities that happen along the entirety of your operations. The access of the administration and the decision-making body of the company in the production of services also comes as a time advantage since it is very easy to escalate the hurdles and challenges that might be encountered.
The values and principles of your company will also contribute to the ease of production of services since the core procedures of the company are uniform in every department. This tells us that there is an avoidance of trust issues because all the work is within the company as it should be.
Another advantage of offshoring is that it’s cost-driven. What this means is that companies often offshore to developing countries, such as India or the Philippines, where there is a lower average salary and the conversion of dollar to the local currency is high. In the Philippines, for example, a .NET developer earns PHP 356,863 ($6,635) per year whereas in the US, it is $66,953 per year. This alone attributes to up to 90% savings in wage of a company per employee. Additional cost advantages may also be incurred for companies that produce physical products since offshoring enables them to get the opportunity to acquire cheaper raw materials from their facilities abroad.
Time spent on training is unavoidable when a company engages in offshoring. Consideration of cultural, communication, and time zone differences is integral because the dismissal of these is detrimental to the company. Since there is time involved in training offshore employees, it means that there is a deceleration of productivity for an amount of time. Although, instead of viewing it as a hurdle, it can be viewed as an investment that will be useful in the overall growth of the company in the long run.
That said, offshoring is very profitable for long-term services. This business model is designed to aid the operations of a company that will have to deal with repetitive client services for a longer time. This means that there is also a steady rate of client retention which could also lead to your company being an instrument for your client to offshore for their own.
What makes one better than the other is their own ability to fit a specific business need. Short-term or long-term requirements are important considerations in determining which one is the correct business strategic path to follow.
Here are points to consider as well:
|Control||Lesser control||Total control|
|Reliability||May encounter trust issues||Very reliable|
|Transfer of knowledge||Will take a less time||Will take more time|
|Termination||Not easy and can be expensive||Straightforward|
|Social impact||Local employment rate decreases||Employment rate in developing countries increases|
|Production cost||Depends on the location||Always guaranteed low|
Offshoring moving forward
However, offshoring has a slight edge against outsourcing due to the guaranteed increase of profit in the longer run. The basis of this is not only the retention and acquisition of new clients but also because of the huge amount of cost savings from the lower production and labor cost in offshoring countries. As controversial as it sounds, the offshoring system actually bolsters the economies of developing countries and further promotes the concept of globalization.
Do you like the following points for your business?
- Low cost – Setting a business expansion to developing countries may seem costly but it is actually much cheaper to do so since key cities in these countries have highly developed industrial locations and resilient a workforce that is able to cater to businesses from around the world with lesser cost.
- Long-term – No successful business invests in temporary and minimal solutions for its company. Long-term operations produce better outputs compared to short-term engagements since the development of products is continuous. Client retainership is also one trait of this point.
- Higher profit – Lesser costs on labor and operations and higher client retainership all lead to higher profits. This will help your company grow and expand to more locations to better your service and reach wider markets.
- Finally, a wide access to global market – Having access to a wider market in terms of workforce, resources, and connections will be very beneficial to the growth of your own company.
If you consider some of these, if not all, points very integral in the growth of your business, it is ideal to engage in offshoring moving forward. These points are just some of the many wonders that offshoring can do for the growth of your company. With lesser costs, consistent production, higher profits, and a wider range of markets to penetrate in the global arena, the direction of offshoring will help you elevate your business and the people you work with.
Full Scale vouches for offshoring
Full Scale is in itself run with a team of software developers, web designers, and content creators offshored in the Philippines. The company’s growth is partly because of the benefits of offshoring that helped the company expand its growth by employing well-trained professionals and extending software development and content services to companies such as Gigabook and Stackify.
The company has now helped a multitude of startup businesses extend their operations and create their own teams for offshoring. As the company is growing, the pool of services offered has also expanded.
Ultimately, success in business not only lies in the advantages that a company can acquire from its engagements but more importantly in its ability to make sound decisions regarding what the company needs and requires on strategic timing.