Is outsourcing the right setup for your business? Or is offshoring more suitable for you?
We will try to answer that in this article.
We’ll compare the two to help you determine which setup is right for your requirements. We’ll also highlight an important tool that can help remote teams better manage their work.
This article contains:
- Comparison of Offshoring and Outsourcing includes:
- What is the difference between them?
- The difference between their goals
- The difference between their workforce
- The difference between their location settings
- The difference between their interests
- The difference between their limitations
- Understand offshore software outsourcing
- The most important tool for remote teams
1. What is the difference between Offshoring and Outsourcing?
What is Outsourcing?
Outsourcing is a process in which a company contracts work to a third-party entity.
Instead of doing the work themselves, they ask this third party to do it for them.
Most people consider outsourcing as a contract to work with a supplier in another (usually cheaper) country – however, that’s not entirely true.
Many companies outsource tasks such as PR and legal to their domestic companies. Furthermore, outsourcing is not always cost-effective.
What is Offshoring?
Offshoring refers to a change in business activity to another country – usually to take advantage of a cost benefit.
Unlike outsourcing, where you contract work to another company, outsourcing can keep work processes in-house.
In this case, you are simply moving the work processes to another country, but they are still your own employees.
However, if you contract work with an outside company that operates in another country, that is also outsourcing. This specific case is also known as ‘Offshore Outsourcing’.
For example, many foreign companies develop their software to less expensive foreign locations to benefit from lower wages and less taxes.
2. The difference between their goals
The primary goal of outsourcing is to take advantage of higher quality human resources.
Instead of wasting time and money hiring and training an in-house team, you can outsource to a specialized company.
This may include functions such as marketing activities, technical support, manufacturing, financial or legal services, etc.
By outsourcing work that you are not fully equipped to handle, you can now focus on your core competencies instead. Leave everything else to an external service provider!
The goal of outsourced business functions is almost always to reduce costs.
By moving business processes to a less expensive country, business owners face:
- Lower salary.
- Lower setup costs.
- Less taxes.
This is one of the reasons why many multinational corporations outsource their production processes.
Since this is often a costly process, you can save millions by moving it to a less expensive country.
Sometimes offshoring can be for other reasons as well. For example, an ethnic apparel company based in the United States may manufacture a line of sarees (Indian clothing) abroad for India or Bangladesh for quality reasons.
In this case, that would be the most logical way to structure the supply chain.
3. Differences between the workforce
Outsourcing involves contracting work with a third party. Therefore, the persons performing the functions will be employees of that third party.
Your employees play no role in the outsourced workflow.
Foreign workforce (Offshored)
The foreign workforce may or may not be employees of your organization. They’re just not in the same country as you.
4. Differences between work locations
While you can outsource the work to a third party overseas, that doesn’t have to be the case. You can also outsource work to third parties in your home country.
The main deciding factor for outsourced work is not where it is done – but by whom. If it is not done by employees within your organization – it is outsourced work.
Offshore setting (offshored)
Offshoring must be done abroad.
Remember, the goal of offshoring is to save money – the only way this can be done is to move your operations to another country, saving costs.
5. Difference between benefits
1. Exceptional source of expertise
Many of your business processes may require specialized skills that are not easily learned.
For example, you can’t expect your content team to pay attention to PR and monitor your PR activities, right?
While you can hire staff skilled in these areas, it’s not always cost-effective. Recruiting can be extremely expensive – especially when it is for non-core activities.
In these situations, it’s much smarter to outsource your operations to specialized companies instead. Since these are the fields where they are skilled, they can get the job done effectively.
You won’t waste time and money training your workforce – you’ll simply leverage experts to do it for you!
2. Allows a company to focus on its core competencies
Instead of forcing your employees to perform tasks they are not fully equipped for, outsourcing frees up space for them to focus on tasks they understand well.
Since your marketing no longer has to grapple with the dynamics of PR, they can focus on building an overall marketing strategy or better collaborate with product and sales teams to build more powerful core processes.
This allows your company to focus solely on its core competencies. You won’t have to struggle to manage non-core activities you’re not equipped to tackle.
3. Possible cost savings
While this is not always the case, outsourcing jobs can save you money.
In the short term, outsourcing is much more cost-effective than training the workforce.
But the benefits are not limited to training costs.
In the event that you decide to train your workforce, it may take several months before results start to appear.
However, with outsourcing, you will have no down-time. Since these are experts, you can expect immediate results – one of the many advantages of outsourcing.
1. Low cost
The main goal of offshoring is to reduce costs; so it’s no surprise that this is one of its biggest benefits.
Outsourcing can reduce costs in a variety of ways:
A. Lower labor costs
Average worker salaries vary from country to country. Employing a workforce in a country with relatively lower labor costs can save you a lot of money.
B. Lower operating costs
Operating costs such as rent and electricity also vary from country to country.
For example, doing your software development in a country with low operating costs like the Philippines can save you money and give you a huge competitive advantage.
Another example is that other countries may have laws that are more favorable to quickly setting up large operations – favoring economies of scale.
C. Tax savings
Tax savings are another big reason for doing business abroad. You can take advantage of company-friendly tax laws and offshore subsidies to reduce costs.
2. Greater talent pool
With offshoring, you are no longer geographically limited when sourcing your workforce.
For example, if your country is the United States, you are no longer limited to recruiting from there.
You can hire highly skilled employees from around the world to create a diverse, talented employee pool. (If you rent from neighboring countries like Mexico, it is called nearshore offshoring.)
6. Difference between disadvantages
Limitations of Outsourcing
1. Lower quality control
The problem with outsourcing is that you give up some of the control you have over the internal workforce.
Think about it.
Since they’re not your employees and don’t work in your office, you can’t really keep track of what they’re doing.
You can see what they offer you and make changes, but that’s it.
By outsourcing work, you are putting the quality and reputation of your work in the hands of a third party.
2. Data security concerns
Another problem with outsourcing is the increased risk of data security breaches.
Because you’re sharing important project- and company-related information with third parties, you’re no longer keeping the data internal.
3. Problems of conveying information
If you are outsourcing work, you will have to clearly explain what you want and need from your third parties.
However, even with detailed project documents, video calls, and collaboration through project management tools, there is always the possibility of miscommunication.
Unfortunately, since you’re not part of the same company, fixing these instances of miscommunication can be difficult.
While technology like instant messaging and video calling can help partially solve this problem, it’s still a big problem for most outsourced teams.
Limitations of offshoring
1. Legal and tax experts may be required
Although offshoring can save you a lot of money in taxes, you’ll have to be careful. You must consult legal and tax professionals to understand the legal and financial nuances of a country.
If you don’t research a country’s laws carefully before outsourcing, you will put yourself in a lot of trouble in business in the future.
You could end up losing a lot of money by making wrong decisions, being fined by the authorities in that country, etc.
2. Cooperation and communication issues
You will face significant barriers of time and distance when working abroad.
Since your offshore teams may be several time zones away, actively collaborating on work can be difficult.
However, that is not the only problem you will face.
Language barriers can also pose a serious challenge for foreign teams.
If your foreign workforce isn’t proficient in your preferred language, you’re increasing the likelihood of miscommunication.
3. Requires deeper monitoring
In general, outsourcing requires a higher level of oversight to ensure that processes stay on track.
Unfortunately, due to distance, time, and language barriers, this can be complicated.
You will have to conduct regular check-ins and hire a lot of on-site managers to keep everything running smoothly.
What is offshore software outsourcing?
Offshore software outsourcing is contracting work with a third party in another country. In this business model, you can:
- Source of superior expertise (often related to outsourcing). And;
- Reduce your costs (usually offshore related).
With increasing globalization, many companies are turning to offshore outsourcing to countries like China and India for their work activities.
With lower wages, improved operating costs, and tons of skilled workers – outsourcing software offshore is now becoming the norm.
However, it is not without disadvantages.
While offshore outsourcing combines the benefits of outsourcing and offshore – it is also subject to all their flaws.
When you are combining both of these processes, you are exaggerating the risks that both entail.
With such a complex setup, miscommunication problems will not only increase – they will be more difficult to solve.
Because your teams now operate independently in different countries, there are fewer safeguards – leading to a higher risk of project failure.
Whether you choose outsourcing or outsourcing teams, one thing remains constant.
You must monitor them.
Since these are mostly remote teams, you will have to carefully monitor their activities mostly to minimize the possibility of project failure.
Time tracking tools like Time Doctor help you track and monitor your team’s performance to verify if they’re working efficiently.
Although outsourcing and offshoring may seem similar, they are very different.
Outsourcing should be the right choice if you are looking to focus on your core functions by delegating work to a talented external workforce.
However, if your goal is to save money, then outsourcing may be a better option for you.
Choosing between outsourcing and offshoring can be a complicated decision due to the number of variables at play. Carefully consider the nuances of each setup before deciding which one is right for your needs.
However, regardless of the setup you choose, you will need a tool like Time Doctor to monitor your work activities.
With modern reports and a user-friendly interface, Time Doctor has everything you need from a time tracking tool.
Why not sign up today and experience it for yourself?
Nissim de Babani
Nissim is the Vice President of Marketing and Co-Founder of Global Citizens Technologies, an outsourcing company based in Ho Chi Minh City, Vietnam. He believes in connecting cultures and technologies and spent most of his adult life in Canada, Israel and Vietnam to realize this vision. He has more than 15 years of business experience in these areas. He is an entrepreneur and investor, and his passion is business development in the tech startup environment. He can’t start his day without a cup of mint tea and he loves spending time traveling with his kids.