Offshoring Vs. Outsourcing
When people speak of “offshoring” and “outsourcing” they often use these terms interchangeably, however, there is a major technical difference that distinguishes one from the other. Both systems are discussed in more detail below.
When a company decides to outsource it means that they are buying a part or a service, that they used to produce themselves, from a third party. The term outsourcing does not specifically mean that the third party from which the products or services are being acquired is based overseas, or out of the country, but they can be.
There can be numerous benefits associated with outsourcing, some of which include:
- Cost Advantages - Costs are arguably the chief motivation behind outsourcing. Often companies find that contracting work out to a 3rd party is cheaper.
- Core Competency - Having to handle non-core functions is a distraction, so many companies outsource them.
- Quality & Capability – Companies often don't have in-house expertise for certain activities. In these cases, it is more efficient to outsource, and resulting products and services tend to be of higher quality when provided by outsourcing vendors.
- Labor Flexibility - Outsourcing allows a company to ramp up and down quickly as needed. It can also provide flexibility so the company does not have to worry about hiring and firing.
Offshoring refers to when a company shifts all, or a portion of their service or production, to a location outside the borders of the company’s original country of origin. This can include businesses that outsource to foreign companies overseas. However, offshoring also includes companies that transfer production or services to a location abroad without outsourcing the job. Despite all the negative attention that offshoring receives there can be unrecognized benefits of the offshoring of production that should not be overlooked.
When a company decides to offshore their production or services overseas they take on several different benefits, some of which include:
- Cost Savings - Companies usually offshore manufacturing or services to developing countries where wages are low, thus resulting in cost savings. These savings are passed on to the customers, shareholders, and managers of these companies.
- Skilled Worker Availability - The competitive advantage of nations often means that some countries or regions develop a much better ecosystem for certain types of industries. This means there is better availability of skilled human resources in that region for specific types of tasks. As a result, many companies choose to offshore certain business functions (e.g. call centers for customer support) to these locations. These can either be captive or outsourced.
- Taxation - Many decisions around offshoring are driven by a desire to take advantage of certain tax or tariff relief in some countries.