The differences between offshoring and outsourcing
We live in a world more connected than ever. The way we work and live is no longer bound by geographical limitations. 65% of digital workers work remotely on a regular basis, which allows companies to access talent pools in remote locations, and cut their operational costs. When we hear that the company we know is relocating its business processes outside the company, two words will likely appear frequently: offshoring and outsourcing. Although they sound similar, they signify different concepts.
How Offshoring Differs From Outsourcing
Offshoring is a practice of relocating business processes from one country to another.
• An American company relocating its production to a newly-built factory in Mexico
• A Swiss company setting up its call center in France to serve Swiss customers
Outsourcing simply means transerring processes to third-party providers.
• A social network handing over its content monitoring to external companies
• A fashion brand buying plain t-shirts from a local supplier
Offshoring and outsourcing can be independent of each other, or intertwined, like in the case of offshore outsourcing.
Offshoring often translates to reduced costs, lower taxes and tariffs, and access to the talent pool abroad. Some countries, like Cyprus, Ireland, and Lichtenstein, attract foreign companies with low taxes to boost their own economy and create employment for their citizens. On the other hand, places like Bermuda, the Bahamas, and the Cayman Islands, are popular among entrepreneurs , since they charge a 0% corporate tax.
Cons of Offshoring
Since offshoring eliminates jobs in the company’s base country, it is often criticized for making it harder for tax-paying citizens to find jobs in their home country. Relocation of processes can also be potentially risky if companies move their operations to politically unstable regions, where labor is cheap, and taxes are low. Although their operational costs might be lower, potential disruption of the supply chain and the risk of violence might cost them more in the long run.
Companies can offshore either their production lines, or services, or, in some cases, both. For example, a clothing company can offshore its production abroad, and keep its customer service in its home country, or relocate its customer service abroad and manufacture its products at home.
Outsourcing’s main goal is to lower costs and gain access to specialized knowledge that may be lacking within a company’s structures. As a result, projects can be executed faster and often at lower costs, and company employees can focus on areas of their expertise to maximize their productivity. When, for example, a clothing company outsources its bookkeeping tasks to an accounting firm, they can focus on selling and manufacturing more clothes instead of wasting time dabbling outside their expertise and compiling receipts. Companies can outsource their process either locally or abroad.
Cons of Outsourcing
The main risk connected with outsourcing is connected to the lack of control: since companies hand over their processes, they cannot continue to control them to ensure top quality standards. In the long run, the lack of experts within the company can lead to the loss of a competitive edge, so it is worth nurturing internal experts as a complement to outsourcing and saving money.
When to Offshore vs. Outsource
When do outsourcing and offshoring serve their purposes best? Outsourcing can be helpful in case of tedious, yet necessary tasks, which consume our employees’ time, but produce little to no value, or smaller projects, which can be safely given to third parties. For example, a team of translators could produce more value for the company handling new projects rather than sending invoices to their clients.
In fact, many businesses decide to outsource to focus on their core business functions and solve their capacity issues. Offshoring, on the other side, is beneficial when we plan a long-term relocation of our business processes and center our strategy around it, since it has both legal and fiscal consequences. WhatsApp has offshored its software development to Eastern Europe to lower costs, allowing the company to quickly expand. The result? The app grew in popularity and was purchased by Facebook in 2014 for a record $16 billion.
We must remember that outsourcing simply signifies transferring our projects to third parties, locally or abroad, and offshoring is the relocation of certain business processes to another country. Both options have their advantages, but every business is unique, so if you would like to understand which option fits better your company, contact us at firstname.lastname@example.org – our experts are at your disposal!