Offshoring vs. Outsourcing: What You Need to Understand

5 Feb 2018

Outsourcing and Offshoring – why is it so important?

In today’s digital age, embracing the global labour force can be the difference in a business remaining viable or not.

Geographical barriers have been broken down with the advent of digital communications technology – this means that businesses are now competing globally, where once they only had to worry about local competitors.

The bottom line is businesses need to be more competitive if they are to thrive. Being competitive means rationalising costs, increasing efficiency, enhancing capability and better servicing their customers.

Achieving this can be difficult but there are many strategies that can adopted in order to become more competitive and ultimately grow in a global market.

Today, many businesses have begun realising that offshoring and outsourcing can play a role in achieving new levels of competitiveness.

Understanding the difference between the models is important as depending on what business objectives you are looking to achieve. Are you looking for a long-term workforce solution or a short-term one? Are you looking to complete a project within a fixed timeframe or are you looking to send an entire function offshore to support local initiatives.

These are all questions which you must consider when looking at the approach you take.

The Difference Between Outsourcing and Offshoring

On paper, outsourcing and offshoring offer similar advantages. The most well-known is that both models help reduce company costs. Both most commonly involve leveraging and collaborating with a team based in another geographical location utilizing digital communication technology. Both models can be based in an office or work from home depending on the role or function being performed. Whether it’s a long term or short-term solution, outsourcing and offshoring help companies stay globally competitive in today’s rapidly changing business landscape.

The cost savings from outsourcing are second to none.

However, let’s look at the definitions of both strategies. Outsourcing refers to the business practice of reducing costs and improving efficiency through the shifting of processes to an external contracted third party based onshore or offshore. The processes that are outsourced can be performed by the third party either onsite or offsite. The key point here is that the service provider engaged is required to manage workflow and work quality in line with an agreed upon service contract. If the conditions of the service contract are not met (quality and quantity metrics are not hit), then there are grounds for rectification or termination depending on what has been agreed.

Meanwhile, offshoring involves the relocation of entire business functions to another country. This function is then managed by you directly. You are directly involved in selecting and managing your team members on a long-term basis. Offshoring is essentially having a team in another country supported by a shared services function. They are your team, with full support provided.

Therefore, to say that you will “outsource” and “offshore” functions mean two completely different things. Some companies lose sight of this, making it more important to be aware of the unique benefits each model brings.

Outsourcing Benefits

Outsourcing is a business strategy that focuses on leveraging processes. This means engaging a third party provider to manage the proposed workflow, including quality of work and output. Unlike offshoring, which requires the client to manage both quality and workflow, outsourcing is a less hands-on approach. As the provider is responsible for the entire process, costs associated with outsourcing are generally higher.

Clients turnover responsibilities to outsourcing providers

When companies choose to outsource functions, they are giving complete almost control to a third party provider over what tasks should be completed and how. Depending on their provider, they can outsource low, middle, even high-level functions. From customer service, to accounting and even marketing functions, just about any function can be outsourced.

What Cost Reduction Really Means

When you hear that outsourcing helps control costs, it does not only mean finding the people who will make up your outsourced team. Through outsourcing, you will experience reduced overhead cost – from office space to utilities – and setup. Back office functions that are outsourced also help with company costs and overall performance.

Through outsourcing, companies can put more focus on their growth and other priorities they may have.

Both the company and outsourcing provider will work together with a strategy to reduce risks and ensure continuity in operations.

Quality service with increased efficiency

Through an outsourcing strategy, companies are now able to focus on growth-oriented activities. By outsourcing more labour-intensive functions, they can allow their local resources, who are paid a premium, to focus on value-adding tasks and objectives.

Overall, outsourcing is the perfect strategy for companies that want to leverage the processes of an already established third-party provider. The immediate availability of manpower and resources helps them put focus on labour-intensive tasks, making it possible to focus on primary objectives.

Offshoring Benefits

Offshoring has a much more hands-on approach than outsourcing does. This means having more control over the staff you hire outside your local team. You will be responsible for selecting specific people, down to the functions that they will handle. This approach towards the long term might be what you are looking for.

Long term solutions are better with offshoring

Offshoring, as a model, is focused on creating and cultivating a long-term team in another location. By selecting this model, you are investing more effort into the recruitment, training and day-to-day management of your team. Your team report directly to you, you manage what work they are assigned and how they perform it. This level of control allows you to mould the team in a way that is aligned to your local operations and ultimately, they become embedded within your business.

Offshoring means being more hands-on in developing the skillset of your team.

As they become embedded, they start to understand your business, learn about how it operates and ultimately develop a sense of loyalty to your business. This is where the long-term value lies (and the major difference between the model lies).

Greater Managerial Involvement

While outsourcing involves contracting tasks to a third party service provider, there is a much closer collaboration between the service provider and the client in the offshoring model. Through offshoring, your company will partner with an offshoring provider in the country of your choice. This is important because your provider is a local company that is registered with their respective government regulating agency.

Your company will appoint people to be assigned in the offshoring host country in order to manage operations. Thus, they will be more involved in the day-to-day ongoings. Compared to outsourcing, having more involvement gives clients more control over operations and quality expectations.

Compared to outsourcing, offshoring is not as simple to implement and requires much more commitment from you. When partnered with a strong offshoring provider however, you can ensure a seamless transition into this new strategy. Not only does your company benefit from increased productivity, you also cultivate long-term team members who can prove valuable for the next few years.

Outsourcing and Offshoring: What’s best for business?

As noted earlier, both outsourcing and offshoring will help companies reduce costs, help maintain their competitiveness while also opening up more opportunities. However, an outsourcing solution is a much simpler, process-centred approach that companies can utilize for many low-level functions. Third party providers are given nearly full control of how outsourced teams are managed, allowing companies to prioritize more of their tasks.

On the other hand, offshoring allows companies to maintain transparency and full control over the team they wish to have. Though a much more intensive process that outsourcing, offshoring puts their focus on costs, long term solutions, and developing the career pathways of the people they recruit.

Both outsourcing and offshoring use dependable, modern models that more and more businesses are considering each day. Knowing what makes outsourcing stand apart from offshoring will help drive your business to success through a strategy that fits the objectives that have been lined up.

As a leading service provider in the Philippines, Diversify is ready to assist companies in starting their outsourcing and offshoring processes. If you’re interested in taking that first step into the global market, contact us today to get your journey started.