Offshoring vs Outsourcing
As there is some overlap, people are often confused about what is offshoring and what is outsourcing. The right option for you will depend upon your company’s long-term strategies, financial needs, and the market conditions.
What Is Outsourcing?
When a company outsources, it contracts tasks, projects, business functions, or entire departments to a third party. The third party can be an individual or another company located within the country or abroad.
One example of outsourcing is contracting a law firm rather than keeping lawyers on staff. Another option could be to contract a marketing firm to handle your product launch or a rebranding. This would avoid jeopardizing the daily functions of your existing marketing department.
What Is Offshoring?
When a company chooses to offshore, it still contracts a third party to handle a variety of work. The difference is that the third party is in another country. This usually allows the company to access a larger talent pool or take advantage of lower labor costs.
One example of offshoring is moving call centers to another country. Alternatively, a company looking to expand to an international market could contract a marketing team in its target country to ensure promotions are culturally relevant. Finally, a company may contract a freelancer in another country to help with a one-off project.
As you can see, outsourcing can involve offshoring or it can be local. However, offshoring is exclusively international. In addition, companies use offshoring and outsourcing for many of the same reasons, but there are some key differences. Let’s look at the pros and cons of each solution in various situations.
The Pros and Cons of Outsourcing (with Examples)
The two most significant reasons for outsourcing are cost savings and access to specific skill sets for projects. By cost savings, we mean more than just the possibility to contract less expensive workers — companies that outsource also avoid all the added costs of hiring staff. For example, hiring employees means paying for job listings, onboarding, payroll, and worker’s compensation insurance. These costs add up, which is why an increasing number of companies are outsourcing.
The other main reason for outsourcing is that it can complement existing in-house teams. In particular, organizations may choose to outsource workers when they have a new product launch or expand into a new market. This allows in-house staff to continue focusing on the day-to-day activities. A company may also require a particular skill set that isn’t available in-house.
There are few downsides to outsourcing, but these are still worth considering. For one thing, it can be difficult to build loyalty and to enforce non-compete contracts. Sometimes, companies find it difficult to maintain a thriving company culture when a significant number of people are outsourced workers. Outsourcing can also create an ongoing reliance on third parties, particularly when companies outsource the bulk of their work. For some companies, this isn’t ideal.
- Hewlett Packard contracts third-party call centers in Arkansas and Omaha, Nebraska.
- T-Mobile used to offshore their call centers to the Philippines. Later, they moved their call centers stateside because of federal taxpayer subsidies designed to help keep jobs in the U.S.
- Walmart has thousands of manufacturing plants in China, but the company also has a growing number of outsourced warehouses throughout the U.S.
The Pros and Cons of Offshoring (with Examples)
Whereas some companies choose to offshore to gain access to a broader talent pool, most offshore to keep costs down. Countries with a lower cost of living tend to have lower labor costs.
Although global talent can be just as qualified as domestic talent, many companies gain a bad reputation for their international contracts. Consumers are often concerned that offshoring affects their local economies, or they may accuse companies that offshore customer-facing jobs of not caring about clients.
- Apple: To keep its products affordable for consumers, the tech giant uses offshore manufacturing in China.
- Accenture is a global services and consulting company with headquarters in Dublin, Ireland. It offshores several business functions to the Philippines.
- J.P. Morgan & Chase is one of the world’s leading financial institutions. It offshores call centers to the Philippines and India.
Offshoring vs Outsourcing: Final Thoughts
Whether you choose to outsource or offshore, you’ll gain the benefits of a wider talent pool and lower costs than hiring. Some companies enjoy significant tax incentives, grant funding, and federal subsidies to keep jobs in-country; however, companies that offshore can also receive tax benefits. Just bear in mind that offshoring can have the significant downside of public scrutiny.
If you’re a small business owner, it’s also important to know about the benefits of outsourcing for entrepreneurs. Learn all about them, as well as about how to make outsourcing work for you, by downloading our infographic.