Offshoring and 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 hiring a marketing firm to handle a product launch or a branding overhaul. This would avoid slowing down the daily functions of the existing marketing department. On a smaller scale, a company may hire a developer, social media manager, or other individuals to handle a variety of tasks or business functions.
What Is Offshoring?
When a company chooses to offshore, it still contracts a third party to handle a variety of work, but the third party is in another country. This usually allows the company to access a larger labor pool or take advantage of lower 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.
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 or functions that aren’t a good fit for the in-house staff.
Cost savings don’t just refer to the possibility of less expensive workers — companies that outsource also avoid all the added costs of hiring staff. Hiring in-house means paying for expensive job searches, the hiring process, onboarding, payroll, and worker’s compensation insurance. These costs add up, which is why an increasing number of companies are outsourcing.
The other common reason companies outsource is to 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.
The downsides to outsourcing are very few, but still worth considering. For one thing, it can be difficult to build loyalty and to enforce non-compete contracts. Sometimes, companies can find it difficult to maintain a thriving company culture when a significant number of people are remote 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 manufacturing and 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 is just as qualified as what’s available in the domestic talent pool, many companies gain a bad reputation for international contracts. Consumers are often concerned that offshoring is affecting their local economy. In addition, consumers may accuse companies that offshore customer-facing jobs of not caring about their 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. They offshore their call centers to the Philippines and India.
Whether you choose to outsource or offshore, you’ll gain the benefits of a global talent pool and lower costs than hiring in-house.
Some companies enjoy significant tax incentives, grant funding, and federal subsidies to keep jobs in-country. However, companies who offshore can also see tax benefits. Just bear in mind that offshoring does have the significant downside of public scrutiny.