It’s not uncommon to hear the words offshoring and outsourcing used interchangeably. In as much as they share similarities, the truth is they aren’t the same. In this article, we’ll look at each term in depth to illustrate what the differences are.
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What is Outsourcing?
Outsourcing is a business approach that allows organizations to delegate specific internal processes to a third party. The different types of outsourcing include project outsourcing, operational outsourcing, and many others.
The goal with each of these types is always to transfer responsibility to a more qualified partner so the organization can focus on what it does best.
There are many reasons why a company would want to outsource. Although it is a contentious subject, business management professionals largely agree that it can increase a company’s competitive advantage. Here’s how;
It lets you focus on what’s important.
Outsourcing is essential but repetitive activities will allow you to re-task your in-house resources to the activities that generate revenue without sacrificing quality.
A company’s administrative processes usually expand during periods of accelerated growth. Unfortunately, this expansion may tie up your human and financial resources while limiting your ability to focus on doing the things that helped your company grow in the beginning.
Let’s have an example here, assume your company won a significant contract that requires you to purchase a large volume of materials and equipment in a short time. Of course, doing this on your own would require that you dedicate a large proportion of your staff to the task, and it would effectively take your focus off the contract itself. But, on the other hand, outsourcing the responsibility would give you the freedom to focus on the task itself.
There are situations where the cost of buying new equipment or moving to a new location can be prohibitive. In those situations, outsourcing will help you expand without the need for internal expansion.
If your growth increases the need for office space, you could outsource simple tasks like data entry and telemarketing instead of moving to a new building. It might cost you a lot less and would be more efficient. In this scenario, outsourcing would also reduce your expenses by eliminating the costs associated with hiring new employees like
· Hiring searches
· Healthcare and other benefits
· Increased need for human resource management and administration
Outsourcing helps companies grow by enabling them to offer comprehensive services.
The overhead costs of some operations (like logistics) may be prohibitively high when done in-house. Outsourcing lets you acquire them at a more affordable cost, thereby helping you expand your reach.
For example, your e-commerce brand wants to offer customers overseas shipping, but your staff isn’t familiar with international customs regulations, and your company doesn’t have the infrastructure required to ensure packages reach their intended destinations.
Outsourcing the task to a third-party logistics company would resolve all these problems. Furthermore, It would let you take advantage of their logistics expertise at a minimal cost.
Outsourcing can give you better authority over poorly managed departments in your company. In addition, an outsourcing company will often add its management skills to your business process to help you streamline your operation. Their assistance can help you achieve a level of control that wouldn’t be possible without significant restructuring.
Disadvantages of Outsourcing
Although outsourcing is generally less expensive than in-house work, there is a risk that you’ll end up paying more than you bargained for. Large outsourcing companies will usually present you with lengthy contractual agreements to sign at the start of your partnership.
You’ll lose some control
Whenever you delegate work to an external agency or freelancer, you lose control over monitoring and execution. If you know and trust the people you’ve hired, that won’t be a problem. That said, it will be a severe problem if you partner with an unreliable contractor.
Outsourcing increases the risk that you’ll lose confidential information, especially if it involves giving the third-party access to your data warehouse. In addition, if they suffer a security breach, it means you and your customers will be affected as well. Such an occurrence would have a major negative influence on your company’s brand and reputation.
Offshoring is when companies relocate part of their processes to different countries, usually to minimize operational costs.
Benefits of Offshoring
Offshoring your business operations to a developing economy is a cost-effective production strategy, especially if the company is in a labor-intensive industry like manufacturing and customer support. An offshore department will minimize your in-house staffing needs, so you won’t need as much office space. From a manufacturing perspective, cheap labor will reduce your cost of production.
You can invest the capital saved into other areas of your business, like marketing.
Many governments offer financial incentives to companies willing to invest in their economies. These incentives can make it economically viable to relocate to an offshore destination. In addition, the tax benefits (and other offshoring benefits) will increase your revenues and enable you to maximize your profits.
Disadvantages of Offshoring
Language and communication problems
Working with people from different countries increases the risk of communication and collaboration problems for several reasons. First, they likely won’t speak English as a first language (assuming your company is from an English-speaking country like the United States or the UK). Even if they can speak the language with relative proficiency, your interactions won’t be as smooth as they would when communicating with a native speaker.
Outsourcing exposes your company to the risk of political turmoil resulting from civil wars, insurgencies, and other problems. Most of the countries that welcome foreign investment are politically unstable. The companies operating in those regions could lose their assets at a moment’s notice in case of civil unrest.
The debates on outsourcing vs. offshoring tend to dwell on their shortcomings. But, the truth is both are effective business strategies when executed the right way. Although each approach has specific characteristics, benefits, and drawbacks, both can help companies improve operational efficiency, deliver high-quality products/services to customers, and minimize production costs.
If you’re looking to delegate some of your business tasks or processes to a partner, you’ll need to examine both strategies carefully to find the one that will work better for you if you’ve already chosen a way forward.