Offshoring and outsourcing are often used interchangeably, and they can occur at the same time. However, they are not the same thing. What’s the difference between these two categories? And when is a business in one category but not the other?
Offshoring Vs Outsourcing
Outsourcing refers to procuring services or goods from a third-party outside of your organization. Offshoring refers to sending work overseas or internationally. International outsourcing is usually offshoring, but not always, while a lot of outsourcing isn’t “offshore”.
If you outsource your IT functions to a company downtown, you’re outsourcing, but you aren’t offshoring. If you are located in the United States and you outsource your website design or IT system maintenance to someone in India, you’ve both outsourced the work and engaged in off-shoring. Another example of outsourcing vs offshoring is when a company stops building specific subassemblies and buys them from a third-party manufacturer. If the components are now imported from a company in another nation, this is an example of outsourcing and offshoring.
Offshoring Without Outsourcing
Offshoring can sometimes be in-house, so it isn’t outsourcing. When Microsoft sends design work to its Indian offices, it is offshoring as an American company sending work abroad. But since both the people planning the work and doing the work are part of the same company, they’re offshoring but not outsourcing.
The same is true when an American company builds factories in Mexico to build labor-intensive subcomponents brought back to the United States for assembly in their union run facilities. They’ve “off-shored” the work by sending it out of the country, but since the factory is owned by the same company, it is merely offshoring, not outsourcing. If they bought the same components from a different company that was also located in the other country, then it is both outsourcing and offshoring.
The Factors Driving Outsourcing and Offshoring
Offshoring is generally driven by the cost savings. The cost of labor in another country is often cheaper, so labor-intensive industries move to the cheapest jurisdictions that still make an acceptable product. Rules and regulations that make it expensive to import something to a major customer market are a reason to move manufacturing “offshore” to be nearer to customers.
Outsourcing is almost always influenced by a mix of business factors. Many businesses outsource IT to major IT firms that offer better IT security and 24x7x365 monitoring that their own in-house staff may struggle to provide. Or they outsource their IT functions to a cloud service provider that offers a wide array of software and virtual infrastructure options at a lower per-person cost than could be delivered in-house. One long-standing axiom in business is to focus on your core competency, so instead of trying to do everything in-house, businesses outsource legal, accounting, HR or IT services to experts that do it better, cheaper or both.
Conclusion
Not all offshoring is outsourcing. Only some outsourcing is offshoring. However, the international outsourcing of work or offshore outsourcing is what makes the news because it causes many people to fear a permanent loss of jobs. Shifts in international business operations are offshoring, but it is rarely noticed unless combined with domestic layoffs that trigger the same anxieties.
