Outsourcing and Offshoring, Defined and Explained

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There is a fair amount of confusion out there regarding offshoring vs outsourcing and what they really are. They are two distinct practices but sometimes overlap. Read on to find out more about these two practices and how they can provide numerous benefits to your business.

This post’s purpose is to inform readers of the key benefits, risks and differences regarding offshoring vs outsourcing. After having read this article, these two terms will have been clearly defined, including detailing where exactly they intersect and diverge in today’s increasingly competitive, specialized and global economic landscape.

Outsourcing refers to any business that sources out to a third-party service or product vendor for work that is too specialized, expensive, difficult or distracting to a business. Outsourcing can help your company reduce costs, improve inefficiencies and allow you to avoid distractions and continue to focus on your core business and on streamlining your operation. Outsourcing gives many benefits to small businesses as well as big corporations.

A good example of outsourcing is when a business needs a web application to support their core business. This project could be sourced out to a third-party provider instead of hiring a whole team of app developers for a very limited need – a single well-made web app. In this example, one can see the three main advantages of outsourcing, namely, the ability to take advantage of specialized skills, maintain labor flexibility and most significantly to lessen costs and become more efficient. Hiring telecommunications consultants is an example of outsourcing as well, as their specialized skills not found in your employees’ skill sets can really improve how you run your business.

Now for a look at offshoring. Offshoring simply means having work done in another country. This practice only really took off in the 1990s due to improvements in shipping logistics and telecommunications technology. These two realities led many companies to realize the benefits of offshoring – such as various cost savings and having access to a vast and skilled global labor pool – to meet specific business needs and/or gain an edge in the marketplace.

Also widely practiced is offshore outsourcing. This combination of the two practices means a company outsources work but to a third-party, foreign-based vendor or service provider. The pluses from offshore outsourcing range from leveraging better economies of scale and scalable, large and skilled labor pools. Substantially improved cost efficiencies are yet again the foremost benefit here.

An increasingly popular practice is captive offshoring, where a multinational corporation decides to relocate – or offshore – some of their operations to foreign countries to gain a competitive edge, for instance via lower labor costs relating to manufacturing needs.

Though these practices, especially offshoring, are understandably politically sensitive – wrapped up as they are in weighted issues relating to accelerating globalization of trade and commerce and how this bears on unemployment – economists tend to agree that the efficiency and productivity gains that are seen with these practices allow companies to pass on savings to consumers, pay shareholders and ultimately expand their operations.

The primary drawback of offshoring is the many issues, such as misaligned goals and priorities and failed projects, stemming from hang-ups in effective communication that oftentimes involve language barriers. Other problems and challenges that can arise here are political and social instability and less developed infrastructure in the overseas or cross-border locations.

There are risks to outsourcing as well. When a business and vendor fail to successfully see eye-to-eye upon long-term goals and interests, or when one party is not sufficiently knowledgeable in the needs of the other, outsourcing can become problematic.

When it comes to offshore outsourcing, the combined benefits also come with the combined flaws, and in some cases these drawbacks can become magnified.

Continual improvement, monitoring and constant measuring of key metrics can help to alleviate any problems or head-off potential ones in your business’ outsourcing and/or offshoring initiatives. Two process maturity models, CMMi and Six-sigma, deserve mention here for their great potential usefulness in smoothing out kinks that commonly occur in attempts to take advantage of offshoring, outsourcing or offshore outsourcing.

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