The practices of outsourcing and offshoring of business processes and tasks have gained momentum in the last few decades. Wide adoption of these practices has occurred due to a large number of benefits that businesses derive from them.

Although outsourcing and offshoring are widely used business models, the difference between offshoring and outsourcing is one of the most misunderstood concepts not only for the general public, but even for the business world. These two terms are distinct and should not be used interchangeably.

The differences between outsourcing and offshoring are discussed under the following headings:

Definition

The term outsourcing can be defined as a business practice in which a business contracts out certain business processes, tasks or services to a third-party provider. Offshoring involves shifting of business processes, tasks or services by a company to its center in a different country.

For example, hiring of a software development outsourcing services provider by a company for creating its software products is outsourcing, whereas opening of a software development center by this company in a different country to provide software products is an example of offshoring. Another example of offshoring is Apple opening a customer service center in a country such as India to serve its clients in the U.S.

Outsourcing can be done to an outsourcing service provider located in the same country or a different country. When outsourcing service provider is located in a different country, then this type of outsourcing is known as offshore outsourcing.

Main Advantages

Outsourcing offers a competitive edge to businesses because of the numerous benefits that it provides to them. It offers the following advantages to businesses -

Reduced costs: Outsourcing to a third-party provider usually provides large cost benefits to businesses. For example, for a US company, getting website developed and maintained in-house is much costlier than outsourcing web development to an IT outsourcing service provider in India.

Better focus on core activities: Outsourcing non-core business functions such as information technology, human resources, accounting, payroll, etc. helps a company in utilizing its time and resources for its core business.

Expertise: Outsourcing a business task, for example, software product development, to a software development outsourcing company that is an expert in development results in a high-quality product. For example, if a company requires a mobile app for its business, then outsourcing mobile app development to an expert outsourcing company results in the on-time delivery of a robust, bug-free mobile app.

Scalability: According to its requirements, a business can increase the size of the outsourced team or decrease it. For example, if a company has hired a team of five remote developers for its current project, but for some reasons, it requires more developers, then the outsourcing service provider can easily scale up the team. The company does not have to spend its time and resources in hiring new talent.

Offshoring involves shifting of some business operations, product development, services or other tasks by a company to its center in a different country. Offshoring provides the following main benefits -

Cost savings: Businesses usually offshore their tasks to those countries where costs of getting those tasks done is comparatively much cheaper than their own countries. Business activities such as manufacturing and services are often offshored to countries where wages and costs of raw materials, transportation and utilities are quite less. The government policies of offshore destinations also favor multinational companies in setting up and running their offshore centers in a cost-effective way.

Skilled workforce: Another benefit that companies draw from offshoring is getting their work done by professionals that are expert in a particular field. For example, India is well-acknowledged for its expert IT professionals, and for this reason, many software companies have offshored their software development centers to India. Thus, offshoring allows companies to choose a particular country for a specific business task.

A project can be outsourced to a service provider in the same country or a different country. Offshoring involves shifting business functions, operations or tasks to a different country.

When a company outsources its tasks, then the outsourced tasks are performed by the employees of the outsourcing services provider, whereas in offshoring, offshored tasks are performed by the employees of the company itself.

As offshoring provides jobs to employees of a different country rather than employees of a business’ own country, it has been criticized for stealing jobs. Loss of jobs is not considered to be associated with outsourcing, when projects are outsourced to a service provider in the same country.

As offshoring involves shifting business functions to another country, the risk of project failure is apt to be involved. The main risk factors that can lead to project failure are difficulty in communication, inadequate and low-quality IT infrastructure, changes in the government’s policies such as IT policy, economic changes, civil or political unrest, etc.

For outsourcing, the above-mentioned factors do not come into play when outsourcing services provider belongs to the same country. Some of the risks associated with outsourcing include difference in the interests of client and outsourcing service provider, high reliance on external service provider, inexperienced staff of service provider, use of outdated technologies by service provider, etc.

From the above discussion, it is quite clear that outsourcing and offshoring are not the same. Each implies a different way to handle business functions, tasks or services, and each has its own set of benefits and risks.

Originally Published On 9th April 2019; Updated On 2nd September 2019