This article was updated on 26 March 2021. Software development outsourcing has become a commonplace practice of hundreds of companies, from small family firms to huge international corporations. This approach to software development reflects the growing globalization of the workplace…
Difference Between Outsourcing and Offshoring: Full Guide
In today’s remote settings, a growing number of businesses delegate some of their processes to third-party vendors. Whether it’s software or payroll processing, a business is more likely to outsource functions that are not core competencies. This way, organizations won’t have to spend resources on developing them internally.
Today, outsourcing is an essential component in the growth strategy of any organization. Experts expect a CAGR of 8.5% from 2021–2028. By 2028, the market value of this engagement model is expected to hit $435.89 billion.
But despite its popularity, business owners still struggle to define this business practice and tell it apart from other engagement models. Thus, outsourcing and offshoring are often used as synonyms.
So what is the difference between outsourcing and offshoring? Today, we’ll have an in-depth look at these two so you can choose wisely for your next project.
What Is Outsourcing?
First of all, outsourcing and offshoring definition is different. Outsourcing is a popular business practice that includes transferring some non-critical business functions or parts of them to an external vendor.
Companies usually turn to outsource firms to benefit from narrow domain skills, cost efficiencies, and production flexibility. Outsourcing is not locally limited and allows both domestic and foreign contracting.
Pros of Outsourcing
The difference between offshoring and outsourcing lies in the advantages that both provide. The main task of outsourcing is to hand over non-core and highly specialized business activities. The impetus behind this business practice can boil down to economic gains, wider talent pools, and higher flexibility.
Pros of Outsourcing
Hiring an outsourcing vendor allows the firm to significantly reduce costs. After all, the company will not have to maintain an additional structure and build up more workers. Transaction costs can also decrease, while some fixed costs can be transformed into variables. Outsourcing vendors also take over hiring expenses, payroll, regulatory filing, hardware costs, and others.
Access to Specialized Talent
According to a ManpowerGroup survey, talent shortages in the U.S. have more than tripled in the last ten years, while an eye-popping 69% of companies worldwide report talent shortages. Therefore, taking their development abroad helps companies expand their talent pools and fill gaps.
Besides, outsourcing opens up access to higher technology. The quality of service in case of outsourcing also increases, as a third-party company undertakes quality monitoring.
Outsourcing companies tend to have a proven track record of completed projects and industry-acknowledged certifications. That is why other businesses use their expertise to get non-core tasks completed while focusing on critical processes. Also, third-party expertise facilitates the introduction of new technological operations, thus boosting overall business efficiency.
Cons of Outsourcing
The outsourcing and offshoring meaning is often associated with unrivaled benefits. However, farming out your tech development may also come with some pitfalls. Anyway, most mishaps can be averted provided you hire the right outsourcing provider.
quite difficult to monitor the stages of project implementation and maintain transparency sufficient for complete synergy. To successfully manage a remote project, we recommend preparing the specifications in-house and signing a contract that conveys the project agreement. Also, most vendors assign a personal Project manager so you can always keep tabs on your project.
Communication is key to setting up your outsourced venture for success. Communication gaps lead to misunderstanding, subpar products, bugs, and other shortcomings. Therefore, you should opt for a country that has at least a few overlapping working hours and a vendor with a calibrated communication regimen.
Now let’s get closer to the difference of outsourcing and offshoring.
What Is Offshoring?
Offshoring is the phenomenon used to describe moving a business or an operational process from one country to another. Typically, relocation occurs to tap into operational cost savings, to obtain a more lenient tax situation or both. In some cases, offshoring efforts do not involve moving the entire business, but strategically placing certain departments or functions in an international location while maintaining a presence in the home country.
Strictly speaking, offshoring is one of the outsourcing types that refers to moving production to another country. In this case, businesses delegate a complete role to a dedicated team. It is usually a long-term solution ideal for added scalability.
Advantages of Offshoring
Offshoring has established itself as one of the winning business strategies, and many successful companies have adopted it as a resilient practice. Even the best business strategies, however, have both benefits and downsides. Let’s dwell on offshoring to discover if it’s good for you.
Reduced Development Costs
Bringing your business offshore augurs well for financial gains due to cheaper labor expenses. This is especially relevant in tech industries like software development, where lowering labor expenses and rates can bring down operational costs while also increasing revenue.
In addition, various types of compensation and employee benefits are significantly lower in other countries. Employers can save money on taxes, hiring expenses, fringe benefits, rates, and others.
Less Stringent Regulations
Favorable government and regulatory policies also contribute to the popularity of offshoring. Some offshoring destinations allow tax breaks and subsidies to foreign companies that bring investments. Regulatory benefits also promote offshoring and make it frictionless.
Offshoring is now climbing steadily up the value chain thanks to business-friendly tax policies. As a rule, offshoring locations offer a more favorable tax regimen to foreign organizations in return for investments and local hiring. Thus, businesses can reduce their tax costs and get access to the unique combination of quality and affordability.
Disadvantages of Offshoring
Setting up an offshore presence augurs well for financial gains, a favorable business environment, and reduced operational costs. However, it can sometimes incur additional stumbling blocks when choosing an inexperienced technical partner.
Cultural and Social Differences
One of the most common reasons why offshore outsourcing transactions fail or run into issues is cultural differences. Other primary cultural characteristics that frequently generate conflicts while managing an offshore outsourcing relationship include different approaches to completing tasks, different attitudes toward disputes, and various decision-making processes. You can avoid it by choosing a vendor with a similar business approach and international practices and methodologies.
This is where the difference between outsourcing and offshoring blurs. Both business practices can limit your vision due to remote practices and a lack of transparency. Quality checks, in particular, can pose significant problems and impact your deliverables. To avoid it, you can assign an in-house project manager or additional tester to monitor the final solution for compliance.
What’s to Choose for My Project Offshoring vs Outsourcing
Both outsourcing and offshoring aren’t new concepts. The idea of hiring a company to perform services outside of your business has existed since the dawn of time. The only difference is that technology has made it possible to hire without geographical limitations and at much lower costs.
Many companies are hesitant to outsource, fearing that it will negatively affect their business. However, outsourcing can improve your business in many ways and save you time and money.
Outsourcing and offshoring definition is similar, yet has subtle distinctions. The main offshoring vs outsourcing difference lies in the tasks that get delegated. Outsourcing is when a corporation hires a vendor to handle a certain task. When a company sends in-house jobs to another location, this is known as offshoring. Both can help a company save money, but only offshore entails relocating work outside of the country.
Also, offshoring is a better option for long-term collaboration, while outsourcing targets short-term projects and tasks. Businesses tend to go offshore to overcome certain local regulations and reach new markets. Whatever your choice, make sure you pay due diligence to pick the right partner and articulate your business requirements beforehand.