When it comes to the world of business today, one of the words that you can hear above all others is ‘outsourcing.’ The other one is ‘offshoring.’ The similarity in word and concept here is what makes them so easily confused for a lot of people. However, you needn’t worry, for this is exactly what we’re going to do now. Explain the differences in outsourcing and offshoring so that you don’t mistake them ever again.
All About Outsourcing
The concept of outsourcing means that one company is actively trying to obtain products or services from a third party one. They typically seek to outsource services such as accounting, manufacturing, copywriting, reporting, and so on. Many people believe that outsourcing refers to hiring a cheaper service provider from another country. However, you should know that it’s not always the case.
It is true that the best part of all outsourcing happens in other countries than your own. However, that just happens because it’s a lot cheaper than in your own country. However, outsourcing can be done absolutely anywhere, even if the outsourcing company is down the road from you.
Here are the main reasons why a company chooses to outsource.
- Because of the cost. There are a lot of services which become a lot cheaper when outsourced while preserving the same quality. Evidently, it will never be as good as something you could manage to do internally. However, since the cost is a lot lower in both money and time, it is completely worth it to outsource. The end result will always be considered acceptable by all levels of management, seeing as they are the ones who chose this solution.
Here is one thing to keep in mind – the cost savings can be quite outstanding, especially if you’re in the business or IT departments.
- Specialization. This concept sheds new light on the idea of quality in outsourcing. If you need some work done in a highly specialized field, then you might be better off outsourcing it. In this way, you can gain access to specialists who will render brilliant results, far better than anything you could have come up with in-house.
For example, let’s say that you need to prepare a pitch and, with it, a presentation. Instead of trying to wing it yourself or having someone from your office do it, why not hire someone who knows how to use modern presentation software and will do a great job?
- The idea of flexibility. Many companies out there love the notion of outsourcing simply because it allows them to pay for exactly what they need. In other words, you don’t need to hire a whole new person who may or may not prove to be good at what you need. You don’t even need to train them beforehand. Instead, you give the job to someone who has already been doing this for quite a while. Therefore, you will only pay for the final product or the few hours of work they have put in.
For example, let’s say that you are in the manufacturing business and you need to make some parts. In this case, you don’t have to set up a whole new manufacturing process just for that. Instead, you hire another factory who will make you the parts in one or two days. You will only need to pay for that.
All About Offshoring
The idea of offshoring is quite similar to the outsourcing one. In fact, this is the main reason most people get the two mixed up. The biggest difference between the two is the fact that offshoring really does mean contracting service from a third party company which is located in another country than yourself.
Another difference is the fact that corporations don’t just offshore services, but different segments of their business as well. You provide your products and services in the same country, but you produce them elsewhere, for different reasons. A good example here, for a better understanding, is an American car manufacturer. They can open a factory for parts in, let’s say, Thailand. The business and everything else is still happening within the same company. However, these precise parts are now being offshored to Thailand.
Here are the main reasons why companies choose to offshore rather than to produce in-house or in their own country.
- The prices. Evidently, just like with outsourcing, it’s a lot cheaper to offshore than to keep a traditional production line. Offshoring and outsourcing will both allow you to produce the same goods and offer the same services to your customers but at a much lower cost for yourself. In other words, you can get a huge discount so to say, of the manufacturing costs.
Seeing as the workforce is a lot cheaper in smaller countries, offshoring parts or services over there will save you a lot of money.
- Tariffs and taxes. A paramount reason why companies choose to offshore is the following one. There is a huge difference in taxes than in their native countries. Therefore, they want to take advantage of this difference and, again, lower their costs. In the same way, smaller countries also have tariff relieves which you can benefit from.
Apart from that, you can also find a whole series of loopholes when it comes to tariff and tax regimes in particular countries. They generate many savings and allow you to import products at relatively low prices.
- This is a very important concept for both outsourcing and offshoring, which makes the difference between the two. The reason why a lot of companies go for offshoring as opposed to the other idea is this one. They do not wish to relinquish the control on any part of their business or their production process to a third party.
Some aspects of the production are extremely sensitive or even dependent on time. That being said, if one single person fails to deliver a high-quality product on time, the whole process might suffer. Evidently, this means a lot of money lost as well as failing to satisfy the customers.
Apart from that, it can also mean trouble for the company who is doing the outsourcing itself. If it fails to outsource in a proper manner, it might get a bad reputation.
Should this be the situation, the company who needs services or products may very well choose to go for offshoring rather than outsourcing. In this case, they will keep control of their entire process.
What Is the Difference Between Outsourcing and Offshoring?
If you want to decide between outsourcing and offshoring, there are a lot of aspects you should take into consideration. Apart from that, you should know that this decision will vary a lot depending on the type of company you have. Evidently, the main benefit of both outsourcing and offshoring is the fact that they will save you a lot of money.
Both on the long term and short term, choosing third parties to do some of the work for you might mean lower production costs as well as tax and tariff cutbacks. However, don’t base your decision solely on this factor. There have been many companies over the years who have regretted the decision. The reason is that both outsourcing and offshoring may have hidden costs which will ultimately reduce the benefits.
Seeing things in this light will make you understand that, when trying to choose between outsourcing and offshoring, it’s always best to refer to a specialist. An expert will be able to save you a lot of time and keep you from making one, very costly mistake.
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