Outsourcing and offshoring are two terms that I am sure every businessman is aware of whether you outsource any function of your business or not. Most of the times, these two terms are interchanged in conversation or even confused by some to think they are one and the same. However, there are some fundamental differences between the two. In this blog post, we shall explore these differences and get a clear sense of what both these terms actually mean for a business.
In simple terms, outsourcing refers to the act of contracting a third party company to carry out certain functions of your business. Outsourcing can be done for the sake of reducing operating costs as outsourcing is more cost effective than hiring an in-house team. Another reason why companies outsource services is to avail expert or specialized skills that their own team does not possess.
Here are some benefits of outsourcing for businesses –
As stated above, outsourcing provides cost-effective services to businesses. When a company sets up a department in-house, apart from the salaries, they have to bear other expenses live electricity, internet, furniture, computer systems, employee benefits, paid leaves etc. Outsourcing saves the business these costs.
- Access to specialized skills
Instead of going through the time-consuming process of finding and training staff members with certain skill sets needed for the job, it is easier to outsource the functions to an Indian outsourcing company that already employs staff members with those skill sets, who are already well trained.
Outsourcing offers companies the flexibility to scale up or down according to their business requirements. If seasonal hiring has to be done, its better outsource this than conduct this in-house. This will save you the inconvenience of constant hiring and firing.
- Focus on Core Functions
No matter what your company does, it has many non-core functions like customer services, billing, hiring, training, accounts etc that need to be handled. Outsourcing these functions to a third party helps your company focus its resources on the core objectives.
Offshoring refers to a company getting their various services handled in a different country to make the most of the cost advantage. Offshoring is usually done by finding a country where the exchange rate gives your business a distinct monetary benefit. Companies based in western countries like the U.S or U.K offshore their business to countries like India, Philippines, and China etc.
Now, this is where we cannot confuse outsourcing with offshoring. A company can offshore their particular department but not outsource it at the same time. For example, companies based in the U.S can offshore their customer service to their Indian captive units. This way, they are not hiring any third party company and still getting cost reduction benefits.
Offshoring has the following benefits for businesses –
- Reduced Cost of Operations
Whether it is help desk service or manufacturing, when any service or function gets offshored, it is usually for the benefit of cost reduction. Cheap labor or workforce is a big driving force for western companies to offshore. Through offshoring, work can get done with just a fraction of the cost of doing it in your own country.
- Capitalizing on Skills of the Locals
Due to various reasons, there are certain geographical areas where the locals have developed skills in a particular industry or sector. For example, India has been for long considered the hub for offshoring help desk services or tech support services. The reason for this is that India produces well educated and tech-savvy workforce that is perfect for the tech support processes for some of the biggest technology companies in the west.
I hope that this blog post has clarified for you the basic differences between outsourcing and offshoring. It is important to remember that you do not have to outsource in order to offshore. There are several captive units of companies set up across different countries that can be used for offshoring. When work is contracted to a third party that is set up in a different country, then it can be called offshore outsourcing.