Offshoring and outsourcing can be one and the same thing at times and can be completely unrelated or disassociated, hence different. Offshoring, also spelled as off-shoring or off shoring, is essentially a type of outsourcing but in some cases wherein the operations are captive or owned, it doesn’t adhere to the concept or practice of outsourcing. Before we delve into the difference between offshoring and outsourcing, let us explore what they are.
Outsourcing: Explained
Outsourcing is an act of hiring a company, individual or both in myriad capacities to take care of a particular job that your business or you should have been doing. You may hire an accounting firm to do your books and offer financial advice, from taxes to evaluating business loans. You can hire an advertising or marketing firm to promote your company and help your entity become a brand. You may hire telemarketers or direct sales agencies to sell your products or services. You can outsource everything from your market and research to prototyping, manufacturing to sales and quality assurance to customer service among others.
All the services that you could have done as a company by hiring employees and setting up dedicated teams or departments can be outsourced to another firm. Outsourcing is not a new concept. Many feel that globalization and the outburst of the internet have made outsourcing a phenomenon. That is true for offshoring, not outsourcing. Outsourcing has been around for centuries.
Offshoring: Explained
Offshoring as a concept is the same as outsourcing with one difference. The company or individual chosen to get the work done is not based in the country. The company or individual may be based anywhere in the world. He or she could be a national of the country where the company offshoring the work is based but the services or products are delivered from another country. Think of the literal meaning of being offshore.
There can be a huge difference between offshoring and outsourcing if the former is a captive operation. Outsourcing implies that the company hiring someone doesn’t own that entity but is paying on a contractual basis to get a job done. Offshoring can be the same but overseas. Also, offshoring may not be a company hiring another entity to get a job done. The company can set up its own facility, registered business entity and start operating in a given country while delivering products or services to its original base or parent company in the country of origin.
Difference Between Offshoring and Outsourcing
There are plenty of similarities between offshoring and outsourcing. Both cost less. The concept of outsourcing and later offshoring developed over time, primarily due to two reasons. One, they can bring down the costs borne by a company. Two, outsourcing allows a company to hire specialists in a particular niche, something that the company may not be able to do itself. Even if a company were to develop an in-house marketing team or department, it would not be as good as the specialist marketers out there. In business, it is always better to have experts work on their fortes. Outsourcing and offshoring allow a company to focus on its core operations.
Beyond the primary difference between offshoring and outsourcing which pertains to where the operations are based, there are serious consequences on the bottom line of the organization contemplating offshoring or outsourcing. A company outsourcing to another firm in the country would not have the same cost advantage as the same company offshoring to another firm based in a country where the foreign exchange or currency conversion rate and minimum wages allow a much better pricing.
Imagine an American Express, Citibank, Visa or MasterCard, Sprint or Dish and even Apple running operations in countries like China, Brazil, Philippines or India. This would be offshoring, not necessarily outsourcing. The costs of operations in these countries would be exponentially lower than what it would cost to run the same operations in the United States, be it a data center, customer service center, market research or manufacturing.
It is no secret Apple has China based manufacturers and Citibank has analytical departments in Mumbai. Both could be outsourcing and offshoring if Apple or Citibank doesn’t own the entity doing the job. Citibank’s bases in Mumbai and other cities across India are effectively offshoring and not outsourcing because they have subsidiaries registered in the country that run these operations. They are captive centers or in-house operations. However, Citibank does outsource some of its operations, such as sales and collections to many firms, in the United States and across the world, hence indulging in offshoring and outsourcing.
For some companies, offshoring works wonders. Sprint, Nextel, Dish and even CitiFinancial acquired hundreds of thousands of customers using telemarketing services based in India. In such cases, offshoring and outsourcing turn out as the same thing. If those telemarketing services were offered by companies based in the United States, as had been in the past, then it would be only outsourcing and not offshoring.
