Outsourcing vs. Offshoring: Which is Right for Your Business?

Offshoring and outsourcing are buzzwords in the business industry, and these two are frequently used interchangeably even though they are different from each other. 

But what do these terms truly mean, and how are they different? Moreover, which is a better choice for your company?

This article will help you distinguish between offshoring and outsourcing and give you an idea of their suitability for your company.

What is outsourcing?

Outsourcing is when an organization contracts out work to a third party to perform services or create goods previously performed by in-house employees and staff. Job functions that are usually outsourced are non-core functions like graphic design, maintenance, and legal services. 

Companies usually contract outsourced work because of the following reasons:

  • Low Overhead – Since outsourced workers are technically not your employees, you don’t have to invest in additional resources for their equipment, benefits, and insurance. This greatly reduces your overhead, which increases cost-efficiency.
  • Specialization – Some business processes or products are highly specialized, and outsourcing to a third party allows companies to obtain higher-quality results. For example, your marketers are better off focusing on core marketing activities while augmenting their team with outsourced graphic designers to help them with campaigns.
  • Flexibility – When businesses outsource, they only pay for what they require. You can hire a team with the right number of people or sign them up on a per-project basis depending on your company’s exact needs.

What is offshoring?

Offshoring is the practice of relocating some of a company’s processes or services to a lower-cost location, usually to a different country to take advantage of cost savings. Job functions that are usually offshored are customer service, manufacturing, and sales.

Companies usually engage in offshore staff solutions for the following reasons:

  • Lower Costs – Offshoring allows businesses to pay less for labor-intensive processes, particularly those related to production. This is because some countries, like the Philippines, have significantly lower wage rates. Some countries also have laxer tax rules and regulations, which can reduce the overall cost of manufacturing a product.
  • Control – Rather than having local suppliers control a portion of their production, companies prefer to outsource full control and responsibility for their entire production process.

How are outsourcing and offshoring different? 

  • Cost

The costs are more flexible with outsourcing employees, as they can be hired on a project basis. On the other hand, offshoring requires more investment in training, equipment, and payroll expenses.

  • Business objectives

Before setting out to recruit offshore or outsourced talent, you should be clear on what your business wants to achieve. Are you looking to fulfill a quick task like designing a batch of social media posts? Then outsourcing is the easy way to handle it. However, if you plan to significantly augment your workforce, offshoring makes better sense.

  • Location

Outsourcing can be done either in the same country or a different country, but offshoring is typically handled by tapping companies located overseas to work for you.

  • Degree of Control

You’ll have a higher degree of control with offshore employees, as they are under your company’s HR policy and use your systems, equipment, and procedures to accomplish their work. On the other hand, outsourced workers are not completely under your supervision and use their own equipment and procedures.

  • Work Functions

Specialized non-core functions like graphic design, search engine marketing, and administrative work are typically outsourced, while core functions like accounting, manufacturing, and sales are typically offshored.

  • Time Frame

Outsourcing is great as a quick solution for quick projects, while offshoring is more of a long-term solution ideal for scalability.

How to Know Which is Right for Your Business

In this highly competitive business environment, the demand for outsourcing and offshoring services has skyrocketed. 

So, which of the two suits your business?

The answer is that it depends on your company goals and needs. That is why you should consider several factors before deciding whether to outsource or offshore.

  • Consider your cost. Although both outsourcing and offshoring offset labor costs, starting the process may be costly for offshore projects. You need to be wise with your strategy to benefit your company in the long run.
  • Determine your timeframe.  Are you looking to augment your workforce for a short-term task, or are you seeing it as more of a long-term project? Being clear with your plan can help you decide which is more suitable for your company.
  • Assess control and management limitations.  Are your management teams ready to take in outsourced or offshore workers? Moreover, are the right systems in place to ramp up and integrate your new hires immediately? Be ready to invest in time tracking platforms, communication channels, and project monitoring tools to ensure the success of your outsourcing or offshoring project.
  • Consider confidentiality. Since offshore employees follow your company’s procedures, they are better equipped to protect your internal data and trade secrets. Meanwhile, outsourced employees should be informed on a need-to-know basis, as they are technically third-party actors from outside of your company.
  • Look into scalability. While setting up an offshore company is much more expensive than outsourcing, it can be easily scaled as your business grows since the right systems and structures are already in place. That is not the case with outsourcing, as its project-based employment lacks continuity that can hinder you from scaling with long-term projects.

Wrapping Up

Understanding the key differences, functions, and benefits of these two business methods can empower you to choose between outsourcing and offshoring. Once you’ve identified your needs and goals, partner with a reputable recruitment firm that can help find talented people for you. If you require assistance in finding and training remote and offshore employees, Manila Recruitment provides professional headhunting services for both international and local clients. Contact us to learn more.

Lawrence Barrett