Offshoring vs outsourcing, what’s the difference? Do you need to expand your business operations but don’t know which can serve your needs?
In this post, we are going to define these terms, discuss their differences, and go through the pros and cons. By the end, we hope that you will be encouraged by this knowledge and able to make an educated decision.
What is Outsourcing?
Outsourcing refers to the process of hiring an entity outside of your own business to perform a business task or operation. This entity can be a separate company within your city, within the country, near the country, or even internationally. What is being outsourced can include core or non-core processes, front office or back office, and long-term or short-term operations. Outsourcing core business operations is referred to as BPO (business process outsourcing). Hiring remote workers to perform tasks within your company can also be called outsourcing.
What is Offshoring?
If outsourcing is handing off a process to a different company, offshoring is changing the country in which a process is performed. Offshoring can be when a parent company moves a process overseas for a subsidiary to perform. In some instances, a company can move personnel out of the main company and station them in the offshore location.
Knowing the difference between offshoring vs outsourcing can get a little tricky. That’s why a little later on in this article we will give you points that distinguish the two.
What is Offshore Outsourcing?
What do we get when we combine both definitions of outsourcing vs offshoring? We get a business that hires individuals, teams, or entire companies from overseas to perform certain business operations. This is done through offshore product manufacturing or service providers. These entities operate similarly to outsourced third-party companies. However, they typically perform much more comprehensive roles and their scope of work is generally much larger.
Differences Between Outsourcing vs. Offshoring
When you outsource, you hire freelancers or independent contractors to perform a task or process for a specified number of years. You then renew the contract as needed. These entities don’t receive worker benefits from you.
When you offshore to a subsidiary or a smaller part of the company that you own, you are still working with your hires. These workers receive pay plus worker benefits, such as healthcare, vacation days, transport, etc.
With outsourcing, you give an external company the details and trust in its processes and procedures for the output. You can negotiate the number of times you receive updates, but your control over the quality is limited.
With offshoring, you have more control because you are maintaining the same SOPs. The offshore branch can then perform the tasks the exact way you specify them to do. You can give your input at any time whereas that may not be possible always with outsourcing.
Now let’s compare outsourcing vs offshoring pros and cons.
Pros and Cons of Outsourcing
As stated in our outsourcing pros and cons article, there are three key pros to outsourcing.
With outsourcing, you can save on employment costs. You don’t have to pay employment tax or benefits. Not only that, but labor can be cheaper in other countries because of the lower cost of living. You can save by hiring only on a per-project or part-time basis. This way, you are only paying for the hours they are working.
Larger Talent Pool
Your choices can be limited in your home country. There are a lot of skilled individuals in popular outsourcing countries like India, The Philippines, and China. A lot of the time you can get the same and even better quality for a generally lower rate.
Able to Be Completely Remote
You can outsource practically anything. Commonly outsourced tasks include marketing, customer service, SEO, and content writing. You could technically outsource any business process and be a completely remote business.
Other pros include:
You can expand your business temporarily during high-volume sales periods and shrink it again during the rest of the year. You can hire per project, per hour, part-time, or full-time. In comparing offshoring vs outsourcing, we’d say outsourcing gives you more flexibility.
Free Up Staff
Outsourcing allows you to focus on the core aspects of your business while handing over the busy work to a remote team.
Though outsourcing has quite a few pros, it also has a few cons.
Remote Communication Issues
Managing a virtual team can be difficult, especially in the area of communication. You might struggle to get used to online meetings and scheduling them can be even harder because of our next con.
While time zones can be beneficial, they can also be challenging. If you need emergency work done but your remote worker is asleep, it can put a pause on the process.
Sometimes it’s hard to communicate because of cultural differences. You need to train and onboard remote hires to get them used to your culture and practices.
Pros and Cons of Offshoring
A lot of the outsourcing vs offshoring pros and cons are similar.
With offshoring, you also benefit from lower labor costs. While it may not be as low as outsourcing, salaries for workers in other countries can be comparatively lower. Benefits packages and such are also much cheaper. Lower labor costs can mean lower production costs. Saving money is making money.
Wide Talent Pool
Same with outsourcing, offshoring also gives you access to more individuals with a lot of quality abilities to offer your company.
Some countries have certain tax benefits and incentives to attract foreign companies. Popular offshoring locations also have less strict regulations, making it enticing to conduct business there. It’s a win-win for both the countries and companies.
One of the offshoring vs outsourcing examples of the pros of time zones is how much more work you can do. Think about it, you can work on a project during your country’s work hours and then hand it off to the subsidiary to work on even after you clock out.
What about the cons of offshoring?
Communication and Cultural Barriers
Even if you hire from English-speaking countries, expressions, cultures, and customs can be different. Proficiency and usage of English in certain situations may also be different. Misunderstandings can occur if you are not aware of these.
Sometimes, even when using the same ingredients, a product can taste different when manufactured in different countries and factories. Guidelines and SOPs help, but the same amount of quality control can be challenging to maintain.
Potential for Layoffs
You can use offshoring to reduce the load of work in the main company. Sometimes, though, companies do it because they can’t afford in-house workers. Lower labor costs can be tempting, and unfortunately, this makes some employers want to switch over at the expense of their local team and local economy.
The cons of time zones also apply here. It may be hard to manage workflows when dealing with two sets of working hours.
Tips for choosing between offshoring and outsourcing
Identify the time required for the service
Whatever avenue you go, you should consider your timelines.
- How long it will take reasonably take to accomplish the task
- Milestones and deadlines
- Time set aside for meetings, updates, and unexpected hiccups
Determine the amount of preferred control
In terms of control when talking about outsourcing vs offshoring, the typical order of most to least control is offshoring, offshore outsourcing, and outsourcing.
It is worth noting that there are some outsourcing companies out there that do give you as much control as possible. However, most companies cannot give that guarantee if they are working with multiple companies at once. Having to check in every day or every other day would take time out of working on other projects. You can give them the rundown, but they typically work independently using internal processes and procedures.
Offshoring allows you to be more hands-on but with a remote team. You have more control and information on the process itself, meaning you have more control of the product’s quality.
Offshore outsourcing services kind of work like a sanctioned third-party integration. They can serve you more comprehensively than your typical outsourced freelancer or team. They still have their processes in place, but it can be much easier to communicate with them.
Every company considering outsourcing vs offshoring needs to ask themselves: “How much trust can I put in this third-party entity?”
Always outsource from entities who have experience working with other companies. That way you can check their work history, and reviews, and sometimes see the quality of the work for yourself.
Do these companies have a good reputation? Do they have privacy guarantees in place?
Offshoring to a subsidiary may be the most data-secure method of handing off a process. You can keep product and service information close.
Decide how quickly you need the service
Every project has a deadline. Business is always moving and the less time you have to complete a task, the better. You need to consider:
“Are you able to deliver on your project on schedule?”
“Can a subsidiary, offshore service provider, or outsourced team do it better?”
“Which one can deliver it quicker without compromising on quality?”
With offshoring, you need to consider the time it takes to transfer the process. You need to contact your subsidiary, inform them of the process they will be handling, and equip them to accomplish it. This takes time. Quality output may not be immediately evident.
You can hand the task over to a team or service provider with the personnel, experience, and equipment to perform the task much faster. Whether it is outsourced or offshore outsourced depends on the depth of the assignment.
Frequently Asked Questions
Does outsourcing or offshoring ever work?
Absolutely, Outsource School was built with the help of outsourced talent. Whether you outsource or offshore, it’s an excellent way to save money and scale your business.
What is an example of offshore outsourcing?
When talking about offshoring vs outsourcing examples, customer service and manufacturing come to mind. As long as you do not operate a physical location, customer service can be purely remote. You can hire a CS offshore service provider. A lot of companies outsource to offshore white-label product manufacturers to cut down on costs and scale their production.
What is nearshoring, and what are the pros and cons?
Nearshoring is hiring from countries near your own. Universal Cargo has a great post on the advantages and disadvantages of this method.
What Is Outsource School?
Outsource School helps you to unlock the potential of virtual assistants and accelerate your business growth.
Since being founded in 2020, Outsource School has helped 1,000+ business owners hire 2,000+ virtual assistants for their companies.
Free resources you might like:
- Outsource School Case Study: How We Scaled to 45+ VAs and 8 Figures in Revenue
- Free VA Calculator | See How Many VAs You Can Afford
- Free Training on 5 Keys to Working With VAs
- Learn Outsourcing 101 | Guides, Downloads, and Checklists
Near, far, wherever you are, you can believe that a remote team can benefit your company. It’s not always easy, but if you want to cut down costs or access more talent, you can’t go wrong with either option.
Offshoring vs outsourcing comes down to:
- The depth of the work
- Where you want to cut costs
- If you prefer in-house workers or contractual hires