Understanding Outsourcing vs. Offshoring and How to Leverage Both Strategies for Business Success

Ever feel like you’re juggling too many tasks in your business? Wouldn’t it be great to have another hand or two to catch a few of those “balls” before they hit the ground?

Turning to outsourcing and/or offshoring could do just that, making your life easier and giving your business a competitive advantage in the process.

So what’s the difference between the two strategies and how would implementing them impact your business?

In this post, we’ll answer both of these questions and lay out the potential challenges and benefits tied to each approach. We’ll also provide a peek into the future of outsourcing and offshoring and talk about trends coming down the pipeline.

Let’s Start with Simple Definitions

The basic premise behind outsourcing and offshoring is the same – to assist business operations with help from the outside. Whether you need low-cost labor, specialized expertise, extra hands during times of peak demand or simply to free up your team to focus on other initiatives, both outsourcing and offshoring can be effective strategies for boosting productivity at your business.

Outsourcing involves delegating certain tasks or functions to external agencies or third parties that specialize in these tasks rather than handling them in-house. This approach assists firms in streamlining their operations, improving productivity, adding a skillset to their team, and potentially decreasing costs. 

Investopedia explains outsourcing as a strategy whereby an organization contracts out major functions to specialized service providers who ultimately become valued business partners. In certain situations, a company may transfer some of its personnel to the outsourcing provider.

Offshoring, on the other hand, is relocating some or all business operations to another country for any number of reasons, including:

• Cost reduction
• Accessing skilled labor unavailable locally
• Tapping into the global talent pool
• Extending work days due to differing time zones
• Offloading simpler business tasks to an overseas branch

And these days, it’s not just manufacturing plants that are moving operations abroad, from customer support to digital services, companies in all industries are now looking to offshoring as a legitimate option for adding talent to their team.

To be clear, offshoring is no longer just about saving money. Often it’s just as much about broadening your options.

The Business Function of Outsourcing

Businesses turn to outsourcing as a strategic tool that makes it easier to focus internal resources on core competencies. By offloading time-consuming busy work or duties that fall outside of the business’s sphere of expertise, employees are able to achieve more by sticking to what they do best.

Research by IBM has shown that companies can save up to 60% in operational costs through outsourcing – but the cost savings is only the beginning. Outsourcing presents unique staffing opportunities:

• Add staff during the busy season
• Bring on a niche skill set part-time
• Backfill missing employees when talent is sick, on vacation, or quits unexpectedly

Yes, your business can absolutely leverage outsourcing to cut costs – but the strategy can also be used effectively without cutting costs at all, with the aim being a boost in your product quality or a catalyst to business growth.

Offshoring to Create a Competitive Advantage

Relocating certain operations or services overseas can provide your business a competitive advantage that may not otherwise be available.

Imagine the possibilities when you have a workforce toiling around the clock? From 24/ 7 customer service to take care of your clients to computer whizzes resolving coding errors while your in-house engineers are asleep, participating in the global market gives your business the power to scale.

Navigating Potential Drawbacks

For all the potential for positive outcomes, both outsourcing and offshoring present unique obstacles to overcome:

• Outsourcing can lead to an over-reliance on external labor that can lead to operational disturbances if they don’t meet expectations.
• Outsourcing can wind up being more expensive over the long-haul compared to training staff in-house as your business grows.
• Language barriers and cultural differences can make it difficult to train overseas staff or integrate them into your company’s existing workflow.
• Offshore teams might operate under different labor laws or tax structures, leading to potentially higher compliance requirements compared with domestic outsourcing partners.

Factors to Consider When Choosing Outsourcing vs. Offshoring

Choosing between outsourcing or offshoring as a means of augmenting your labor pool starts with defining your business objectives and evaluating your specific needs.

Are you looking to eliminate specific tasks from your internal processes? Cut overhead expenses by capitalizing on geographic arbitrage? Expand your operational hours? Bring on specialized knowledge or expertise? Free up skilled employees by relieving them of duties that could easily be accomplished by someone with less experience?

You must first identify what you are looking to achieve, and then analyze which strategy is the right fit to accomplish those needs.

Future Trends in Outsourcing and Offshoring

Technological advancements are fueling a shift in the way companies outsource and offshore, with automation leading the charge.

The rise of Robotic Process Automation (RPA) is expected to redefine traditional outsourcing models. RPA enables companies to automate repetitive tasks that were previously outsourced, enhancing efficiency while reducing costs. Forbes discusses this trend extensively, highlighting how it allows businesses to refocus their energies on core competencies.

Another significant trend is the concept of near-shoring, which moves operations closer to the company’s customer base rather than focusing on locations with low labor costs. Near-shoring leverages cost savings in shipping and delivery while protecting firms from the volatility of rising labor costs in countries typically targeted for offshoring.

Digital technologies are also playing a role as cloud computing, artificial intelligence (AI) and machine learning  enable new levels of scalability, flexibility and agility to transform how services are delivered. The digital transformation makes it possible for offshore teams to deliver services instantaneously to local clients, as if they were located next door.

Game Changers in Today’s Competitive Business Landscape

Outsourcing and offshoring are not simply corporate catchphrases. They are legitimate business strategies that can help you do more with the same resources, in a number of different ways.

 Whether it’s cutting costs, tapping into new skills sets or freeing up your top talent for exciting growth initiatives, keeping an open mind about implementing outsourcing or offshoring could lead to a significant impact on your business success.