Offshoring vs Outsourcing: What is the difference?

Offshoring vs Outsourcing: What is the difference?

The two most trending terms in the IT industry these days are Offshoring and Outsourcing. These are the methodologies to carry out the software development and other key IT operations with the help of teams or individuals working elsewhere than onsite. However, both these processes are similar, but they are not the same. There are some key differences between Offshore Product Development and Outsourcing which we will discuss further in this blog.  

First, let us get clear on the concepts of Offshoring and Outsourcing. So, without any further ado, let’s start… 

Definition of Offshoring and Outsourcing  

Outsourcing is the process of subcontracting or delegating the non-core IT operations of a business to external service providers. These service providers are experts in their domains to perform the specific tasks given to them efficiently. The purpose of outsourcing is to shift the focus to the task company can do the best and eliminate the tasks where they cannot attain maximum output. For example- if a company has a core operation to manufacture a product, it will outsource the activities like payroll, customer service, and maintenance of statutory records. 

Offshoring on the other hand is the process of shifting the core business activity to someplace else where the resources are cheaper and easily available. The main purpose of Offshore Product Development is to minimize the cost and maximize the output, efficiency, and quality of the product or service. Offshoring may include the shifting of the company’s production house or service centers to the target offshore location overseas. When selecting an offshore location, companies look for low labor costs, lenient laws, less government interference, cheap availability of resources, less tax rate, and other variables that turn to their advantage. 

Key Differences Between Offshoring and Outsourcing 

Even the people working in the IT industry have sometimes confused between these two terms. It is due to the overlapping benefits they have to offer. But there are substantially observable differences between Offshoring and Outsourcing. 

Some of the key differences between the two are the following: 

Basic Idea: 

The basic idea behind outsourcing is to assign the peripheral activities supporting the core area of the business to external services having expertise in the specific activities. While Offshore Product Development is the relocation of the entire business unit to a faraway location where resources are cheaper, better, and easily available. 

Implication: 

In outsourcing, the delegated business activities are completely controlled by third-party services and the location of the core operations remains the same. On the other hand, offshoring includes the relocation of both services and offices. 

Location: 

Outsourcing is done within the country that is the primary location of the business as well as the other countries. Offshoring always means going overseas, out of the organization’s primary location.  

Why Businesses Choose: 

Reasons for outsourcing

• Lacking the required expertise to carry out the task onsite 
• Not having enough time and resources to conduct several operations 
• Cost cutting and attempt to focus on the key activities by outsourcing the rest 

Reasons for Offshoring… 

• To evade the rules and regulations that are constraining the business operations at the primary location 
• Cheaper labor, capital, and other resources 
• Expanding the market reach by starting operations in a new country  

Main Purpose: 

The main purpose most business organizations choose to outsource their certain activities is to divert all due focus on the key area of their business. While the key purpose of choosing offshore development is to acquire cheap and best labor & resources. 

Potential Benefits: 

Outsourcing benefits… 

• The tasks are carried out by expert services. Hence, the overall efficiency of the business improves. 
• Risk over the activities is shared between the vendor providing the services and the organization that is outsourcing the activity. 

• It saves a lot of money on personnel recruitment and operation costs. 

Offshoring benefits… 

• You can choose a location where you’ll get a workforce having the best skillset according to your business requirements.  
• One benefit that is similar to outsourcing is that you’ll save money on labor and operation in offshore product development as well. 
• There are good chances of getting the right local partners to expand your business. 

• When the company operates in the international market it opens itself to the benefits of economies of scale. 

Operation Methodology 

In outsourcing, the activities are performed by the staff of the vendor or the service provider. They are not employees of your company. On the other hand, if you are choosing offshore development, the personnel working on the business operations will be your employees. At least till the said project ends.  

Final Word 

Considering all the facts above, we can conclusively say that Offshoring and Outsourcing are not something to get confused between. Outsourcing is a process that increases the efficiency of a business by relying on a third-party service provider that specializes in a specific area. A lot of Software Outsourcing Companies are out there as an example to prove this point. While offshoring enables an organization to maintain complete control over the operation even operating at an overseas location away from home.