Recently we’ve spoken about Outsourcing, specifically about Software Development and Latin America as a prime target for outsourcing work. However, in the business world, there’s a whole horde of buzzwords thrown around, and sometimes their meaning simply muddles. That’s why I wanted to take the opportunity to disambiguate these two very similar yet distinctly different terms: Outsourcing, and Offshoring.
One by One
Let’s start with the most recent one. Outsourcing is easily defined by James Bucki, for The Balance, as such: It is to shift tasks, operations, jobs, or processes to an external workforce, by contracting with a third party for a significant period.
Businesses typically do this to reduce costs or improve efficiency. Outsourced third parties typically offer more competitive costs, due to macroeconomic reasons, and also the simple sharing and distribution of tasks allow the main team to focus on the more important tasks, while other perhaps more laborsome activities are the ones typically sourced out.
Sometimes outsourcing is the key to making a project come alive, due to the competitive edge, the lower costs offered, and the expanded, global labor pool that comes with it.
Moreover, Outsourcing is a precise matter. As a contract between companies (usually), the company wanting to outsource work pays for what they need, they source out exactly what they want and no more and no less. If we consider that outsourcing can also be a specialized affair, a contract between a company and an individual, for example, there’s also the opportunity to hire exactly who you need, from anywhere in the world.
Now, let’s get to Offshoring. We have to understand that Offshoring is inherently a geographical affair. Also motivated mainly by costs, it’s all about the location — as Johnathan Webb, for Forbes, explains, Offshoring takes advantage of these cost differentials by relocating factories from costly countries to the cheaper economies to sell the goods back in the West at a hefty discount (and profit).
So it’s not only a geographical affair, but mainly a physical thing as well.
Typically, companies offshore the production of goods to a location where said production would be cheaper. Consider the most typical example: your iPhone, your Samsung TV, or even your Ford car. Their companies might originally be from the United States or South Korea, but you will find that little tag in some parts of the product that reads “Made in China”.
And it’s a worldwide known truth. Production costs in China are dramatically lower than they’d be in North America — this is due to macroeconomic points, such as the value of the Chinese Yuan versus the American Dollar, but also due to the nature of Chinese Labor laws, which are also very different from what we’re used to here in the West.
Offshoring can also have something to do with breaching another market. Such is the case with Nintendo, a Japanese company, and Nintendo of America; it’s not only about where the product is made or put together but also about where’s it intended to be sold. If you’re aiming for an offshore market, perhaps having an offshore factory and base of operations is a point in your favor.
When to Outsource, When to Offshore
Outsourcing, as we’ve seen is activity-based. When you want to have a specific task or service performed for your company (or person) by a third party elsewhere. Also, while typically international, it doesn’t necessarily have to be; you can outsource work locally, even in your city — the fact is that any work for your company done for you by a contracted service is outsourcing.
Whereas, Offshoring remains in the company. It’s the movement of operations, an expansion into the soil; whether for production or sales targets, it’s a physical, product-based affair.
Let’s picture some examples to make everything clearer: Image Apple is designing a new brand of computers to hit the market in 2022. They want to cater specifically to the Chinese market, a burgeoning arena where they expect to boost their sales. To achieve this, and profit further due to the lower labor and production costs, Apple offshored part of the operations concerning this project to Shanghai, where they opened an office and a factory.
Yet Apple is having trouble with the particularities of the design, they’ve hit wall after wall, and they decided that what they need is outside help, thus they outsource the design, to a company in the Netherlands specialized in avant-garde hardware manufacturing.
I hope with that example the mud became clearer — offshore is part of the company, and it’s usually very physical. Outsourcing involves third parties, and it is activity-based.
Conclusion
This article hopes to be more informative than anything else. If you’ve ever been in a spot where you must use these two similar terms, now you can give a masterclass about their difference, after learning about the very nature of both terms.
And if now, knowing the difference between these terms, you concluded that your company needs outsourcing services, then make sure to contact us and we’ll give you the best solutions!
See more articles by Paola Rodríguez.
