Outsourcing vs Offshoring: Similarities and Differences
Outsourcing and offshoring are two of the biggest trends in business management and the labor market, inspiring much commentary and conversation among business leaders and journalists. These two terms are often used interchangeably. However, while there are similarities between them, they don't mean the same thing. There are fundamental differences between them, with outsourcing referring to the use of third-party products and services, while offshoring refers to locating production plants or service centers on foreign soil.
On the other hand, while these differences are important, there are also similarities between outsourcing and offshoring, including similar strategic goals for optimizing cost and efficiency, as well as similar requirements in communications infrastructure. Here’s a closer comparison of outsourcing vs. offshoring, what they have in common, what the difference between them is, and how they call for similar communications solutions.
Outsourcing refers to the business practice of one company hiring a third-party firm to handle production or service tasks that could otherwise be performed in-house. For example, while some larger companies often have their own in-house accounting departments, many smaller businesses, as well as some large ones, outsource their accounting to outside firms specializing in this area
There are several common reasons a company may choose to outsource a given task:
- Cost: Hiring full-time in-house employees incurs considerable costs, including wages and benefits. Outsourcing to an outside firm can significantly cut payroll expenses.
- Time management: Outsourcing a task reduces the amount of in-house labor a company must expend to perform that task. For instance, business owners who do their own taxes may spend 120 hours or more a year on tax preparation — equivalent to three weeks of labor — and outsourcing this task can win back lost time.
- Talent: In some cases, a company may lack the in-house talent to perform a necessary task. A company without an IT department may lack the personnel to perform adequate online security without outsourcing.
- Efficiency: Even when a firm has the necessary in-house talent to perform a task, it may be more efficient in terms of time and cost to have an outside contractor handle the job. While the owner of a tech firm may possess the programming skills to create and manage their own website, it may make more sense for them to hire a web developer so they can focus their time on other areas.
These benefits make outsourcing a popular strategy for businesses to cut costs, save time, and increase efficiency. Common candidates for outsourcing include:
- Routine tasks that involve repetitive work, such as data entry
- Specialized tasks that require special equipment, like product component manufacturing or special expertise, such as legal counsel
- Tasks outside a company’s core competencies, such as a marketing firm that would prefer not to handle its own IT work
These categories illustrate some of the most commonly outsourced types of tasks. Other frequently outsourced tasks include accounting, tax preparation, manufacturing, marketing, graphic design, writing, customer service, web development, security, and more.
Offshoring is when a company locates a production facility or service center in a different country than its main headquarters. For example, Apple does much of its manufacturing in China. There are a number of reasons why a company may opt for offshoring:
- Labor is cheaper
- Qualified workers are more abundant
- Natural resources needed for manufacturing parts are located in the other country
- Tax laws are more favorable
Offshoring can be contrasted with reshoring — also known as onshoring, inshoring, or backshoring — which is the process of bringing production plants or service centers back from foreign countries to domestic locations. Companies may reshore for various reasons — to reduce lead time, to improve production quality, to avoid rising offshore wages, or to take advantage of domestic tax incentives.
A number of tasks are common candidates for offshoring, such as production tasks, manufacturing of electronic components, service tasks like IT support, and more.
Comparing Outsourcing vs. Offshoring
From the above definitions of outsourcing and offshoring, a number of differences emerge. Outsourcing involves the use of third-party contractors for products or services. Offshoring merely means that production of goods or services are performed in another country and does not necessarily involve the use of third-party contractors.
Likewise, outsourcing differs from offshoring in that it does not necessarily involve production facilities or service centers in another country. Outsourcing is often done domestically. However, it is possible to outsource a task to a contractor in another country, effectively combining outsourcing and offshoring into “offshore outsourcing."
Along with these differences, outsourcing and offshoring also share some similarities. They are both often used as strategies to reduce costs and may also improve efficiency.
Communications Requirements for Outsourcing and Offshoring
Outsourcing and offshoring also have a point of commonality in that they pose similar communications needs. Both involve the use of workers at remote locations, whether domestically or internationally. This requires a project management infrastructure suitable for communicating with remote workers, contractors, or suppliers.
An outsourcing solution or offshoring solution suitable for communicating with remote team members should ideally possess a number of key features:
- A cloud-based infrastructure, allowing all team members to access the interface regardless of location or device
- Unified communications as a service (UCaaS), which serves as a single portal for accessing all communications channels, including VoIP, email, messaging, and chat
- Integration capability for common office software and communications apps, such as contact center as a service (CCaaS) platforms
- Ability to scale up and add workers as needed
- Enterprise-grade security to protect digital communications transmissions and stored data
A tool with these features can serve as an optimal platform for communicating with outsourcing and offshoring workers and partners.
Outsourcing and offshoring are different concepts, but they both represent ways to cut costs and improve business efficiency, and they call for similar communications solutions. Adopting a communications solution that supports outsourcing or offshoring can save your business significant time and money on common tasks.
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