One of the most commonly misunderstood aspects of operating a business is the concept of outsourcing and offshoring. People usually ignore these terms because both of them have almost the same meaning and thus, the general population in the workplace confuses these two.
It is not required to learn and understand the meaning of Offshore or Outsourcing, but doing so will enrich our knowledge when it comes to business operations and also, knowing the advantages and disadvantages of the two processes.
What is Outsourcing?
Outsourcing, in its most basic term, is the process of hiring another third party company, allowing them to take full control of your operations. This can also mean that you can shift your entire operations to a third-party company for the long term purpose. For example, let’s say you want to develop an app as a product for your company but you don’t have the manpower to do so. In order to solve this problem, you asked another company to develop an app for you.
What is Offshoring?
Unlike Outsourcing, Offshoring refers to doing business processes and operations in another country or area but still, maintaining full control of it. For example, costs in the US are expensive when it comes to manufacturing and delivery services, so in order to solve the problem, you transferred your manufacturing operations to a different country, where it’s cheaper and easier to do.
The Difference Between their Objectives.
The main goal of outsourcing services is to take advantage of higher quality human resources.
Instead of spending unnecessary costs on hiring and training & development of an in-house team, you can result in more efficient and skilled employees from an outsourcing company
Along with their benefits to your company’s budget, they also provide quality outputs on your business’ core functions such as software development, marketing, operations, production, etc.
By outsourcing work you’re not well-equipped to deal with, you can now focus on your core competencies instead and leave everything else for the outsourcing company to accomplish.
On the other hand, of offshoring business functions is nearly always to reduce costs.
By shifting core activities and to a less expensive country, business owners will face:
- Lower wages.
- Lower setup costs.
- Fewer taxes.
These are three of the several reasons why many multinational corporations offshore their manufacturing processes.
For an expensive cost in manufacturing and production, your cost savings can skyrocket when offshoring your business.
Sometimes offshoring can also be for other reasons. For example, an ethnic apparel company based in the US might offshore production of its line of sarees (an Indian dress) to India or Bangladesh because of quality reasons.
In this case, it would be the most logical way to structure the supply chain.
The Differences Between Their Workforces
Outsourcing involves contracting work to a third-party. As a result, the people performing the functions will be employees of that third-party.
Your own employees play no part in outsourced work processes.
Offshored workforces may or may not be employees of your organization. They’re just not located in the same country as you.
The Differences Between Their Location Setups
While you can outsource work to a third-party in a foreign country, that doesn’t have to be the case. You can outsource work to third parties in your home country, too.
The main determinant for outsourced work isn’t where it’s performed – it’s by who. If it’s not performed by employees of your organization – it’s outsourced work.
Offshoring must be done in a new country.
The goal of offshoring is to save money – the only way this can be done is by shifting your activities to a different, cost-effective country.
The Benefits of Outsourcing and Offshoring
1. Source and create a highly-skilled talent pool
Most of the time, your core and non-core activities are hard to master or even take into knowledge.
While having the option of hiring employees or leveling up their skills through different programs are possible, by doing so, you could spend and lose a significant amount in your budget that can be used in other aspects of your business. The bottom line is: Hiring can be extremely expensive for your company if not correctly monitored.
In scenarios like these, the smarter and more efficient move is to outsource your activities to specialized companies instead. With labor flexibility from software development to production, they can easily get the job done in no time.
As a result, you get to spend on more important product lines and activities that will expand the growth of your business
2. Allowing an organization to focus more on its core business functions
Instead of forcing your employees to undertake tasks, ones that they’re ill-equipped for, outsourcing frees up space for them to focus on tasks they understand.
As your team doesn’t have the time to do non-core tasks, they can focus on building an overall business model or collaborating better with product and sales teams to build stronger core processes .
This allows your company to solely focus on its core competencies. You won’t be struggling to manage non-core activities that you’re not equipped to deal with.
3. Possible Cost Savings
While this isn’t always the case, outsourcing work can save you money.
In setting up your business activities, outsourcing work to an external party is far more cost-effective than training a workforce to do the job
But the benefits of outsourcing aren’t only limited to training costs.
In case you decide to train a workforce, it could be months before they start delivering returns, wasting your time and investment in programs and activities.
With outsourcing, however, you won’t have any down-time. As these are experts in specific fields, you can expect instant results – one of many advantages of outsourcing.
The prime objective of offshoring is to reduce costs; so it’s no surprise that this is one of its biggest benefits.
Average worker wages differ from country to country. Utilizing a workforce that’s situated in a country with comparatively lower labor costs can save you tons of money while keeping services are at high quality. The same case goes with operational costs.
Operational costs like rent and electricity also vary on a country-by-country basis. For example, migrating your software development team to a country with a low operational cost like the Philippines can help you save money and give you a huge competitive advantage.
Another example is that other countries may have laws that are more conducive for quickly setting up large operations – conducive for economies of scale.
Tax savings are another big reason to use offshore. You can take advantage of company-friendly tax laws and subsidies in foreign countries to lower spendings.
2. Larger Talent Pool
With offshoring, you’re no longer geographically limited when sourcing for quality human resources.
For example, if your original ar is the Philippines, you’re no longer limited to hiring from there.
You can have the option of hiring quality employees with different sets of skills across the globe to create a diverse, talented group of employees that can get the work done.
Combining Offshoring and Outsourcing; is it possible?
Even though Offshoring and Outsourcing are two different processes, but amidst their differences, they can be combined to benefit your business. When combining Offshoring and Outsourcing, called Offshore outsourcing, not only is work handed out to a third-party company, but also work is done in another country.
Now, is it a great move to switch to this model? The answer will depend on your current business model. By observing changes in economics and the market of a specific area and company, you can take advantage of offshore outsourcing’s multiple benefits that will greatly decrease your spending and hire efficient workers to operate your business.
Significantly decreased cost expenses and time-consuming activities
- Combining the removal of staff issues and rental fees on outsourcing companies as well as the reduced labor costs granted by offshoring to another country will result in a great deal of decreased cost for your business. You will be avoiding taxes, staff salaries, tariffs, relocation fees, travel expenses, etc. In fact, economies of scale in other countries are entirely different so costs in manufacturing and production are dramatically decreased to your advantage increasing your profit margins.
- Moreover, offshore outsourcing services not only decreases your cost but also saves you the time and hassle of training and developing employees since they have already set up their training and development for their specialized team. This makes you have more time allocated to expanding your business and focus on core business functions.
Create new market opportunities
- By choosing to go to an offshore outsourcing process, not only does it save you some time in business operations, but it will also help you create new market opportunities in different countries. Non-profitable products in the origin country might become much more meaningful due to. Moreover, having new demographic means new products since the livelihood of people there are different, expanding the growth of what your company can produce. This will overall benefit your company, globally, based on the reputation and reviews on your product.
Greater access to skilled employees
- Expanding to new markets through offshore outsourcing will grant you access to a diverse talent pool of highly skilled people that are unique in terms of knowledge and skills, especially in English-speaking foreign countries. Having access to these skilled people will grant you a competitive advantage over your competitors by eliminating tedious bottlenecks in your business process, decreased costs in hiring, and bringing your business’ performance to a higher quality.
With increasing globalization, more companies are turning to offshore outsourcing in countries like China and India for their work activities. With lower wages, improved operational cost and tons of skilled workers – offshore outsourcing is now becoming the norm.
It is evident that the benefits of outsourcing & offshoring, separately, or offshore outsourcing, are impactful and effective in getting work done, saving money, and creating output quality for your customers.
However, it isn’t without its drawbacks.
While offshore outsourcing combines the benefits of outsourcing and offshoring – it also suffers from all its faults. As you’re combining both these processes, you’re magnifying the risks they both suffer from. Mixed with a complicated setup, miscommunication issues won’t just rise – they’ll be harder to address.
As your teams now operate independently in different countries, there are fewer safeguards in place – leading to a greater risk of project failure.
Loss of Control in Day-to-Day Operations
- When working with an offshore company, you will have limited access to the daily activities of the remote team. That may result in the progress of your products being delayed or slower than what you agreed on with the company. This can lead to miscommunications and disagreement situations between you and the offshore company that may cause changes in quality and extended delivery times for your product.
Greater Security Risks.
- Working with an offshoring company means you will share confidential and valuable information with the company. Information that can be used against you in the forms of leaking data information, sabotaging your operations, and many more. You run the risk of exposing your company to backlash and a temporary halt in operations.
Limited Control over Company Functions and Changes
- Partnering with an offshore company means that you have no control over the team structure and operations—meaning it is fixed once you have agreed to a deal. You won’t have control over situations like a change of employee in a specific task since the assigned offshoring manager has complete control over staff management.
- Language barriers can also pose a serious challenge to offshore teams. If your offshored workforce isn’t proficient in your preferred language, you’re increasing the chances of miscommunication taking place.
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