The global supply chain consists of outsourcing and offshoring but most people confuse between the two. These two are separate concepts but the difference between offshoring vs outsourcing is not apparent to many.
Research conducted by procurement experts suggests that the aforesaid terms are used in a business context by consumers without proper awareness of the differentiating factors. The terms are often presented in a negative light and are meant to represent the wrong intent of large corporations who are least bothered about their clients. Most people of countries which outsource to other nations largely find both terms equally offensive. Some believe that businesses resort to them just for making money without caring about common consumers. Most often, they hide facts about products from customers.
This misunderstanding is not desirable. Proper understanding of the concepts can prove valuable in enriching our awareness about business processes. The outsourcing vs offshoring pros and cons should be clearly understood to make processes more efficient.
What is Outsourcing?
Outsourcing stands for outside resourcing. It is also another term for subcontracting. In this process, non-core or secondary activities of the businesses are often transferred or delegated to outside agencies or service providers. Since the external vendors have specialization in completing those operations efficiently, productivity increases.
Outsourcing is done by companies to focus more on the core competencies of the organizations. Peripheral activities are outsourced by major companies. The services that are outsourced by various companies include payroll management, call center support, statutory details maintenance, data entry, image post-processing, graphic designing, etc.
There is no compulsion that outsourcing has to be done to national players only. One can outsource to offshore service providers also. There are two types of outsourcing i.e. KPO (Knowledge Process Outsourcing) and BPO (Business Process Outsourcing).
The advantages of outsourcing are a reduction in overall operational costs, significant quality improvement, ability to concentrate on important business processes and access to qualified professionals specialized in doing particular jobs.
What is Offshoring?
When the business processes of a company are moved out to a country which is not the country of origin, it is termed as offshoring. This can be because the raw materials and resources are available at cheaper rates in that country which would impact the bottom line of the company favorably. The company can choose to migrate the production facility, service centers or some part of the operational infrastructure to overseas.
The organization may choose to move its business operations from a developed to a developing country. This would entitle it to avail off cheaper labor, relaxed statutory norms, minimal interference of federal bodies, resources at lower costs, lower taxation, and many other advantages.
In the recent past, the fact that offshoring is being used by underdeveloped countries as a means of improving their GDP or Gross Domestic Product has come to the fore. Financially poorer nations are using it to be economically sound. Infrastructure in those countries is also improved and more employment opportunities are generated. The companies that choose to offshore have to experience communicational barriers and other problems.
Outsourcing with Offshoring
By combining offshoring with outsourcing, companies can save good sum of money. Production can be outsourced to a third party vendor which is located in overseas destination. In USA, many companies have been engaging in this since long. Numerous USA based organizations have relocated their production units in countries like China and India.
The companies can enjoy significant increase in profits but costs too increase correspondingly. The increase in expenditure is experienced by nations also, some argue. In USA, for example, public has been vehemently opposing the outsourcing of jobs to offshore entities and this has been impacting the political landscape also.
When strategic business decisions are used for political debating, it is important to understand the differences between outsourcing and offshoring. Both these activities have moral as well as economic impacts which are separate from each other. One needs to be aware of these differences.
Major Differences Between Offshoring and Outsourcing
Outsourcing is the assignment of secondary activities of a business to an external service provider whereas offshoring means relocating the business processes outside of the country to a different nation. In outsourcing, selected operations are executed by a 3rd party whereas in offshoring, activities and production units are shifted. In outsourcing, companies focus on major business activities wherein in offshoring, the emphasis is on lowering labor and production costs. In outsourcing, activities that are entrusted to service providers are executed by their employees whereas, in offshoring, the company employees perform the activities. An outsourced service provider may be situated within or outside the company’s country whereas offshoring is essentially done outside the nation. The service provider being outsourced to has specialization in that job and have qualified professionals on its rolls. In offshoring, the cost of operating the business from a foreign location is lesser compared to the home country.
Any business function can be outsourced. Offshoring is also a possible option. Both of these are in practice for many years now. When business operations are outsourced to a party which operates from a location which is not the epicenter of the parent business, it can be called as offshoring. A business must decide on the best route i.e. only outsourcing or offshoring or a combination of both by factoring in all possible scope and aspects. Offshoring, in particular instances, can also be viewed as outsourcing’s subset.