The Difference between Outsourcing and Offshoring to the Philippines | Offshoring vs Outsourcing
History of outsourcing and offshoring
In the latter half of the 20th century, the term outsourcing first appeared in business contexts. Businesses discovered they could employ outside providers who could complete tasks more quickly and effectively. This prompted them to employ more outside contractors to complete tasks that required specialized skills.
As shipping and telecommunications infrastructure developed toward the end of the 20th century, it became more efficient to have work completed in nations with lower wages. The practice came to be known as offshoring.
What is outsourcing vs. offshoring?
Outsourcing is the practice of handing off a portion of the business’s operations to a different company. This might take place within the same nation or lead to the transfer of work across borders. Furthermore, the outsourcing could be long-term or connected to a short-term contract for the provision of services.
Although outsourcing and offshoring have some similarities, offshoring differs from outsourcing in a number of significant ways. When a business moves its operations to a different nation, it offshores those operations in order to gain certain advantages, such as lower costs, a lighter tax burden, or the ability to ship goods more quickly to customers. In contrast to outsourcing, choosing to offshore does not always imply that the work will be carried out by a third party. While that is a possibility, the business may decide to continue having direct control over its operations in another nation. For instance, it might decide to establish a factory or new location abroad.
Benefits of offshoring
Offshoring has advantages in terms of efficiency and labor costs, as well as in terms of tax and legal obligations. Your business will have to decide whether these advantages outweigh any potential drawbacks of offshoring during the decision-making process. Your employer won’t be able to determine whether offshoring makes financial sense until after that.
Lower labor costs
Saving money on labor costs is one of the most obvious reasons a business might choose to offshore production or services. Companies can access labor at rates significantly lower than they would pay domestically by opening a factory abroad.
Reducing the tax bill
Another reason for offshoring could be to lower the amount of taxes the business is required to pay. This could be justified as a means of freeing up additional funds for investments in new products or updating the manufacturing machinery used by the company.
There are many places in the world where corporate taxes for businesses are low or even nonexistent, so this strategy can be successful there. To benefit from these advantages, the business might need to relocate some of its operations there or merely register a company there.
Your employer might argue that offshoring’s cost savings and increased labor flexibility will allow the business to operate more productively. For instance, the business might be able to establish a modern facility at a low cost thanks to investment incentives instead of trying to upgrade an outdated factory at a high cost.
Increased productivity will increase the company’s profitability, whether it’s through producing 10% more product annually or responding to twice as many customer inquiries. This makes it possible for the company to provide customers with more affordable product prices.
Some popular offshoring destinations market themselves as business-friendly countries. The paperwork and preparations needed to start operations can frequently be finished in a day or two, and regulatory requirements can occasionally be minimal.
This may be appealing for some business operations because of the flexibility it provides or the security that comes from knowing that company assets are secure.
Benefits of outsourcing
If the move is properly planned and executed, outsourcing can have a number of significant advantages for a business.
Your company’s desire to reduce costs could be the primary factor in the decision to outsource. Instead of hiring staff full-time, outsourcing makes it possible to accomplish this by only paying for the service when it is actually required. For instance, your employer might decide to outsource HR services because the company isn’t big enough to require full-time assistance. This enables them to finish the required human resources tasks without having to pay for another full-time employee.
The choice to outsource could result in additional cost savings, such as the capacity to relocate the company’s main headquarters.
Benefiting from the specialists
A certain service or manufacturing procedure might occasionally be so complicated that it is best carried out by experts. Your business may have decided that training in-house staff to carry out these tasks would be too time-consuming or expensive. This might be the case for specific IT operations or the production of a specific good, like auto parts.
In these circumstances, your business may decide that hiring a specialized company to handle the project is the best course of action. They can access highly skilled, knowledgeable professionals in this way while also maintaining competitive prices.
The choice to outsource made by your employer might also have something to do with increasing operational flexibility. An expert outsider who specializes in a particular service, such as accounting, cleaning, or legal services, may be able to offer these more quickly than an internal team.
Additionally, a third party is frequently better prepared to handle sudden changes in demand, such as a decrease or increase in the quantity of goods a company needs to ship.
Risks and criticisms
Offshoring is subject to a significant amount of criticism. Many claim that offshoring steals jobs from potential workers in the nation. However, outsourcing allows businesses to reduce these costs, which they can then pass along to customers. However, there are risks associated with offshoring, including the possibility of project failure due to poor communication, political or civil unrest that could affect production or delivery, changes in other governments’ economic policies, and subpar infrastructure in developing nations that can have an impact on quality.
Outsourcing does not face the same level of scrutiny or dangers. For instance, when outsourcing occurs domestically, it is not held responsible for the loss of jobs. Lack of familiarity with the client’s business is linked to the main risks of outsourcing. Additionally, there is a potential disconnect between the client and the vendor’s long-term business goals, which could affect the level of service.
As a result of the global economic downturn forcing businesses to look for new ways to reduce costs and boost efficiencies, outsourcing and offshoring are on the rise. Businesses are increasingly outsourcing and offshoring more significant portions of their non-core operations. Purchasing smaller vendors with the knowledge necessary to meet the demands of a large organization is another trend.
Tips for choosing offshoring vs. outsourcing
Here are some guidelines to help you choose whether outsourcing or offshoring is best for your company.
Identify the length of time you need the service
One benefit of outsourcing is that it is effective for services you only occasionally or for short periods of time need. This is a great example of something to outsource if you run a marketing firm and only occasionally receive client requests for video production. You can fulfill the request more quickly and save money by not having to hire someone internally.
Determine the amount of control you need
Offshoring may be an option if you want to have total control over the operations and quality control. For example, let’s say your company manufactures plug-in air fresheners. Although your team assembles them in the United States, you don’t have any control over how the bottles are made because you buy them from a third party in another country.
You might want to think about offshoring and investing in a factory abroad where your team can carry out a quality assurance check in accordance with the specifications you specify if you want to gain complete control over the procedure. Although the initial investment might seem larger, it could ultimately save you money and give you complete control.
Outsourcing may be challenging or impossible for your business if it deals with confidential client information or must adhere to legal requirements. You might need to conduct more expense monitoring or take precautions to prevent fraud or dishonesty from a third-party provider.
Decide how quickly you need the service
Training employees is essential when you engage in offshoring. You must consider how difficulties with communication, time zones, and cultural differences can affect your ability to train. You might observe a brief slowdown in productivity because training offshore employees takes time. Long-term, though, offshoring is highly productive and profitable.
Which is better outsourcing or offshoring?
Conclusion. While outsourcing and offshoring may seem similar, they’re very different. If you want to focus on your core functions by giving work to a talented outside workforce, outsourcing should be your first choice. But if you want to save money, outsourcing might be a better choice for you.
What is outsourcing and offshoring with examples?
Finding a business or individual who specializes in the task at hand is essential when outsourcing a process or operation. However, offshoring occurs when a business sends internal tasks to be completed in a different nation. A company with headquarters in the United States producing products in Mexico is an example of offshoring.
What are the two types of offshoring?
They mainly fall into two categories: product offshoring, in which the primary item is produced abroad and imported for domestic sale. When a product is produced domestically, but services like customer service, IT, marketing, and human resources are outsourced, this practice is known as service offshoring.