Difference Between Offshoring vs Outsourcing

Difference Between Offshoring vs Outsourcing

As an entrepreneur, you may be wondering: “What is the difference between offshoring and outsourcing?” Indeed, business leaders always want to know more about both of these concepts, especially when they wish to lower their overheads.

They are used as part of the strategies that entrepreneurs employ to cut their running costs. In the end, they can make greater savings to invest in staff welfare, expansion, or research, etc. If you wish to learn more about them, you are perusing the right guide.

Many people have sent us emails in the past, asking us to discuss the disparity between them. In keeping with our commitment to satisfying our readers, we will exhaustively cover the topic today. Do you wish to understand the difference between outsourcing and offshoring? If yes, you should continue reading to learn more. Just before we get into the actual differences though, we will define the terms.

Definition of Offshoring

Offshoring is a cost-reducing strategy where an organization’s unit is shifted to another country because the human and/or nonhuman resources required to run it are readily available in the foreign country or location. With this approach, just any part of the business can be moved. This could be the movement of a production department, a service center, or routines, etc.

More often than not, the firms that practice this do it just to take advantage of business-friendly climates, cheaper labor, tax holidays, or raw materials, etc. Over the years, many multinational companies based in advanced economies have embraced this strategy by moving a considerable amount of their activities to developing countries. Doing this improves the country’s GDP, enhances its infrastructure, creates jobs, and puts the country on the global business map.

Definition of Outsourcing

Outsourcing is the method of passing on non-core operations of an establishment to another organization (often called a contractor). While the reasons for taking this step vary from one organization to another, the major one is to allow the bigger brand to focus on the key functions where they have more expertise. In a similar vein, the contractor must be a professional in its area of specialization.

Truly, this is yet another cost-reducing strategy. Before such tasks are transferred to the contractor, the two entities sign a memorandum of understanding, detailing what the two parties expect of each other.

Oftentimes, multinational companies delegate their payroll, recruitment, helpdesk, maintenance, and audit, etc. When they give out these duties, they will able to focus on the other activities that matter most to them. Aside from cost reductions, it improves the quality of its products and services.

Main Difference Between Offshoring and Outsourcing

To simplify the differences between them, we have explained them below:

Basis of ComparisonOffshoringOutsourcing
MeaningThis is the movement of a unit to another country where labor cost and other factors are favorableThe delegation of the non-core activities of a big firm to another to focus on more important areas
Other party involvementIn this case, no other parties are involved as the employees are still working for the same establishment albeit in another locationA reliable party, which is another organization, is employed to service a big brand
Objective The objective is to reduce the running costFocus on the company’s core operations
CountryThe other unit is located in another countryThe contractor may be within or outside the same jurisdiction
ControlThe same company is in charge of everything that happens here The big establishment has no control over factors, such as staff, procedures, suppliers, etc.

Difference Between Offshoring and Outsourcing: Conclusion

In conclusion, choosing between offshoring vs outsourcing depends on what your establishment wishes to achieve. Notice that even though they both achieve operational cost reductions, the latter primarily focuses on devoting more time, energy, and resources to the core activities of a big firm. As an entrepreneur, the two concepts are important to businesses.

However, you should identify the method that works for you by considering certain factors, such as business line, fund availability, labor, etc. With those factors and more, you will be able to make an informed decision. Indeed, we strongly believe that this article will have helped you overcome the outsourcing vs offshoring dilemma.