Offshoring and Outsourcing are two tools of modern business today. Thousands of businesses around the globe are engaged in offshoring and outsourcing. This number is still increasing day by day. Even so, many people continue to use these two terms interchangeably without realizing the difference. In the article below, let’s find out the difference between offshoring and outsourcing that businesses need to grasp.
1. What is Offshoring?
Offshoring is a term that refers to getting work done in another country. In other words, offshoring is the practice of placing some business activities or business establishment in a foreign country.
The goal of offshoring is to reduce the cost of the service or process the company is providing. Example: A Chinese company builds a manufacturing plant in Vietnam.
2. What is Outsourcing?
This phrase has been included in business terminology since the 1980s. Outsourcing refers to the process of contracting out certain tasks with a third party to outsource the work, performing the task on behalf of the company’s internal staff. In simple terms, outsourcing is the activity of hiring outside human resources to do the work that the business needs.
When a business outsources a service or product, it means they cannot produce the service or product themselves. The goal of outsourcing is to focus more on the business for which the company specializes and not spend a lot of resources on backend activities.
For example: An enterprise needs a large number of software developers within 06 – 08 months to develop an application. They will outsource software development services at a company or team to do it instead of hiring a team of programmers that cost a lot of money.
1. Benefits of Offshoring
- Lower Labor Costs:
Offshoring helps to save costs and reduce labor. By working with teams in lower-wage countries, businesses can still achieve the same high service standards.
- Business Continuity:
By allocating teams in different countries with different time zones. Businesses can operate 24/7. While you are sleeping, your team in another country may be working. This will ensure a seamless workflow on projects at both your parent company and your outsourced company.
- Access to foreign markets:
When you have a business in another country, your international workforce can help you explore new markets there.
2. Benefits of Outsourcing
- Cost optimization: Often, companies find it cheaper to contract with a 3rd party.
- Save time:
Businesses do not have to spend a lot of time looking for qualified human resources. Outsourced human resources already have high expertise in the field you need, the work will become faster.
- Focus on core values of the business:
Outsourcing to non-core areas helps businesses focus resources and costs on key activities.
With companies that do not have in-house expertise for certain activities, outsourcing will be more effective and products and services of higher quality than when the enterprise self-implemented.
- Flexible workforce:
Usually, a company cannot recruit employees who only work for a short period of time to complete projects and then quit. So, outsourcing can provide flexibility so that the company does not have to worry about hiring and firing.
- Reduce risk:
The use of temporary outsourced personnel helps to reduce work pressures on other employees, as well as minimize long-term absenteeism and workers’ compensation claims.
III. Risks of Offshoring and Outsourcing
Although offshoring and outsourcing bring many benefits to businesses. But at the same time, these forms also come with some risks.
1. Offshoring Risks
- Language and cultural barriers:
Executives at headquarters may not be familiar with the local culture of their foreign service provider. This can affect holiday schedules, daily communication, or misunderstandings related to body language, etc.
The more familiar with each other’s culture and language, the better for business. Therefore, businesses need to learn and train to understand and bridge the cultural gap between the two sides.
- Time zone difference:
Different time zones in countries offer the advantage of ensuring business continuity. However, it also comes with the disadvantage of being able to experience communication delays, making it difficult to set up a team meeting with all team members.
With this in mind, it is important to have at least a few hours of joint work for internal and external teams. And to ensure smooth communication between the two parties, each party can have a team dedicated to work in shifts to coordinate with each other.
- Quality control issues:
Local production conditions and regulations may vary greatly from your country. A foreign company’s product may not live up to expectations. Furthermore, disruptions and delays in the local supply chain can affect deliveries.
You should deploy a team to understand the local government, regulations and business practices of the foreign location. Design a business process to ensure quality and timely delivery.
2. Outsourcing Risks
- Lack of control and linkage:
The degree of control depends on the geographical distance of the supplier. With longer distances, performance monitoring or live testing becomes more difficult.
At the same time, the lack of face-to-face meetings but only working via the internet made the two sides not fully understand each other’s intentions.
Thereby, leading to a lack of alignment in the long-term business goals of customers and suppliers.
However, in the present time, traveling by plane from one country to another is quite convenient. It only takes you a few hours to be there to meet, share wishes and check progress.
Besides, you can come up with a few project management measures such as: scheduling meetings, tracking KPIs and metrics,…
- Information security:
If you hire an unscrupulous third party, the company’s confidential information may be leaked to the outside.
To deal with this security risk, businesses should set up tight outsourcing contracts to sign. Or may require related parties to participate in NDA (Non-Disclosure Agreement).
- Hidden costs:
Outsourcing has the advantage of cost savings, but if there are additional hidden costs, it becomes a risk. Because in the project development phase, you may encounter unforeseen costs such as: overtime service, troubleshooting,…
If you want to avoid hidden costs and stay within budget, you need to be specific about your project requirements to ensure smooth business processes and avoid errors.
At the same time, thoroughly analyze the products. This way, you’ll get a quote for the project and know exactly what you’re going to spend ahead of time.
Should businesses outsource?
Outsourcing is the best way to get your work done at a lower cost. Like every other form of activity, it also has some risks of its own, but not much of a concern. Don’t let that stop you from helping your business grow. All you need to do is check in regularly, pay attention to details, and work to reduce the risk.
Offshoring and Outsourcing markets are really the right choice for companies that want to develop products but do not have much expertise. However, you need to distinguish these two forms to be able to choose the most suitable and best for your business activities.
Learn more about the offshore development challenge here.