Outsourcing vs. Offshoring
Outsourcing refers to an organization contracting work out to a 3rd party, while offshoring refers to getting work done in a different country, usually to leverage cost advantages.
Both of outsourcing and offshoring are awesome because it depends on the demanding of business. Offshore outsourcing is the practice of hiring a vendor to do the work offshore, usually to lower costs and take advantage of the vendor’s expertise, economies of scale, and large and scalable labor pool.
Comparison
Outsourcing
- Definition: Outsourcing refers to contracting work out to an external organization.
- Risks and criticism: Risks of outsourcing include misaligned interests of clients and vendors, increased reliance on third parties, lack of in-house knowledge of critical.
- Benefits: Usually companies outsource to take advantage of specialized skills, cost efficiencies and labor flexibility.
Offshoring
- Definition: Offshoring means getting work done in a different country.
- Risks and criticism: Offshoring is often criticized for transferring jobs to other countries. Other risks include geopolitical risk, language differences and poor communication etc.
- Benefits: Benefits of offshoring are usually lower costs, better availability of skilled people, and getting work done faster through a global talent pool.
The Advantages of Outsourcing and Offshoring
Outsourcing
There are several reasons why a company might outsource. While this can be a politically sensitive topic, management experts generally agree that outsourcing increases competitive advantage with a natural division of labor that evolves in any society.
- Cost advantage: Costs are arguably the chief motivation behind outsourcing. Often companies find that contracting work out to a 3rd party is cheaper.
- Quality and Capability: Often companies don’t have in-house expertise for certain activities. In these cases, it is more efficient to outsource, and resulting products
- Labor flexibility: Outsourcing allows a company to ramping up and down quickly as needed. Besides, it can provide flexibility so the company does not have to worry about hiring and firing.
Offshoring
Captive offshore units are set up to leverage the benefits of offshoring without having to outsource to vendors. This is usually done when companies believe that their offshore centers for production/service will provide them with an edge over the competition.
- Skills: The competitive advantage of nations often means that some countries or regions develop a much better ecosystem for certain types of industries. Therefore, many companies choose to offshore certain business functions to these locations. These can either be captive or outsourced.
- Cost savings: Companies usually offshore manufacturing or services to developing countries where wages are low, thus resulting in cost savings.
References: Reading Wikipedia about Outsourcing & Offshoring.
