Offshoring vs. Outsourcing: Differences, Examples, and Benefits

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Fred Monnier
By
Fred Monnier
|
Chief Staffing Operations Officer
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Outsourcing and offshoring can both be beneficial to your development team. Learn about the benefits and drawbacks of each and how to decide which is the best fit based on your needs and resources.
Published on
October 13, 2022
Updated on
June 26, 2024

The terms offshoring and outsourcing are often used interchangeably. After all, the two business processes have some similarities — both seek to boost efficiency and maximize a company’s use of resources. In reality, there is a sizeable difference between outsourcing and offshoring.

Offshoring refers to relocating all or part of a business overseas. For example, when a company opens a factory or a call center in a different country, that company is offshoring. On the other hand, outsourcing refers to hiring consultants instead of employees to perform some business functions. Hiring a marketing consultant is a common example of outsourcing.

This article will dive into offshoring versus outsourcing in different economies. It will explore the pros and cons of outsourcing versus offshoring and provide examples.

What Is Offshoring?

Offshoring is the practice of either moving employees overseas or hiring new employees in an overseas location. Companies may decide to offshore because they want to open up their talent pool or because they are interested in accessing a new consumer market. They may also be interested in the resources obtainable overseas.

Offshoring is distinct from outsourcing. When a company moves some of its business operations offshore to another country, its functions are still carried out by in-house teams rather than outside contractors.

If you’re debating between offshoring versus outsourcing, it’s a good idea to study the benefits of offshoring closely.

Benefits of Offshoring

Offshoring increases a company's global reach while still allowing that company to maintain internal control of products and services. Here are some of the top benefits of offshoring:

  • Lower costs: By hiring remote teams in different geographic locations, where the cost of living may be lower, companies can benefit from cost savings. Wages and benefits may be lower in certain locations, as may facilities, resources, and transportation.
  • Larger hiring pool: Companies that want to hire skilled workers can benefit from widening their labor pool. Offshoring allows businesses to pick from the most skilled workers around the world. This is an excellent way to ensure you find the people whose competencies, experience, and values most closely match the company’s needs.
  • Internal control: Offshoring means companies keep their proprietary information, trade secrets, and internal guidelines in-house. The risk of theft or data breach is reduced. Offshoring gives companies greater control over their final product since everyone working on the project is an employee who is fully accountable to the business.

Disadvantages of Offshoring

Offshoring has several built-in disadvantages. Here are a few of the most significant downsides of offshoring:

  • Communication issues: Offshoring usually means a company is spread over a wide geographic area. This can make collaboration difficult, especially when teams operate in different time zone differences.
  • Quality control: Even when everyone working on a project is an employee of the same company, quality control can slip when teams work far apart. Overseeing junior employees on offshore teams is challenging; it is also more difficult to conduct regular inspections when workers are in other countries.
  • Language barriers: Faulty or inadequate translations, cultural differences, and misunderstandings have the potential to turn into significant obstacles. Over time, language and cultural differences can create a sense of mistrust between employees, even when working for the same company.

What Is Outsourcing?

Outsourcing is contracting with an outside individual or group to perform a specific job function. Companies often outsource tasks like marketing and accounting. Cleaning and maintenance are also frequently outsourced positions.

Unlike offshoring, outsourcing does not usually involve delegating the company’s core functions. In most cases, outsourced positions are peripheral to the company’s operation.

To determine outsourcing vs offshoring, it’s a good idea to examine the chief benefits of outsourcing.

Benefits of Outsourcing

Outsourcing can significantly reduce the financial and organizational pressures on a company. It can also give the company access to a broader pool of workers than it would typically have. Here are some of the top advantages of outsourcing:

  • Reduced labor and resource costs: Contracting out specific tasks instead of hiring a full-time employee means that a company does not have to pay for benefits like healthcare or vacation days. It also reduces hiring costs. Contracting out responsibilities may be cost-effective for facilities, equipment, or expensive technology.
  • Increased access to highly specialized workers: Many businesses do not have room in their budgets to hire full-time IT teams. By contracting out IT tasks, they can afford to work with top talent without paying the cost of a full-time salary. The same is true for other highly specialized skills, like software development.
  • Reduced pressure on company employees: Outsourcing jobs such as quality assurance means that company employees are free to focus their energy on other tasks. This allows for greater productivity and reduces the pressure on employees; instead of being stretched too thin over several roles, employees are now free to concentrate on doing the best possible job in their primary roles.

Disadvantages of Outsourcing

There are some disadvantages associated with outsourcing. Here are the most prominent downsides of the process:

  • Less internal control over products and services: Hiring outside consultants or specialists means trusting others’ expertise and ability to get a job done well. However, sometimes consultants don’t do the job the same way as you would. This loss of control can be challenging.
  • More difficult collaboration: Employees often learn — and gain new insights — by engaging with their colleagues. "Water cooler" talk can lead to cross-pollination of ideas and new collaborations. When you outsource a task to an external, third party, the potential for collaboration and insight is gone.
  • Increased risk of losing data: Hiring outside consultants entails a certain risk. It’s always possible that consultants will take advantage of their position to steal trade secrets, proprietary information, or sensitive data. Having consultants sign a non-disclosure agreement helps, but there is still a level of risk involved.

Key Differences Between Outsourcing and Offshoring

Outsourcing and offshoring are very different processes. Offshoring means working with remote teams, usually in a developing country. Software offshoring – when a company hires remote teams to do IT-related work – is a common example of offshoring. Offshoring can cut labor costs but can also cause communication problems.

Outsourcing, on the other hand, means contracting outside experts instead of hiring employees to perform tasks. Software outsourcing, for example, means contracting software engineers or programmers to perform IT work. Outsourcing services can save a company money but can also increase the risk of data theft and reduce a company’s control over its products.

What About Offshore Outsourcing?

Offshore outsourcing is a different business strategy altogether. It’s a type of business process outsourcing (BPO) that employs an overseas service provider to manage IT-related tasks.

Software Outsourcing and When It’s Useful

Software outsourcing can be a solid business strategy for companies that don’t have a large IT team. Contracting software developers and a tech team can be a good choice for some companies, especially those facing resource and budget constraints.

Outsourcing allows companies to choose software developers with expertise and experience. Because consultants deal with many companies, they’re likely to have already dealt with many of the outsourcing challenges that may arise.

On the other hand, outsourcing means that the company won’t have the level of control over their project — or over the personnel involved in each project — that they may wish for.

Outsourcing vs. Offshoring Examples

Today, more and more companies in North America and Western Europe are outsourcing or offshoring some of their tech projects. Here are a few examples.

Skype and Product Development

Skype, based in Luxembourg, was struggling to handle product development while staying on budget. The company eventually decided that it would perform better by outsourcing the project to developers in Estonia.

The Skype project started as pure outsourcing and became an offshore hire over time. Many developers did such a good job that Skype hired them as employees.

Citigroup and IT Offshoring

Citigroup currently does most of its IT operations offshore in Poland, India, and the Philippines. Citigroup also works closely with outsourcing teams to recruit temporary consultants. The company has cut its labor costs through outsourcing and offshoring.

Slack and Outsourcing

San Francisco-based Slack outsourced a significant design project to the Canadian company MetaLab. Outsourcing this project allowed Slack to choose the perfect design team for its project.

Explore Software Development Outsourcing & Offshoring

Many business leaders hesitate when deciding between offshoring and outsourcing. But what if there’s another, better option?

Revelo helps companies find the perfect software development or IT teams so that they can outsource projects with complete confidence. Revelo carefully vets time zone-aligned Latin American developers for technical skills, soft skills, and English proficiency.

Moreover, Revelo handles the entire onboarding process, including payroll, benefits administration, taxes, and local compliance.

Ready to learn more? Contact Revelo today to get started.

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