Difference between outsourcing and offshoring
In terms of business processes, outsourcing and off-shoring are two terms which are quite in contrast to each other but are often used interchangeably inadvertently. This article tries to bring out the main difference between outsourcing and offshoring.
Outsourcing is the process where a company contracts with a third party company/individual to perform some of the company’s work on its behalf. The third party, known as outsourcer, may do the work within the same country, or may take it to another country. Whereas Offshoring is where you take a function out of your country of residence to be performed at another country in order to reduce the cost. The work is done under the same company office which is established at the other country.
Offshoring is either completely offered to a third party or the company sets up its own offshore development centre to harness the advantage of cheaper labour costs. In case of outsourcing, the process is entirely carried out by the third party service provider specialized in the activity. The service providers in either case can offshore either from a neighbouring country or any country across the globe. When services are taken from a neighbouring country, the process is termed as near shoring or near outsourcing where some advantages of time of working and cultural matching can be possible.
For an example of outsourcing, A USA bank gives responsibility to manage its network and IT infrastructure to an IT company which can be situated either in USA or in other country such as India. Then the team of the IT Company will handle the entire bank’s work on a contract basis. Offshoring is where the bank sets up its own call center in India to server its US customers.
In case of offshoring, the core work of the company in a well defined form is offered to the service provider to take the advantages of cheaper labour costs, overcome manufacturing limitations in the host country or higher operational costs, or to meet the company’s target of achieving the project deadlines and sometimes to harness the special expertise available with the service providers in the area. For example, China is a good source of providing offshore services whereas; India has emerged as a core software development service provider to the world.
In case of outsourcing the companies look forward to list out all the non-core mundane activities and to specialist service providers either in the same country or offshore/ near shore. While outsourcing has been in vogue since specialization of skills and work levels have been identified, newer activities which were hitherto thought to be part of organization’s own responsibility are being outsourced to specialized firms. For example, payroll preparation, billing information generation, data entry, recruitment, claims processing etc are being outsourced now.
The case of offshoring is relatively a recent phenomenon with liberalization of policies of developing counties resulting in harnessing their skills.
The case of offshoring and outsourcing has even touched the research and development activities. The companies offshore their core R&D activities to an offshore development centre or enter into a collaborative agreement with the other similar partner/competitor in a well defined form including sharing of intellectual rights. In outsourced research activity a well defined research steps are offered to a third party service provider to get the results. In the outsourced research the service provider is expected to deliver the results without any claim on the intellectual rights.
When economic slowdown touched US and European Union, the offshoring activity got badly affected by the governments regulations of the host countries initiating cascading effect on the economies of India and China where major offshoring work was being carried out. But outsourcing business was less affected as the activities were even otherwise were sourced outside to expert service providers. An offshoot of melt down brought a new kind of offshoring and outsourcing namely “Rural Sourcing” within the host country where cheaper services are available.
In a more subtle way, offshoring can be termed as Knowledge Process Outsourcing and Outsourcing can be called Business Process Outsourcing. Whether offshoring or outsourcing, the world is slowly uniting and progressing because of exchange of business activities. As rightly pointed by Thomas L Friedman, the world is becoming flat with equal opportunities and equal development.