Outsourcing v offshoring: Let’s clear up the confusion

| January 13, 2018

When a business begins to grow the dilemma about when, who and how to employ resources comes to the forefront. Do you bite the bullet and directly employ someone and hope the role fills to a fulltime role? What tasks will you get the person to do? How will they be trained? Where are you going to locate them? Do you have the infrastructure to train and support them?

Then, the conversation turns to the options of Outsourcing or Offshoring. Most people, however, use these words interchangeably though they are actually quite different. It is important to understand the differences to make the most of these business methods in the overall management strategy.

Outsourcing
Outsourcing is the transfer of the management responsibility a part of a business’ operation that occurs internally to an external third party. For instance, it may be transferring the bookkeeping or accounts payable functions to a third-party provider. It might be a car sales yard transferring the car detailing to a third party.

The nature of outsourcing contracts has changed over time. What started off as a straightforward arm’s-length agreement between a buyer and a supplier moved on to become structured more like a partnership agreement. In this ‘partnership’ both parties in some way share the risks and rewards of the outsourced activity.

The basic premise of Outsourcing’ is to move a transactional activity to experts in that activity leaving your business to focus of the areas it is an expert at. Location is not important – outsourcing is moving a task or transaction from within a business to outside the business. Cost also may not be a factor – the task or activity just may not be core or something a business are not experts at.

Outsourcing is also not a new concept. The concept “outsourcing” came from the American Glossary ‘outside resourcing’ and entered our lexicon back in the early 1980s. Going back even further companies have outsourced their advertising almost as long as advertising has existed. What has been new though has been the development of transport and communication infrastructure which has made Outsourcing much easier.

Offshoring
Offshoring is the transferring of part of a business’ activity to a different country. The modern workplace is no longer restricted to a single location and is defined by technology rather than bricks and mortar. Offshoring is a geographical rather than a transactional transfer of business activity. For instance, a company in a developed company may move part of their operations to a developing country where the labour costs are much lower.

Offshoring can be utilised for both physical production of goods and for services. IT offshoring to India is an example of services offshoring. Ford setting up a manufacturing unit in China to take advantage of lower labour costs and to access lower cost raw materials is an example of physical production offshoring.

Combining Outsourcing and Offshoring
Many businesses are combing the outsourcing of non-essential or key tasks and offshoring them to another geographical location e.g. Apple deciding to produce microchips in Korea – the non-core task of producing microchips is combined with the move of the task from the USA to Korea. It is this combining of Outsourcing and Offshoring that causes the confusion between the two, and why sometimes the terms are used interchangeably.

There are many factors to consider when deciding if either Outsourcing or Offshoring, or a combination of both, is right for your business. The right decision can vary from business to business, location to location and task to task. Over the next few weeks in further articles I’ll explore the advantages, disadvantages and the criticisms of Outsourcing and Offshoring and debunk some of the myths around these business strategies.

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Stephen Barnes

Stephen Barnes is the principal of management consultancy Byronvale Advisors and the author of ‘Run Your Business Better’. He has spent over 20 years advising clients from start-ups to publicly listed companies and prides himself on understanding their issues and producing pragmatic solutions.