Words like Offshoring and Outsourcing are often mistakenly put together in the same context. But the truth of the matter is that they are vastly different and have different applications and executions.
In this article, we are going to explore the meaning behind Offshoring and Outsourcing, the pros, and cons of implementing them, and of course the risks.
First and foremost, what is the difference between Offshoring and Outsourcing?
According to InvidGroup.com, Offshoring is a precise and calculated geographical business activity. Activity that plenty of modern-day businesses use in order to internationally obtain services, products or gain economical efficiencies . So, when a business offshores its operations to another country, that business or a company shifts the entire operation of the business into the new location.
However, Outsourcing is a process in which one of the company’s key operational processes is transferred to a supporting third-party.
The main difference between offshoring and outsourcing is therefore that when offshoring the process stays internal but moved to an overseas location, while when outsourcing the process is extended to an external partner.
Each of these business activities has its share of pros and cons, so let’s explore some of them. However, before we touch on the benefits and risks of offshoring and outsourcing, let’s briefly explore the reasons for them. Why do modern-day businesses and companies turn to these business activities?
There are plenty of reasons why some companies choose to offshore and outsource their operations. Perhaps they don’t have the proper tools for a particular job or simply don’t have access to the relevant workforce or expertise. If it’s a very specific task, for instance, that same task may require special software, machines, or a piece of special knowledge that the company might not have at the moment. But there are plenty of other reasons. Labour laws, costs, and simply better control over the operation process. Just to name a few.
But what are the pros and cons of Offshoring?
Much like with the reasons for offshoring and outsourcing, the pros and cons are also plentiful. But for the purpose of clarity and time, we are going to focus on the most important points.
Pro: Reducing costs. Most companies that offshore their operations to other countries, do that in order to save money. They also offshore to developing countries in which the wages are lower compared to the developed countries.
Pro: Tariffs And Taxes: Some countries do offer tax reliefs and laxed tariffs for exporting the products. While some countries even allow certain companies to import tools, goods, and other materials at lower prices. This of course generates better savings for the company.
Con: Geopolitical risks are a common drawback when offshoring. Depending on the region, offshoring can be a bit dangerous. Especially if there is a history of unrest, war, or famine in the country in which the company is offshoring.
Con: Different time zones are also a problem when it comes to offshoring and so are the cultural differences. The offshoring countries may have different customs, laws and different cultures. Expensive set up, to shift an entire internal function needs an initial injection of investment, whilst the saving might be there long term, the initial set up of purchasing premises for example, can be expensive.
What about the pros and cons of Outsourcing?
Pro: Flexibility and cost-effectiveness of the labour are often the main motivation. For instance, if a company needs developers for a fixed term of only 6 months, they can turn to outsource as a solution. They can outsource the workforce for that specific amount of time. Not to mention with high flexibility for the company/team that is being outsourced, and with that a much lower cost.
Pro: Quality And Effectiveness of Labour. Truth be told, most of the companies don’t have in-house experts for every aspect of the daily operations. For that purpose, it is best to outsource the areas in which the company is lacking in. Whether it is digital marketing or tech support, the effectiveness and the quality of the outsourcing aspects in such cases outweigh the risks that may occur.
Con: A threat to confidentiality is present. Confidentiality and security according to smallbusiness.com. So, make sure to protect all of your confidential data and intellectual property from the outsourcing party. At Causeway connect, we offer a protective clause in your contract that ensures all your data and intellectual property doesn’t get stolen or abused.
Is offshoring and outsourcing the best option for your business?
Offshoring requires a large investment and with that greater risk but can have a longer term pay off. As a result, its usually reserved for large, international companies who can expand their operations and invest substantial amounts of money in a different country.
So, it depends. You must weigh out the good and the bad of both business actions. Each of them comes with certain perks and risks. If you feel that you can successfully manage an outsourcing or offshoring team then go for it. Outsourcing can be a good first step into cost reduction and scalability, and is certainly more accessible and carries lower risk, so is a good option for those business who can’t afford such large capital investment. Likewise, it can be a good way to test the model, with low barriers to entry and controllable costs.
Causeway Connect has been outsourcing successfully in North Macedonia for several years, managing to create one of the most successful outsourcing stories in the region. We can offer some of the lowest outsourcing rates due to our scale and shared resource options, designed for smaller companies to test if outsourcing is the right route for them. If you’d like to talk through your options or have any questions, leave your details on our contact page and we’ll be in touch to see how we can help take your business to next level with effective, professional outsourcing.