Sometimes used interchangeably, outsourcing and offshoring are actually distinct terms that describe different practices. Outsourcing is the practice of hiring external organizations and third parties to carry out tasks for a company—for example, hiring a law firm as a vendor to handle a business’s legal matters, draw up contracts, and so forth.
Though a lot of these tasks can be handled internally—and organizations do carry them out through their staff and departments—a lot of organizations, especially smaller ones, just don’t have the capacity or resources to do them.
This is what makes outsourcing so convenient for companies that can’t scale up operations or set up entire departments, offices, and teams. Common examples of outsourced tasks include content and web development, design, social media management, human resources—all things that need individuals and teams in order to be carried out. When an organization or business is small, say around fifty people, it can be difficult to hire separate on-board technical experts for the work mentioned above.
Offshoring, on the other hand, is when companies hire vendors and contractors outside their home country. Think of call centers and freelance writing for instance. It’s often done because foreign vendors are able to offer competitive rates, economies of scale, and large labor pools.
For years, companies carried out offshore operations in the form of factories where goods were manufactured for cheap, but with ease in communication methods and connectivity, it’s become quite easy to offshore more technical and administrative jobs as well.
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Are they mutually exclusive?
No. Both of these practices can exist independently of each other. Some tasks can be outsourced but not offshored and vice versa. For instance, a company can outsource and offshore a customer service helpline to cater to local clients, but not a physical center where those clients have to come to in person.
However, outsourced offshoring is entirely possible too, which is what allows companies to make use of vendors’ skills, knowledge, expertise, and ability to perform the same task for cheaper. So both the work and the skill are external, but under the name of the business.
Criticism and advantages
They both offer separate advantages such as cheap labor cost, efficiency, convenience, but are met with criticism too—especially offshoring, because it’s seen as a cop out from hiring and paying local employees. Since they’re outside the main organization, misaligned interests, goals and motivation can be a problem too. Overall though, both are fairly advantageous to businesses.