Difference between Outsourcing and Offshoring

Updated on May 27, 2017

Have you tried calling a certain company’s hotline and then being connected to someone who is in a different state or country? Although it is interesting to speak with someone from a place different than yours, this sometimes makes you wonder, “Why are these companies routing my calls to a person in a different place?” You may have gotten responses like “we are outsourcing our business….” or “we are offshoring our business….” But what do those terms mean? How is outsourcing different than offshoring?

Descriptions

Outsourcing

Outsourcing means using the services of a third party company or firm to accomplish a particular project. For instance, if you own a cable company in the U.S. and you need people to create an app for you, you can hire an IT firm to complete the task for you instead of having a special internal IT team.

Companies outsource for several reasons:

1. Lower cost – Sometimes it is more cost efficient to hire a third party team to deliver a product or service for you. This means you no longer need to spend the time and money to hire workers, train them, and acquire new equipment and technology for the project.

2. Expertise – Some projects can only be completed by experts or highly trained individuals. For instance, if you own a company that produces organic cosmetics and you need someone to create the right formulations, it is a wise decision to hire a firm that specializes in this field.

3. Flexibility – Outsourcing gives you the flexibility to only spend on what is necessary, whether the project is large or small.

On the other hand, offshoring means moving the site of the production or service to a different country. This may mean creating a remote site for the same company or hiring a third-party firm located abroad. For instance, if you own a company that provides internet service and you need a customer service team to assist your 4 million subscribers, you may move your customer service department to Asia or hire a firm in Asia that specializes in customer service.

The benefits of offshoring are numerous:

1. Flexibility – Contracts are, of course, still necessary in offshoring. However, with offshoring, you have the option to end or extend the contract according to the business need and you always have the option to change the vendor or partner with multiple vendors when necessary.

2. Cost efficiency – Many countries offer a much cheaper labor than your country of residence. This way, you can save money without sacrificing the quality of your products or services.

3. Project management – Offshoring sometimes means placing responsibilities on other people. This allows you to focus on the tasks that need your attention and delegate others to offshore management.

4. Specialty – With offshoring, you no longer need to look for qualified individuals and then train (or be trained by) them for the project. Offshoring allows you to select firms or teams that specialize in different fields or industries to help you develop your project.

5. Time zone benefits – If you need people to answer your customer service hotline 24 hours a day, 7 days a week, your customer service department in the Philippines, for instance, will have no problem providing round the clock support to you and your customers because of the opposite time zones.

Outsourcing vs Offshoring

What, then, is the difference between outsourcing and offshoring?

Outsourcing means hiring a third-party firm to complete a specific task for you, whereas offshoring means moving the site of your service or production of goods to a different country, whether by hiring a third party firm or by putting up a remote site under the same company. In short, offshoring is a kind of outsourcing, but the project is completed in a different country.

Both outsourcing and offshoring provide great benefits to a company: flexibility, cost efficiency, better project management, expertise, and time zone benefits (mostly for offshoring but this also applies to outsourcing, especially if you hire a firm in a different state or time zone).

Comparison Chart

OutsourcingOffshoring
Hiring a third-party firm to complete a specific task or project (e.g. partnering with XYZ Technologies to create your company website)Moving the site of your service or production of goods to a different country, whether by hiring a third-party firm or by putting up a remote site under the same company (e.g. you build a captive site in Singapore for your communications solutions company or you hire ABC BPO in Singapore for customer service)