Outsourcing vs Offshoring: Which is Better?

Know the difference, the risks, benefits, and best practices.

Outsourcing and offshoring became very popular during the early 1980s - the time when both terms were widely used within the business world. But you should know, before these terms became prominent, as early as the 1800s, it’s been used and practised by some of the big brands of today.

In 1885, cash-poor Atlanta pharmacist John Stith Pemberton, who is also the brand founder of Coca-cola, was forced to replace his first knockoff product (French wine) with carbonated water due to citywide alcohol consumption restrictions in Atlanta. Even without the capital to build his own factory, Pemberton kept Coca-cola running by outsourcing 80% of the production. All he needs to do is distribute a dark, concentrated syrupy product he made to soda fountain operators who’ll then take care of all the mixing and bottling process. 

In 1899, Pemberton’s successor, Atlanta pharmacist Asa Candler, signed Coca-cola’s first offshore bottling franchise contracts.

We’ll whack out another success story for you! 

IKEA, a furniture retail company was founded by Ingvar Kamprad, a Swedish business magnate. There were a lot of remarkable concepts IKEA implemented that made the brand popular, especially their flat-pack concept. Years later, the company faced one of it’s biggest crisis, Kamprad’s Swedish rivals urged the suppliers to boycott IKEA.

To conquer the crisis, Kamprad began outsourcing cheaper materials from suppliers in Poland. As Kamprad resolved this crisis, the odds turn to his favour when communism in Poland fell during the late 1980s. While the polish economy is weak on exports, retail services, and financial services, IKEA took the chance and established their very first offshore outlet. For years, the company generated more profit, winning more than half of the homes in Poland.

But we’re not here to discuss the success of those who have taken a big leap on outsourcing or offshoring. Truth is, we want to unveil the good and bad of both practice helping you decide which practice to use and how you’ll get the best for your business!

Focal point: Outsourcing vs offshoring, which is better?

The terms outsourcing and offshoring can be very confusing. While most of their functions overlap, each has distinct methods, advantages and disadvantages.

At face value, the difference between these two terms is vague. While some assume the only factor differentiating offshoring from outsourcing was the idea of taking the work OVERSEAS - yes? But there’s more to it. Look at the comparison chart below.

Outsourcing

Offshoring

Contracting work out to a 3rd party organisation (local and or overseas)

Getting work done in a different country

Cost-efficient

Lower cost of labour

Sudden work influx? Hire a contractual team to do the work for you.

Low on budget? Establish a long-term team for continuous business operation


You might also need to take a good look at these pointers:

  1. You can outsource work without offshoring.

  • Hiring a nearby or a local firm to accomplish certain work for your business.

  • For example: Hiring a local accounting firm to do all the finances for your business.

  1. You can offshore work without outsourcing.

  • With much lower costs offered overseas, you can actually establish a branch office in a different country.

  • For example: An Uber customer service centre in the Philippines supporting American customers. An established offshore branch.

  1. You can do both outsourcing and offshoring at the same time

  • You have just enough budget to build a new offshore team.

  • For example: Hiring 10 web developers from the Philippines to improve your business production.

While the differences between the two may seem irrelevant at this stage, some might think using any of the two will give them the same exact results. Sadly, it won’t, especially if bigger teams are involved. 

Let me give you a better look at your two options here:

Outsourcing

Instead of hiring new office staff, outsourcing work from a third party organisation allows you to save more with cost-effective services. And for better trade, you can make bargains, closing a deal at its lowest reasonable price.

Some of you now are a bit sceptical, and wonder - "What's the catch?" Well, there's nothing for you to worry about. For years now, outsourcing succeeds in providing quality work for any specialized fields. Even if your business has limited staff with specific fields of expertise, no need to waste time training them to do tasks outside their main skills. You’ll end up with too many frustrations from several trial-and-error runs, and even cost you for screw-ups. You don’t have an accountant to do your business finances? Outsource those work to an accounting firm - no stress!

Outsourcing also grants business the flexibility to ramp up and down quickly whenever they need to. Let’s say, you manage a web development business and you’ve closed a big deal with a valuable client, with a three-month deadline. Knowing your business lacks manpower for a single big project, outsourcing contractual programmers will enable you to meet the deadline and gain your profit. 

Upscale your team if you need to and immediately downscale to save your business from too much labour cost in the future.

For those who are about to outsource for the first time, we can never give a 100% guarantee for your success. But we can give you a few pointers to remember when outsourcing. 

Start Small - When you’re about to work with a service provider for the first time, start with a small and simple project. Be very cautious of who you give your trust to or you might end up with too much frustration.

Clear project scope - Explain your project requirements in advance. Service providers want an accurate and complete project specification so they can present you their service proposal with an upfront quote. Give them as much information as you can regarding the project and in what way you want the work done.

Build Relationship with key managers - Start building trust with the key managers (e.g. project manager, team leader, and team manager). They will help you make sure every task are made according to your demands and expectations. They’ll also cover you from major managerial responsibilities, motivate your team to do their very best to either meet or exceed your expectations.

Offshoring

Let’s now move on to your second available option - offshoring. If outsourcing offers cost-effective services, offshoring can give you a much cheaper cost, considering some developing countries have lower minimum wages. Picture this: $20 per hour wages in western countries vs. $3 per hour wage in the Philippines. 

Just to clarify, we’re not saying offshoring is better than outsourcing or the other way around. You can use one (or both) of them at the right time for the right situation.

Are you worried about finding the right people for the job outside the country? Relax, there is a pool of expert and skilled workforce within developing countries. No matter what role or what field of expertise you need, you’ll be able to find them offshore.

Here are a few pointers to take note of before deciding to offshore:

Choose experienced and trusted partners - A lot of service providers will want to work with you. Some might lower their cost to win you over,  but don’t look at the cost alone. Check their company background, their previous and current clients - EVERYTHING! If you are not satisfied with what you found out about them, move on to your next choice.

A clear and detailed contract - Have a specific and thorough contract. Clarify the scope, schedule, demands, and expectations. Make sure everyone who is involved in the contract understands and will comply with the agreed statements.

Hire an on-site program manager - Hire a program manager whom you’ll extend managerial responsibilities to. They’ll ensure your team will continuously work and meet the deadlines. Look for a leader with strong organisation, communication and people management skills.

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Outsourcing and offshoring are still highly utilised within the business world today. More and more businesses enjoy the benefits they both offer, despite the fact that it’s a practise that has been long utilized in the modern world. But despite its older roots, the whole outsourcing community continues to evolve. 

Keep all the best practices I’ve shared with you to get the best out of outsourcing/offshoring. If you have any questions or if you’re looking to dip your toes in the outsourcing water, feel free to contact us here.

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