Offshoring vs Outsourcing

BY: ALBERTO LUGO

More often than not, offshoring and outsourcing occur simultaneously and are used interchangeably. However, this should not be the case because they are two different terms with their own meanings and functions. The confusion between “offshoring” and “outsourcing” is one of the most commonly misunderstood aspects of the global supply chain. So what exactly are these two terms?

Offshoring

Offshoring is a geographical business activity that businesses and corporations use to obtain services and products internationally or overseas. When a company offshores, it shifts the location of a service or production of a part to a location abroad.

Reasons Why Businesses Offshore:

  1. Costs- By offshoring, companies are able to produce goods or acquire services at much cheaper prices and rates than they would locally.
  2. Tax and Tariffs- The regimes in different countries offer certain tax and tariff relief. For instance, many countries typically allow companies to import goods at cheap prices enabling them to generate great savings.
  3. Control- As opposed to relinquishing control of part of their production to local suppliers, companies prefer to offshore as they then get full control and responsibility for their entire production process.

Outsourcing

Simply defined, outsourcing is the practice of hiring an external party to carry out services, perform tasks, and handle operations of a company. This is seen when companies contract works out to external individuals or organizations.

Reasons Why Businesses Offshore:

  1. Costs- The mere fact that some products and services are usually offered at lower prices while maintaining the same level of quality as if the job was done internally is one of the key factors that draw businesses to outsourcing. Even in scenarios where the quality of the service or product is not exactly the same, there is the fact that it will be more pocket-friendly.
  2. Specialization– Some business processes or products are very specialized and outsourcing to another provider enables companies the access to higher quality end results.
  3. Flexibility– When companies outsource, they only pay for exactly what they need. Therefore, outsourcing offers them the flexibility to only pay for what they actually need and will use.

Outsourcing and Offshoring

Key Differences:

  1. Outsourcing is the act of transferring business activities to an external organization that has a level of specializations. Offshoring, on the other hand, refers to moving an organization’s business to another country.
  2. Offshoring is only carried out internationally whereas outsourcing can be done both locally and internationally.
  • It is important to note that outsourcing can be a part of offshoring. When a company outsources internationally it can be referred to as an act of offshoring.
  1. The objective of outsourcing business activities is to focus on the core activities of the company. On the other hand, offshoring is performed to minimize the cost.

Although very similar, it is now clear that offshoring and outsourcing are two different entities of an organization’s business operations. They both serve their own specific objectives and offer different values to an organization.