Overview: What to know beforehand?
Outsourcing vs offshoring: Definitions first
Offshoring, Nearshoring, Onshoring and Outsourcing are processes through which a company transfers different portions of their services or business process to another company. Below we’ll discuss the differences between offshoring and outsourcing, but you can learn about nearshoring and onshoring by clicking here.
What does “outsourcing” mean?
Loh and Venkatraman (1992), consider outsourcing as the provision of physical and/or human resources by external suppliers, associated with the company’s information technology (IT) infrastructure. In other words, it is the process by which a company outsources a part of its activity, i.e,: hiring an external company to manage a part of the company’s business process. Through outsourcing a company can improve certain functions while increasing efficiency.
What are the advantages of outsourcing?
- Cost savings: outsourcing a business process along with some HR-related activities can result in substantial cost savings.
- Expertise gains: some tasks are outsourced to specialized companies. For example, HR and recruitment or payroll and scheduling can be offshored to an organization that specializes in HR procedures and is familiar with all company policies.
- Focus on basic business processes: outsourcing non-revenue-generating tasks, such as administration and customer service, frees up the time and resources to focus on revenue-generating business processes.
- Lower operational, infrastructure and recruitment costs: outsourcing can free up space while saving on the costs of hiring, purchasing office equipment, IT systems and rental expenses.
- Shared risk: when a company outsources specific components of its business processes, it also shifts the liability associated with those processes to the outsourced provider.
There are some disadvantages to outsourcing that a company should consider
- Exposing confidential information: outsourcing departments such as human resources or customer service, the third party often has to disclose confidential data.
- Provision of services: when a process is outsourced, feedback and reports are produced weekly or even daily. This may not be enough, especially if delivery is delayed or quality is below expectations.
- Instability of outsourcing companies: if the outsourcing company goes bankrupt, so does the business department of your organization, calling for immediate corrective action.
- Lack of customer focus: Some outsourcing firms work with a wide variety of clients on multiple projects at once. This may lead to disappointing results for the organization’s tasks, as they may lose focus.
What does “offshoring” mean?
It’s the process by which goods or services come from a subsidiary of the company located in a different country. In short, from an operation abroad, which belongs to the same company. An offshoring process in the service sector could be for services like customer service of a mobile operator. In doing so, customer service is provided from locations where this service is cheaper allowing the company to cut costs.
Some key benefits of offshoring are: lower labor costs, multicultural environment, access to new markets and more. If you want to know more just visit our blog Benefits of Offshoring.
What is the difference between onshore and offshore outsourcing?
The different types of Outsourcing are: onshoring, nearshoring and offshoring. Each type presents its own distinct set of benefits. As we detailed above, outsourcing is simply the action of transferring a given task to an outside company, whilst offshoring, onshoring and nearshoring all have a different geographic location where these services are carried out.
How to choose the best service for my company?
In today’s business world companies use on-site and remote workers. Both have their advantages. Here’s a clear example: Apple, the IT giant, is a leader in the smartphone market yet most of its manufacturing is carried out in China, a low-cost country. Offshoring describes the relocation of a business process from one country to another.
Offshoring by the numbers
- Goldman Sachs estimates that U.S. companies have sent 400,000 service jobs overseas since 2000, and the Information Technology Association of America (ITAA) says that 104,000 tech jobs moved abroad in that period.
- Forrester Research Inc. predicted that 3.3 million U.S. service jobs would be sent offshore by 2015, but that analysis is now called conservative by experts like Cynthia Kroll, senior regional economist at the Haas School of Business at the University of California, Berkeley. Kroll estimates that as many as 14 million U.S. jobs
- The ITAA says that offshore outsourcing will create jobs in the United States (some 317,000 by 2008), thanks to the economic boost companies get from this move.
- Offshoring increasingly impacts high-paying jobs. Forty-seven percent of survey respondents say most of the jobs that moved overseas paid $50,000 or more before being outsourced.
Outsourcing by the numbers
- Around 300,000 jobs are outsourced by the US annually.
- The top reason for outsourcing (70%) is cost reduction. The total IT budget in 2020 grew from 12.7% in 2019 to 13.6%.
- 58.8% of US marketers saw no covid-related changes in the outsourcing marketing activities.
- Larger companies are 66% more likely to outsource than small businesses.
- 36% of workers in the US are part of the “gig economy.”
- The global outsourcing market was worth $92.5 billion in 2019.
- By 2025, the global IT outsourcing market will be worth $397.6 billion.
- 83% of IT leaders are planning to outsource their security to an MSP in 2021.
- 24% of small businesses outsource to increase the efficiency of their business
(Source Capital Consuelor)
