When discussing the topic of Offshoring vs Outsourcing, the first thing that must be taken into consideration is that they represent two different means of conducting business.
Outsourcing and Offshoring Defined
Offshoring takes place when a company moves some or all of its activities to a foreign country. Such a move is usually undertaken for the express purpose of reaping the benefits of the lower cost labor that is commonly found in a number of emerging nations’ economies. This is the main motivation of many of the companies that move to and establish operations in Mexico, for instance. Firms may also offshore production to other foreign nations, including Mexico, for the further purpose of taking advantage of lower cost infrastructure or to be closer to their client base and customers. In some instances, businesses offshore work in order to take advantage of labor skills that are available at a competitive rate of pay in their country of choice but are not available at home.
Outsourcing, as is the case with offshoring, can also take place outside of the country of origin. It occurs when a business contracts some of its activities out to a third-party. Outsourcing was first popularized during the second half of the twentieth century when skills required to do work became more specialized. Companies began to contract some of their non-core activities to firms that were proficient in performing them. Additionally, business organizations found that they were often able to get work done faster, more efficiently, and at lower cost by accessing another firms’ expertise.
Offshoring vs Outsourcing: The shelter company hybrid
Companies that offshore operations may opt to set up a wholly-owned subsidiary in their country of choice. Although they are incorporated in a foreign nation, they also may opt to outsource some chosen non-core functions to companies that are located in proximity to them. This scenario can be termed “offshore outsourcing” or “overseas outsourcing”. In this case, outsourced activities are performed in an international setting. A hybrid of offshoring vs offshore outsourcing is utilized by offshore companies that contract for the services of a “shelter company” in Mexico, for example. Under this business model a manufacturer that is seeking to initiate and maintain production in Mexico contracts for the provision of outsourced non-core functions. Among the contracted-out activities are accounting and payroll, import-export and customs, logistics, human resources, and facilities management. In the case, where the outsourced activities are performed in the neighboring countries, like Mexico, we can talk of “nearshore outsourcing”.
Benefits of Offshoring and Outsourcing
The benefits of offshoring include the ability to reduce costs by accessing competitively priced labor, a proximity to clients and customers, and the ability to utilize competitively priced infrastructure. In addition to benefits, however, offshoring can pose some risk to firms that pursue it as a business strategy. Depending on the country to which operations have been offshored, problems may encounter difficulties and, possibly, can fail as a result of poor communications. Also, lesser developed countries may be more susceptible to unrest and political risk. Although some countries such as Mexico have developed an infrastructure that is capable of servicing the needs of offshored operations, other countries may be weak in this area.
Outsourcing is beneficial to companies that use this business model in that it enables them to contract with third parties to perform non-core activities. This enables them to use their time, financial, and other resources more efficiently and to concentrate on activities which represent their competitive advantage.