Offshoring vs. Outsourcing: Comparing the Differences

Despite politics, one of the most misunderstood aspects of the business world comes from using offshoring and outsourcing processes. Although many see offshoring and outsourcing as interchangeable, these business terms don’t mean the same. Staying competitive during supply chain log jams and shortages is a matter of knowing and understanding the differences between offshoring and outsourcing. Consequently, a savvy business companies manager utilizes both for maximum supply benefits.

Origins

Outsourcing (1) traces its origin to the eighties and increased attention to globalization. As businesses grew and prospered, expansion became an issue. Companies looked for new markets and ways to improve financial inputs. Indeed, at the heart of using outsourcing as a strategy rests the need to increase profits for stockholders. As a result, outsourcing comes with a political message most businesses would rather not deal with.

High-profile scandals like Enron meant that stockholders and other vital stakeholders needed more supervision. They needed to show the public how they did business in the spirit and mandate of financial transparency for publicly traded companies. Thus, as the eighties came to a close, terms like outsourcing started being understood by average citizens. Public understanding often comes with political outcomes, which the 2012 Presidential campaigns highlighted for maximum benefits.

Outsourcing Defined

Broadly, outsourcing is when one business hires a third party to complete work elsewhere. Outsourcing is the opposite of “in-house” or doing work within the business. Companies outsource their work for numerous reasons, some based on economics or geography and supply chain logistics. 

Offshoring Defined

Offshoring refers to sending traditional “in-house” jobs to another company or company division. Most of the time, offshoring refers to jobs leaving one country to go to another, more times than not, because the receiving country provides a better economic footprint for business prosperity. 

Typically offshoring will source staff from countries like India. But in recent years nearshoring has been an innovative alternative to traditional offshoring. Clicking the link to learn more about it and how nearshoring can potentially help with your business!

Business Practice Accountability

Which business practices a business decides to use depends on financial factors but should not discount the political messaging attached to the chosen methods. The Presidential candidate criticized during the 2012 election cycle was called out for his responsibility for outsourcing jobs because of the nature of his business companies, which specializes in putting people out of work as a condition for profit making.

Frequently Asked Questions About Offshoring vs. Outsourcing: Comparing the Differences

Outsourcing vs. Offshoring: Which Should You Choose?

Outsourcing and offshoring are distinct business practices that can be used to strengthen a business’s financial standing. Which method a company uses depends on a few key factors. In addition, choosing business practices to promote a business is strategic in nature, meaning there might be instances where using outsourcing and offshoring together produces the best facial outcome.

The Vision and Mission Statements

Large multinational companies have vision and Mission statements that inform stakeholders about what they do and want to do. While modern companies and startups envision their footprints as international participants, some businesses might still be focused on products and services that are localized or don’t need globalization. If a company focused on global markets has a vision and mission statement that doesn’t support outsourcing, there might be some negative feedback from the public. This feedback should be part of the decision-making process.

The Chief Financial Officer’s Role In Determining Financial Strategy

Older, more established companies either have a CFO or outsource the strategic thinking these executives perform for the company’s financial benefit. This executive position understands the complexity of outsourcing and all the inherent political messaging that comes with it. Generally, the CFO weighs the benefits and risks of outsourcing, offshoring, and other financial  strategies that influence the companies.

Benefits and Risks of Outsourcing

Paying close attention to the always-present political messaging that comes with outsourcing, CFOs and business owners can expect the following outsourcing benefits:

• A lower cost for doing business
• Access to specialized skills
• Labor flexibility

Contrast these benefits with inherent risks attached to outsourcing:

• Misalignment of business interests
• Over-reliance on third parties to complete the business mission
• Eroding the in-house knowledge base

Weighing these essential benefits and risks against the backdrop of the company vision should provide a starting point for thinking about strategic outsourcing. Note that outsourcing doesn’t necessarily include moving jobs but rather; thinking about the best financial footing for the company as expected by stakeholders.

While this article focuses on comparing outsourcing and offshoring, outsourcing can pose many other challenges for your business that we cover more in-depth: here

Benefits and Risks of Offshoring

Offshoring is a business term replete with political messaging because of its job-shifting focus on keeping a company in business. That said, offshoring’s benefits might be clouded by non-financial motivations but still be the best thing for the company. These benefits include:

• Faster work cycles due to supply chain logistics
• Lower across-the-board business operating costs
• A way of bypassing home base regulations

The above benefits must be weighed against the risks associated with offshoring, which include:

• Permanently moving jobs out of the home country
• Lack of motivation to learn skills needed to do those offshored jobs
• Works against the geopolitical forces that drive the global economy

Most small businesses will never need to understand the benefits and risks of outsourcing and offshoring because those decisions have already been made upstream. But as globalization continues as the dominant force in the global economy, those that make the findings need to be careful of the political messaging.

Finally, some see offshoring and outsourcing as a pair of strategies that should work together. But culturally you must also consider the risks to your own company. According to an article from Forbes (2)

“Outsourcing doesn’t always have a negative impact on company culture, but you need to protect against this before you ever take a step in this direction. This typically means discussing your decision with any employees who could be impacted.”

-Forbes

Think Strategically

In place of a CFO, a business must have some vision for moving forward. For example, mission and vision statements give business owners and other stakeholders some direction about what the company does and what it wants to do. Small business owners usually don’t have vision and mission statements but instead have an entrepreneurial drive to be successful.

Offshoring vs. Outsourcing Post Covid

The Covid 19 pandemic taught everyone the meaning of waiting on supply deliveries for a living. Indeed, as word spread about supply availability, everyday household items like toilet paper disappeared from store shelves. As the public coped with these shortages, the global supply chain began feeling the strain from boycotted cargo ships and closed ports, all to stop the pandemic.

The Post-Covid World Economy

As the United States and other countries throughout Europe and the rest of the world began opening again, global supply chain logistics would need to kick into overdrive for vaccine deliveries. Those in the United States and other nations that developed their vaccines utilized internal supply chain logistics, resulting in a rush to get back to normal.

However, those nations that relied on vaccine imports were confronted by supply chain log jams, slowing global control of Covid 19 and its mutations. Supply chain logistics were strained just when the global economy needed them most. Quoted from Harvard Business Review (3) 

“The challenge for companies will be to make their supply chains more resilient without weakening their competitiveness.”

– Harvard Business Review

Thus, the global economy in a post-pandemic world must rely on offshoring-outsourcing as a necessary strategy for globalization.

Notably, most businesses, even small businesses, must be aware of supply chain logistics as an engine for globalization and a strong world economy. The challenge in the future for individual economies that are integral parts of the world economy comes from inflationary and deflationary forces that can damage the supply chain.

New Models of Offshoring and Outsourcing

In a post-Covid 19 world economy, businesses that need supplies for normal operations should reimagine their use of offshoring strategies to align with their own financial goals. Some companies might find that a combination of both offshoring and outsourcing practices can be replaced with onshoring practices from experts that understand the intricacies of supply chain logistics on a global scale.

If supplies from an offshore company lead to in-house jobs returning to the home country, the impetus for globalization remains intact. For example, the automobile manufacturing industry is a globalized mix of offshoring-outsourcing strategies that provide brand recognition worldwide. Most people driving new American-branded cars don’t realize they were produced in several global locations.

Now onshoring and offshoring aren’t the only types of outsourcing model used today. In fact, they’re many types of outsourcing models’ business owners explore to reduces cost and expand teams. For more information on this click on the hyperlink!

Use Offshoring-Outsourcing Strategies to Bring Jobs Home

Things like labor shortages and computer chips affected the globalized automobile industry. However, the thriving used car industry has already filled the needs until the supply chain logistics could be resolved.

Much of today’s global economy depends on the movements of raw materials and partially completed supplies to produce consumer goods. The resulting global supply chain runs with intelligent software that can adapt to issues on the supply chain almost instantly. Onshoring practices tap into this intelligence to deliver value to companies that counter the political messaging associated with offshoring.

Offshoring has created a major benefit to large corporations looking for opportunities to expand the business, increase production, and reduce overhead. But it’s not all perfect and may not fit everyone’s company model. We’ve written a whole article answering the question: Is offshoring good or bad?

Is Onshoring the New Normal?

Onshoring that uses technology to tap into the advantages of a digitally managed global supply chain might be the future of CFO-guided strategic thinking. Although there are apparent advantages of onshoring that include positive political messaging, onshoring might be a link that helps multinational companies become multicultural companies that depend on disparate locations for completed projects.

Onshoring is part of the offshoring-outsourcing strategy for modern supply chains., the engine for a global economy that might be a game changer for developing countries that have a way into international markets. Onshoring may not be the standard way of operating on its own. As a financial strategy, it must be hedged against other market forces, such as the labor force and the profitmaking needs of business owners and/or stockholders. Onshoring strategies are significant because they align local economies with the global.

References:

1. Outsourcing Definition
   https://en.wikipedia.org/wiki/Outsourcing
2. Outsourcing doesn’t always have a negative impact on company culture, but you need to protect against this before you ever take a step in this direction. This typically means discussing your decision with any employees who could be impacted. – Forbes Quote
   https://www.forbes.com/sites/deeppatel/2017/07/17/the-pros-and-cons-of-outsourcing-and-the-effect-on-company-culture/?sh=7c938ee0562d
3. The challenge for companies will be to make their supply chains more resilient without weakening their competitiveness. – Harvard Business Review Quote
   https://hbr.org/2020/09/global-supply-chains-in-a-post-pandemic-world