Outsourcing vs offshoring: Key differences explained
Outsourcing and offshoring don’t just mean ‘giving your work to someone else.’ While they might seem like the same business model, or a mix many call ‘offshore outsourcing,’ they’re two distinct approaches to building tech teams.
In this guide, we compare outsourcing vs offshoring and analyse their benefits and drawbacks. After reading it, you’ll be able to distinguish between both models and decide which one best fits your organisation’s goals.
What is outsourcing?
Outsourcing means delegating tasks to a third party in your home country or abroad, generally on a short-term basis.
For example, you can outsource the testing of a new software feature to an external QA team for a few weeks due to the unavailability of your in-house engineers. Or a startup with no in-house team that needs an MVP to show to potential investors.
Companies that opt for outsourcing are looking for a quick, affordable solution due to an increase in their workload or need for extra support. They value cost-cutting over the niche specialisation and long-term commitment of the engineers they hire.
What is offshoring?
Offshoring means moving operations or processes to another country, normally thousands of miles away from your headquarters.
For example, you can set up an offshore software development team in India to design, build, and maintain software applications for your organisation.
Businesses that decide to go offshore are looking for a high-quality, long-term solution to extend and scale their tech teams. They prioritise hiring specialists who are fully committed and aligned with their culture, mission, and vision.
Outsourcing vs offshoring: Main differences
The key differences between outsourcing and offshoring can be understood through several parameters:
Talent
With outsourcing, the talent you get is often a shared resource, as engineers may be working on multiple projects at once. With offshoring, you get professionals who work just for your company and under your name.
Quality
The quality of outsourced engineers can vary, depending on the reliability of your service provider and the availability of the right talent at a given time. On the contrary, offshoring provides you with a steady flow of engineers possessing specialist skills.
Commitment
Professionals hired via outsourcing focus on completing temporary tasks or short-term projects with little commitment to the long-term goals of your business. Offshore engineers work just like your in-house team and are 100% dedicated and committed to your success.
Control
When you outsource, generally, you have limited control over projects, as they are managed by a third party. If you opt for offshoring, you can maintain full control over your operations, even if your headquarters are located in Europe and your new team is located in Asia.
Scalability
Outsourcing doesn’t give you many options to extend your team if you need to unless you renegotiate the contract with your service provider. Offshoring allows you to expand your team with top talent whenever needed.
The key benefits of both models
Now that we’ve outlined the crucial differences between outsourcing and offshoring, we’ll talk more in-depth about both models by analysing their benefits.
Outsourcing
Flexibility
A stand-out advantage of outsourcing is the flexibility that comes with it.
Let’s say a FinTech builds an in-house Quant development team. That team is permanently employed, so even if it’s a quiet period and there’s no real work to be done, they’re still paying them for sitting around twiddling thumbs.
Outsourcing, on the other hand, can be managed as little as a few hours or days at a time — the engineers only work when an organisation needs them. This level of flexibility is particularly important for companies whose work is more sporadic.
Affordability
Outsourcing is a business model that usually comes with significant cost savings. For instance, the cost of maintaining infrastructure and administration is almost completely eliminated, making it a very budget-friendly approach.
According to a study by Deloitte, cost reduction remains a primary driver for companies choosing outsourcing.
Better resource allocation
There are countless business functions in every company, many of which are non-core activities, ones which don’t offer any distinct advantage over competitors.
These non-core functions can distract key team members from focusing on their primary tasks, therefore wasting resources. Outsourcing to a third party means organisations can focus completely on their core competencies.
Offshoring
Ownership
With offshoring, companies maintain full control over their core business while collaborating closely with an offshore provider. The process of recruiting and building a high-performing offshore team is typically handled in partnership, combining the company’s vision with the provider’s local expertise.
While the offshore provider manages the recruitment process, the company retains the final say on who joins their team.
Top talent pools
One major benefit of going offshore is accessing vast talent pools with engineers who possess skill sets that are hard to find at home.
Countries like India and the Philippines, two of the most popular offshoring locations in Asia, put major emphasis on educating and training their people. The result is a huge number of skilled, well-educated, and English-speaking talents just waiting to be hired.
Cost-effectiveness
Thanks to the lower cost of living compared to the West, offshoring allows companies to access exceptional talent at a fraction of the cost they’d pay at home.
By hiring professionals with niche skills in talent-rich locations worldwide, organisations can build teams with engineers who are just as skilled, or even more so, than those available locally — all for 50% or even 70% less than what they’d pay in Europe or the US!
Scalability
Offshoring and scalability go hand-in-hand.
By building offshore engineering teams, companies can scale faster while reducing pressure on their in-house teams. This means:
- Increasing development capacity with more Scrum teams.
- Expanding beyond product development by adding new technologies like data and machine learning.
- Enhancing efficiency with shared services like QA, DevOps, and support.
This provides a great opportunity for organisations to expand their product offerings, driving innovation and growth across new markets.
See our unique and proven approach to building offshore teams that put people first
DOWNLOAD BLUEPRINTThe cons of both models
We’ve covered the good. Now, let’s dive into the drawbacks of using outsourcing and offshoring to build tech teams.
Outsourcing
Loss of control
When a company outsources tasks to an external team, it inevitably loses some control over how the work is being conducted. This could lead to poor communication and visibility between the company and the team, potentially undermining the success of the whole project.
Hidden costs
Though outsourcing on a contract basis always appears cost-effective, companies must always be prepared for any hidden costs which the vendor might bill them for at a later date. Companies frequently pay above their initial agreement on account of the work done being ‘out of scope’.
By focusing too heavily on cheap costs, it’s also very easy to hire professionals without the necessary skills for the job, resulting in a lower-quality product or service than expected.
Lack of customer focus
Your outsourcing partner may be catering to several other businesses at once. This makes it impossible to expect 100% focus and attention from them. Again, companies that opt for outsourcing risk receiving products or services that are not quite up to the mark.
Lack of creative thinking
Outsourced engineers often follow instructions without questioning or suggesting improvements. They do what they are told to… and that’s basically it.
Since they’re not invested in your business goals, they rarely go beyond the brief to offer innovative solutions. This can limit your ability to refine ideas or explore better approaches.
Offshoring
Geographical distance
Sometimes, collaborating with a team in a different time zone can be challenging. When the necessary tools and procedures are implemented poorly, it can lead to delivery lags and a resultant slower time to market products and services.
However, these issues can be solved by an experienced offshore development partner who’ll ensure the means of collaboration are properly implemented.
Businesses that want real-time collaboration with their teams and prefer them to be in the same time zone may view geographical distance as a major disadvantage of offshoring.
But, what some see as a drawback, others see as an opportunity. Organisations that understand that some of the most talented engineers live and work in vibrant tech hubs like Bangalore, India, don’t hesitate to build teams thousands of miles away from their home countries.
How we helped a fitness manufacturing company accelerated its delivery with an offshore team
DOWNLOAD CASE STUDYOutsourcing vs offshoring: Which is the better model for your business?
For short-term projects that don’t last for more than a couple of months, high-quality outsourcing is usually the strongest option.
On the contrary, offshoring is the way to go if you’re looking to build a resilient, high-quality team with specialised talent while still retaining complete control of the process.
At The Scalers, we’ve crafted a unique offshoring model that sources the top 1% of Indian engineering talent. We’ve built 100+ tech teams over the past decade for industry leaders like Preqin.
If you’d like to learn more about our offshoring model’s unique advantages and how we can help you set up a world-class dedicated development team, contact one of our senior executives by filling out this form. They’ll answer any questions you may have!
We hope this article has been helpful to you in understanding the key differences between outsourcing and offshoring. Stay tuned for more articles and guides on offshoring and building tech teams!
