The growing demand for specialities like information technology (IT) and software engineering in the West — combined with an eruption of talent in Asia, has caused ‘offshoring’ and ‘outsourcing’ to become major business buzzwords.
While many think they’re two vague words meaning ‘giving your work to someone else’, this couldn’t be further from reality. The line can become blurred, with some even combining the two as ‘offshore outsourcing’, but while both share the characteristic of distributed working, outsourcing and offshoring represent two utterly contrasting business models.
In this guide, we compare outsourcing vs offshoring and the benefits and drawbacks of each model within specific types of business. If you’ve ever considered extending your software development team with top talent overseas, this article is just for you!
The evolution of outsourcing and offshoring
Outsourcing
The Industrial Revolution radically changed how businesses operated. Highly productive machinery and breakthrough technologies meant companies could grow at an unprecedented rate. By the mid-1900s, many were thinking outside the box, looking for any angle to increase profits and grow their market share.
Technology was then so powerful that by simply scaling up operations, companies could leverage massive economies of scale to increase profit margins while undercutting smaller rivals. Unfortunately, this scaling led to a bloated and complex management structure and business process and a lack of agility and flexibility.
Struggling with having their cake and eating it, companies decided to focus on their core business and began to outsource their support functions. This move made it easier for companies that weren’t self-sufficient or had no internal competency to outsource to third-party vendors on a contract basis, forming the baseline of outsourcing.
Fast-forward to the 1990s. Outsourcing, as a cost-saving measure, was as popular as ever. Contracts were drawn, timelines set, and what seemed like smooth and hassle-free delivery of services was established.
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The outsourcing model of the 90s worked amazingly well, and companies were more than happy with the results. However, their expectations began to rise, and they wanted more. The one thing that outsourcing couldn’t give them was a sense of ownership, and they wanted to be in charge of the entirety of their business. Thus began the search for a business model that was cost-efficient, scalable, and gave business owners complete control and ownership. The ethics of offshoring slowly but surely began to shift.
At the turn of the 20th century, offshoring came into play.
What makes outsourcing and offshoring so popular today?
Before we dive into the pros and cons of offshoring and outsourcing, it’s important to look at the major reasons why businesses today rely on both models more than ever. Here are a few of the main ones:
1) Acute shortage of talent
Recent studies have shown that the talent shortage in the UK has doubled over the last decade. This massive talent shortage means companies have to look elsewhere to source talent.
In early 2023, British Chambers of Commerce reported that 2 out of 3 UK firms sought staff, but 8 out of 10 faced challenges in finding the right talent.
The last decade has seen more and more firms establish a global presence. Setting up remote teams sets new trends in business on an international scale. Globalisation therefore facilitates economic growth and competitiveness, and offshoring vs outsourcing is merely a consequence.
2) Globalisation
The last decade has seen more and more firms establish a global presence. Setting up distributed teams sets new trends in business on an international scale. Globalisation facilitates economic growth and competitive advantage, and offshoring vs outsourcing is merely a consequence.
3) The need for innovation
The rapidly changing market and the need to build innovative products and services further popularised offshoring and outsourcing.
4) They broke the mould
While in-house businesses seemed to be working fine, the operation of such an enterprise was often rigid and frail because of the sheer amount of work that needed to be done. Manufacturing and sales became a tedious process with little to no changes. Companies began to realise that outsourcing and offshoring offered a way to break free from traditional business models and, quite possibly, generate significant returns for the business.
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DOWNLOAD CASE STUDYThe key benefits of both models
Outsourcing
Flexibility
A stand-out advantage of outsourcing is the flexibility that comes with it. Let’s say a company builds an offshore finance team. That team is permanently employed, and so even if it’s a quiet period and there’s no real work to be done, you’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 — they only work when you actually need them. This level of flexibility is particularly important for companies whose work is more sporadic.
Cost-effectiveness
Outsourcing is a business model that usually comes with significant cost savings. For example, the cost of maintaining infrastructure and administration is almost completely eliminated, making it a very budget-friendly approach. According to a study conducted by Deloitte, cutting costs ranks within the top four primary drivers for outsourcing for companies.
Resources
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 you can focus completely on your core competencies — a real boon to the company!
Offshoring
Ownership
In the offshore business model, unlike with outsourcing, the company keeps full control over their core business. The responsibility of recruiting a stellar offshore team, then directing and training them, lies entirely in their hands.
Talent
One major benefit of taking a business offshore is access to a massive pool of talent. There is immense pressure in developed countries to discover and recruit individuals with the right skill set, especially in software development and production.
Countries like India and the Philippines put major emphasis on educating and training its people; the result is a huge number of skilled, well-educated, and English-speaking talents just waiting to be hired. That’s the quality offshoring gives you.
Cost-effectiveness
Cost-cutting is undoubtedly the most significant factor that drives companies to look into offshoring. Offshore teams in countries like India are incredibly talented and passionate about what they do. Because of the lower cost of living compared to the West, offshoring allows companies to access this exceptional talent without the same huge costs as at home.
Scalability
Offshoring and scalability go hand-in-hand. By successfully building offshore teams, a company establishes remote centres in different parts of the world. This provides a great opportunity for the company to scale its business, supporting clients whenever and wherever they need it.
The cons of both models
Outsourcing
Loss of control
When a company outsources 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 people 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, the company risks receiving products or services that are not quite up to the mark.
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 of products and services. This is offset by an experienced offshore partner who’ll ensure the means of collaboration are properly implemented.
Outsourcing vs offshoring: the better model?
Finding the right balance between distributing core and non-core competencies of a business isn’t always easy.
Both outsourcing and offshoring come with their benefits and drawbacks.
For short-term projects that don’t last for more than a couple of months, high-quality outsourcing is usually the strongest option.
However, offshoring is the way to go if you’re a company looking to enhance your operations by building a team hand-picked from a deep pool of talent while still retaining complete control of the process.
At The Scalers, we offer Offshoring 2.0, a modern approach to offshoring that focuses on building stellar development teams by hiring nothing but the best talents for businesses across the globe.
If you’d like to learn more about our offshoring model’s unique advantages, schedule a free consultation with one of our experts.
