Outsourcing and Offshoring

Outsourcing and offshoring are two terms we hear a lot, and both are important to businesses of all types, but the terms are often misused and misunderstood.

Outsourcing refers to the practice of using external companies to provide functions to our own company. This is so common that it is often ignored as a special practice and we see this commonly in the use of bookkeeping, accounting, financial, human resources, information technology, legal, electricians, plumbers, and many other roles & departments.  Bringing in outside companies that specialize in these functions, rather than staffing up and training departments of our own, is often the only sensible way to get the expertise that is needed at a price that can be afforded.  Outsourcing is generally done to leverage either scale or expertise, or often both.

For example, a typical business would not get good financial returns from hiring a full accounting department with a full range of skills and training, they would be idle most of the time, wasting money.  But an outsourced accounting firm can work just as needed, while providing a range of skills from many different internal people.  Through outsourcing, your company may get more and better skills, all while saving money.

Offshoring is different and refers to having staff work from locations outside of the country (presumably across the ocean, hence the term, but simply outside of the country is all that is really meant.)  The term arose from the common practice of using south Asian resources across the Pacific from the US as low cost workers, but it is important to understand that many European countries use American staff in exactly the same way – low cost, overseas labor compared to what they can hire at home.  Offshore workers may be normal employees, or may be provided through an external vendor.  The concept of offshoring does not imply outsourcing as well.

Essentially all companies outsource, whether a little or a lot.  Outsourcing is most often another business right down the street, or at least in the same country. Rarely is outsourcing also going to be offshored.  But no reason that it cannot be.

Offshoring is very rare, for an average company.  It is complicated and poses many legal and logistical hurtles, and it requires much understanding of the offshore location and culture.  Most people who express concerns over outsourcing actually mean offshoring – extremely low cost, extra-national workers with little training, and probably no oversight.  Offshoring tends to engender apprehension either because people associate it with low quality work because end users typically only interact with it through low cost call centers that give it a bad reputation, or staff react to the idea with fear that their jobs will be sent out of the country.  But offshoring can be effective if done well, and can be important to keeping your business competitive.

Combining these two is common and can be beneficial; it is not surprising to find that many outsourcing firms also offshore.  But the two components are distinct and serve different purposes.  When seeking an outsourcing partner,  consider that offshoring may be an optional benefit that they can offer.