More and more companies may be considering outsourcing and offshoring their work as a potential way to reduce costs and streamline their operations. Outsourcing is when a company hires an outside organization to do specific jobs or provide services. Offshoring means a business arranges to get its work done in a different country, usually to take advantage of cost savings.

Many companies may be considering one or both—or a combination of the two, known as offshore outsourcing—in order to help stay competitive, especially in global markets.

Outsourcing vs. offshoring: How are they different?

Although the terms are often used interchangeably, there are some key differences between outsourcing and offshoring:

Outsourcing

This involves contracting out work to a third party, which may or may not be located overseas.

It's possible to outsource to a vendor without sending the work offshore. For example, a North American company may hire a local accounting firm to manage its bookkeeping instead of having its own staff members do the work in-house.

Offshoring

This is when a business moves some of its operations and employees overseas, often to less developed countries with inexpensive labor and resources.

It's possible for a business to set up offshore operations without outsourcing those processes to a third party. For example, a company may move its call centers to India to serve its North American customers.

Pros and cons of offshoring and outsourcing

There are advantages and disadvantages businesses should consider when it comes to outsourcing and offshoring.

Potential advantages of offshoring:

• Lowers labor costs. One of the potential advantages of offshoring is that businesses could save money by hiring foreign workers to do the same work for less money than it may cost in North America.
• Establishes new markets. Setting up an offshore presence may enable a company to broaden its customer base to other countries.
• Enhanced knowledge of overseas markets. Foreign employees may offer a better understanding of the regional trends, markets, business risks and cultural norms in their country than North American employees
• Alternate tax and regulatory benefits. Several countries offer tax breaks and financial incentives to entice foreign companies.

Potential advantages of outsourcing:

• Frees up in-house resources. By shifting some of the workload to an outside source, businesses can focus more on growth strategies.
• Lowers operational costs. One of the potential advantages of outsourcing is that contracting out work could lower overhead expenses and the need for additional in-house employees.
• Provides access to outside expertise. Outsourcing offers companies the opportunity to hire a vendor that specializes in a skill their company lacks.
• Faster service. A specialized offsite vendor may have the talent and resources to complete a task faster and more efficiently.

Potential disadvantages of offshoring:

• Regulatory differences. There are also foreign laws and risks that may impede standard North American business practices.
• Time zones. Working with overseas employees may mean having to make calls at inconvenient times in order to reach them during their normal business hours.
• Exchange rates. The highs and lows of currency valuation can make a significant dent in overseas transactions and may offset savings.

Potential disadvantages of outsourcing:

• Security risks. Entrusting an outside firm with sensitive company information may increase the chances of a security breach.
• Loss of control. Delegating responsibilities to an offsite vendor can make it difficult to monitor progress and maintain quality control.
• Lack of institutional knowledge. A company's interests may not align with those of an external organization, which lacks the firm's in-house insights.
• Intellectual property concerns. Sharing ideas and data with a third party can make it difficult to protect intellectual property.

What is offshore outsourcing?

One of the ways to experience the potential advantages of outsourcing and offshoring is to combine the two, which could result in even greater cost savings. Offshore outsourcing means delegating certain tasks to a third party in an overseas location. There are several potential benefits:

• Cost savings. By combining offshoring and outsourcing, a company could potentially save more money if able to take advantage of lower foreign costs and less overhead.
• Territorial knowledge. Having the ability to leverage a foreign workforce familiar with its own country and markets could be useful.
• Global competitiveness. As more North American companies expand operations overseas, offshore outsourcing could help them remain viable in an increasingly competitive global marketplace.

Current and future effects of offshore outsourcing

Market demands for lower labor costs will likely drive the continued growth of offshore outsourcing. More and more companies are also implementing this strategy so they can turn their attention to their core business and better serve their shareholders.

Offshore outsourcing has been prevalent in the Canadian IT industry, with many firms outsourcing software development, network operations and other IT services.

This article is intended for general informational purposes only and does not constitute legal advice or an opinion on any issue. It should not be regarded as comprehensive or a substitute for professional advice.