When a company initiates its operations, it has certain business objectives i.e. profit maximizing, service-oriented, etc. With the success of the company's activities, it intends to expand its services and portfolio. Scaling the business operations and cost reduction assist in the profitability of the business. To amplify the company business more, companies may select between offshoring and outsourcing, which are effective business solutions that offer several profits for the company and its stakeholders.
There is often a misconception about the global supply chain that they are interchangeable terms but both viable business solutions have different meanings, benefits, risks, and potentials. Offshoring and outsourcing both are used for cost-cutting, scaling business processes, and expansion of services amongst a wider audience. We will be discussing a synopsis of both of the business solutions along with their differences.
Outsourcing word is commonly used and heard frequently. Outsourcing is carried out by a third-party external vendor That focuses on the company operations, which has hired that party for its ultimate purpose. Outsourcing refers to delegating tasks to the service provider to handle the non-core functions. For example, if an ‘A’ class commercial bank requires 50 eligible staff for a customer care center, then the bank can contact the outsourcing company for the tasks of the vacancy announcement to final recruitment, and on behalf of the bank, the third party or the outsourcing company employs a robust workforce. Rolling Plans Private Limited is also an example of an outsourcing company along with a certified Business Process Management firm. The hiring process doesn't fall under the category of core operations of a bank as its core operation is conducting banking functions with customer service excellence. In this way, the bank can fully capitalize on its core operations. According to the popular BPO website, the global outsourcing service may grow to $904.95 billion by 2027 in a hulking manner.
In outsourcing, the company provides the ultimate freedom to the 3rd party provider to operate its business functions with constant communication and collaboration. Employee management tools, emails, and other required technologies and tools are exchanged. It's also estimated that outsourcing can reduce labor expenses by up to 70% so outsourcing is one of the best cost-cutting or cost-effective solutions without affecting the core business operations. The people hired by the 3rd party vendor are not the actual employees of the company, but the service provider maintains individual contracts with the employees who work for the company. As the service provider operates on all the criteria on the company's behalf, there is no such requirement of investment in tech, resources and infrastructures by the company.
Outsourcing helps to optimize the processes for a short period which enables the companies to improve their services. Independent contractors or service providers search for talent in an easy process. There may be various types of outsourcing such as IT outsourcing, project outsourcing, BPO outsourcing, and manufacturing outsourcing, but the ultimate goal is business scalability with smooth business operations. Outsourcing may have several benefits maintained in the business lexicon, such as cost advantage, labor flexibility and quality, but it may possess certain risks like project failure due to miscommunication, scope creep, etc. However, there should be strong collaboration between the company and the service provider to minimize such risks.
While outsourcing means delegating tasks to the 3rd party service provider, offshoring means moving the operations or processes overseas (to another country). For example, establishing a call center in Romania due to its low-cost labor and competitive advantage. Since the outbreak of COVID-19, the trend of offshoring with remote employees has escalated. It's done to ensure a smooth operation with low costs with the manpower of the company. Outsourcing may be best for the short term, but offshoring is the practicable solution to catch labor costs and operating expenses The employees hired are the companies’ employees and the company needs to invest in team relationships for the betterment of the organization.
Unlike outsourcing, the company itself has to invest in tools and technology, system processes, infrastructures, resources, and more. As the relocation is done, the company needs to maintain some legal formalities overseas. As time zones may differ due to locations, companies need to maintain the scheduling shifts. The expansion of business services in a different country, helps the business to reach the global market with competitive advantage and cost differentials. With the potential benefits of low wages and reduction in other expenses, offshoring also constitutes potential challenges like legal battles overseas, due diligence, political and economic hassles, communication issues, and more. But when the offshore facility is maintained with a proper team with depth analysis, it benefits both the company and the economies where facilities are established.
Offshoring and outsourcing are often mistaken as interchangeable business solutions, but both are different. Offshore outsourcing is also a viable solution where both terms are combined and business activities are operated. It depends on the organizations to select the best possible business solutions for their smooth operation and high scalability.