Outsourcing vs. Offshoring: Making the Right Choice for Your Business

Backlogs slow progress on project completion or service delivery. As such, non-core functions can overshadow and steal resources from your growth-driven initiatives, delaying the time-to-market of your products and services. 

Many enterprises turn to business process outsourcing (BPO) to address such issues. Some companies outsource a specific business function, while others choose to offshore some of their processes.

But is there a difference? Should you outsource or offshore?

This article explores how different outsourcing and offshoring are to help you make a wise decision for your business. It also discusses best practices when adopting either approach.

Outsourcing vs. Offshoring: An Overview

Working with a third-party service provider comes to mind when someone asks what BPO is. Outsourcing occurs when companies want to prioritize improving their core business offerings while cutting operating expenses.

A U.S.-based company, for instance, hires a service provider in another state (onshore outsourcing), a neighboring country (nearshore outsourcing), or an overseas country such as the Philippines (offshore outsourcing). It does so to quickly and effectively perform these front- and back-office tasks.

• Customer service
• Information technology (IT) support
• Finance and accounting
• Healthcare support
• E-commerce support
• Human resources (HR) services
• Sales and digital marketing
• Cloud services
• Manufacturing and inventory management
• Knowledge and legal processing

Due to increased cost savings and productivity, the global outsourcing market constantly grows. In 2022 alone, the industry reached a market value of almost $262 billion, according to Grand View Research’s latest data. The organization expects the sector to expand at a compound annual growth rate (CAGR) of 9.4% from 2023 to 2030.

Despite such benefits, businesses might lose touch with their product quality when acquiring BPO services. Entrusting a function to an external party might also lead to job losses for some in-house staff members. This gap happens when companies find third-party contractors more efficient and capable of accomplishing tasks at their desired speed.

Businesses aiming to maximize the benefits of an offshore workforce while expanding their in-house talent can try offshoring. It refers to relocating or establishing a subsidiary in another country, specifically in developing nations with a low-cost labor pool. Companies typically offshore customer support, manufacturing, and software development.

Offshoring lets companies boost global competitiveness by accessing new markets, optimizing diverse talent, and enabling scalable business operations. But this business strategy comes with risks that include:

• Navigating various legal and cultural environments
• Dealing with language barriers
• Encountering quality control issues
• Ensuring intellectual property protection
• Upholding ethical labor practices and social responsibilities
• Facing different data security threats

Outsourcing vs. Offshoring: Key Differences Between

Because people still get confused about the terms “outsourcing” and “offshoring,” knowing their differences is crucial. You must know how distinct they are for better budget and business development planning.

Such clarifications further allow you to truly understand the BPO challenges and appreciate the BPO advantages. As you decide whether to outsource or offshore your non-core functions, remember these major distinctions between hiring a service provider and establishing a unit overseas. 

Outsourcing vs. Offshoring: Total Costs

Both outsourcing and offshoring let you save money on non-revenue-generating processes. The difference lies in which resources you can cut from the total operating costs and by how much. See the table below for a more straightforward comparison.

Based on Deloitte’s latest statistics, 57% of executives reported that cost reduction motivates them to adopt BPO and offshore services. They use such approaches to augment their staff for transactional business activity or IT support. 

Gaining cost savings remains dependent on your business decisions, though. Select outsourcing if you want temporary support for weeks or months. Otherwise, offshoring is your best bet for a long-term, cost-effective business unit outside your home country. 

Outsourcing vs. Offshoring: Scope and Operational Control

BPO service providers use advanced and automated solutions to handle your various front- and back-office processes. The speed and accuracy they bring allow your in-house staff to focus on the core functions. 

Meanwhile, your offshore team members handle similar tasks as your in-house staff back home. For instance, you own a beverage factory and move your manufacturing processes to the Philippines. Filipino workers follow exactly similar procedures and strategies as your American workers to produce the goods. The difference is that the former have lower wages. 

So if you still want full and strong operational control while lowering expenses, you must adopt offshoring. It lets you oversee and maintain the same quality of your onshore business offerings as long as you appoint the right staff. 

Outsourcing vs. Offshoring: Location

Outsourcing lets you pick service providers from cities and provinces in your home nation, neighboring countries, and other parts of the world. Offshoring enables you to move your operations to foreign countries with low cost of living, such as the Philippines and India. 

If you want aligned business hours and zero cultural barriers, outsource your non-core tasks to U.S.-based companies or nearshore countries such as Canada and Mexico. But you should consider offshoring to provide 24/7 support and expand your market reach at affordable costs.

Outsourcing vs. Offshoring: Security Risks

Both outsourcing and offshoring pose risks to your sensitive business and customer data. Because information sharing occurs online, your data becomes vulnerable to cyber threats such as breaches and hacks.  

According to the 2022 Internet Crime Report from the FBI’s Internet Crime Complaint Center, phishing and personal data breaches are among the top incidents filed. In Illinois alone, victims lose an average of over $30 million due to technical support scams.

If you do not work closely with your third-party and offshore teams, expect to receive the same complaints or lose the same amount of money. Thus, you must carefully align your security measures and policies to strengthen your data protection.

Best Practices for Outsourcing and Offshoring

Whether you adopt outsourcing or offshoring, you need a concrete plan to ensure returns and avoid future conflicts. Take note of these best practices when seeking a service provider or considering a new branch overseas.

• Identify in-house challenges. Knowing which areas hinder you from being productive and require immediate improvements helps you. It also assists in determining which non-core functions are costing you resources without positive output. 

• Clarify your business goals. Having measurable and specific objectives helps you make informed decisions. This practice helps you balance your resources well and ensure cost efficiency.

• Perform market research. Studying the outsourcing and offshoring sectors gives you an overview of how they can benefit and influence your business. This measure provides insights into requirements, trends, and resources you must consider before investing in BPO or setting up a subsidiary abroad. 

• Conduct a cost analysis. Knowing whether outsourcing and offshoring can meet your financial needs is critical. The results of a cost analysis also show how much money you can save by hiring a service provider or setting up a subsidiary in another country.

• Finalize investment decisions. Once you list all your challenges, needs, requirements, and possible budget allocations, decide whether to outsource or offshore. Seek referrals and advice from board members, executives, investors, and legal advisers to make a wise business decision.

The Bottom Line

Outsourcing and offshoring are two simple but distinct terms. If you do not understand the difference between these concepts, you might overspend instead of saving on costs when adopting BPO or establishing a new branch overseas.

Although these approaches bring you significant cost reductions, your total savings depend on several factors such as labor, equipment, and the workplace. When deciding whether to outsource or offshore, consider location, scope, operational control, security risks, and best practices.

Let’s connect once you are prepared to try BPO. We have scalable teams in our onshore, nearshore, and offshore locations ready to assist your business growth.