What Is Offshoring? Understanding the Real Meaning Behind It

The difference between offshoring and offshore business process outsourcing (BPO) is a commonly misunderstood aspect of the global supply chain. Business owners and decision-makers often confuse these terms, but they are two different concepts.

This is an unfortunate misunderstanding because knowing the difference between the two business practices enriches your knowledge. It helps you understand their positives and negatives to make an informed decision.

So what is offshoring, and how does it differ from offshore outsourcing? Let’s find out!

The Main Difference Between Offshoring and Offshore Outsourcing

Before jumping to a comparison of these strategies, let us first answer: what is BPO? BPO is the process of transferring internal operations to a third party, which, in turn, manages and oversees the task based on established metrics. Offshore BPO is a type of outsourcing that involves contracting the work to a service provider in an offshore location.

Offshoring and offshore outsourcing are two distinct business activities. What is the difference between offshoring and offshore outsourcing? Here are six ways they vary:

Still confused about what offshoring is? Let us expound on the details to better understand this strategy.

What Is Offshoring?

Offshoring, or captive offshoring, is the process of relocating a business operation from a company’s home country to a foreign location. Multinational companies (MNCs) establish subsidiaries in offshore countries to leverage differing labor laws, lower costs, and easier resource access. Organizations use the strategy frequently and for a variety of reasons.

Thanks to the improvements in telecommunications infrastructure and shipping technology during the end of the 20th century, getting work done in foreign locations or developing countries became more efficient.

Manufacturing is a common component that businesses transfer offshore. The cost reduction resulting from offshoring helps generate higher profits for businesses. Companies then pass on the savings to customers by offering more affordable goods.

Another benefit of offshoring is the availability of skilled human resources in the region where the process is transferred. For example, the Philippines has a large pool of talent—14 million are fluent in English.

How Does Offshoring Work?

Captive offshoring happens when an organization creates its own captive site, or subsidiary, in an offshore location and hires locals to become its employees. The rest of the organization’s business functions continue to operate in their home country. An MNC can establish its own internal centers or subsidiaries in another country while maintaining full control and ownership.

Unlike outsourcing, captive offshoring is mainly a geographic activity. Goods are costly in the West because the labor required to produce and distribute them is expensive. Conversely, inexpensive labor costs in the developing world offer a basis for a low-cost economy.

Captive offshoring leverages cost differentials by transferring factories from Western countries to cheaper economies to market the products back at a significant discount. Along with technological improvements, offshoring helps lower the cost of consumer goods.

What Is Offshore Outsourcing?

Offshore outsourcing involves assigning business processes to an external vendor in the developing world to increase efficiency and save money. Companies outsource certain tasks or processes to BPO companies in offshore countries where labor costs are cheaper.

The term entered the business lexicon in the 1980s. As companies grew in the second half of the 20th century, they required more specialized skills and found that third-party vendors could accomplish work faster and more efficiently. This BPO trend led to hiring external providers to oversee business functions where the client lacked specialized skills.

Offshore outsourcing has become increasingly popular in recent years, with companies citing benefits such as improved workflow flexibility, greater productivity, and lower operating costs. The global IT services outsourcing market alone will be worth around $1.06 trillion by 2030, with the Asia-Pacific region having the largest market share.

The benefits of offshore outsourcing are:

• Not needing to handle non-core functions;
• Focusing on core competencies;
• Cutting up to 70% of labor costs; and,
• Achieving labor flexibility and sustainable scaling.

How Does Offshore Outsourcing Work?

Offshore outsourcing can come in the form of shifting a business division to an external party and buying the services back or selling a physical plant to a supplier to buy back services or products. A commonly outsourced function is customer service.

The core idea is to transfer transactional activities to experts to allow organizations to focus on their expertise.

Offshore outsourcing is the basis of decades worth of trade. Companies that outsource achieve greater specialization in areas that earn them the most profit. Outsourcing, in turn, generated significant wealth for the global economy.

So, is outsourcing a good idea? Is the BPO call center worth it?

Yes, outsourcing is absolutely worth it, but it poses several downsides. When you assign your tasks, you transfer knowledge to an outsider, which can lead to data security issues.

The Bottom Line

Hopefully, this article answered what offshoring is and its difference from offshore outsourcing.

Understanding the difference between the two terms is important. Both offshoring and offshore outsourcing have distinct economic and moral implications, and they offer their own business advantages. 

Are you looking for an offshore outsourcing partner? Let’s connect to discuss custom solutions for your business.