Outsourcing and offshoring are often confused. Many business owners may be ready to delegate some of their workload to a trusted third party but wonder what the real difference is in outsourcing vs offshoring.
Defining the difference
At first glance, the difference is simple – location. Outsourcing relies on companies within the U.S delegating duties to other companies within the U.S. Offshoring refers to a U.S. company that is outsourcing duties to a company outside of the U.S. (i.e., offshore).
However, the difference between outsourcing vs offshoring can get a bit more complicated than just the location of the companies in some cases.
Blurring the lines between outsourcing vs offshoring
Outsourcing and offshoring aren’t always black and white issues. Sometimes a company might use both outsourcing and offshoring. Learn about the types of outsourcing and the definition of offshoring below.
It’s possible for a company to outsource almost every aspect of their workload – call answering, production, accounting, marketing duties, and other responsibilities are commonly outsourced by companies in the U.S.
There are three general types or methods of outsourcing.
- Lights on outsourcing – A company seeks to lower costs by outsourcing, but doesn’t see strategic value in it and so does not look for talent or expertise.
- Efficient outsourcing – A company decides to outsource in order to drive continual improvement and gains in efficiency, but doesn’t see the value in using high-level talent or expertise to differentiate from competitors.
- Strategic outsourcing – Experienced outsourcing buyers target high-level talent and look for industry expertise when locating a company to outsource to. They seek to enter a strategic working relationship and plan for the outsourced work to drive competitive differences because of the quality of the work. They understand the concept of investing now to reap the rewards later on, rather than the offshoring concept of getting savings now while diminishing the quality of work and overall returns.
When a business offshores, this can mean either of two things:
a) They shift the location of at least one of their services or products to a company outside the U.S.
b) They open an overseas location and transfer production or services there without outsourcing.
These differences are subtle, but important.
An example of offshoring that doesn’t involve a third party company: When a company like GM opens a factory in a location like China and manages the factory without outsourcing any of the production or services to another Chinese company, it’s offshoring. But if GM opens a factory in China and also outsources some of the production to another Chinese factory, it’s both offshoring and outsourcing.
Dangers of offshoring
Outsourcing vs offshoring is an important comparison of two very different concepts–but both can (in theory) help business owners delegate work tasks to outside parties; however, offshoring has a negative reputation in the States because the quality of work and inter-company communication often suffers when work is transferred overseas.
Additionally, when companies choose to offshore, the American economy suffers from the loss of jobs and competition with disturbingly low rates of pay. In fact, one article referred to the economical consequences of offshoring as a greater threat than terrorism – an exaggerated claim to be sure, but one that stirs many important questions.
If you’d like to learn more about offshoring and the dangers it presents to both individual companies and the American economy as a whole, check out the excellent resources below.