Offshoring and Outsourcing: The Advantages and Disadvantages
February 05, 2019 by Aley Brown
In today’s economy, it makes sense for your business to explore the idea of offshoring and outsourcing different areas of your company. Before you make a decision to offshore or outsource, it is vital that you understand the advantages and disadvantages of each of your options.
So, what is the difference between offshoring, outsourcing, and even insourcing?
“Insource” or “insourcing” refers to the process of having an employee of your company complete a task or business process.
“Outsource” or “outsourcing” refers to the process of having someone external to your company, that is not an employee, complete a task or business process. This could be an outsourcing agency or a consultant.
Say, for example, that you have tons of accounts payable work at your organization. You could hire an employee of your organization to handle your accounts payable, or you could outsource it to a company that specializes in doing accounts payable. This is a great, and very common, example of choosing between insourcing vs outsourcing.
“Offshoring” is kind of like outsourcing. You’re taking a process or function of your business, and then paying another entity to do that work for you. The only difference is that when you offshore something, the entity you are paying to do the work is overseas. Hence the term “offshore.”
An example of this would be if you wanted to offshore the manufacturing of your tech gadget to a factory in China. Or maybe you are looking to offshore your Spanish marketing materials to a marketing agency in Latin America. Both of these would be examples of offshoring.
Now that you understand what each of these options are, it is also a necessity that you understand why making a decision to offshore or outsource is so important.
There is a lot at stake with this decision. Your choice could be the reason that your business grows at an exponential rate, or saves your company from going under. It could also be the reason that your business actually goes under.
This is a big decision! Which is all the more reason why you should have a great understanding of the following offshoring and outsourcing advantages and disadvantages we will cover.
Offshoring and Outsourcing: Outsourcing Advantages and Disadvantages
You will find that in the insource vs outsource debate, positives and negatives are inverses of one another.
While insourcing lets you have more control, allows your employees to feel more ownership, and allows you to have more customization and flexibility for quick changes, outsourcing firms most likely don’t have those abilities.
The employees of the outsourcing firm won’t have the same pride in the work that they do for your company because it isn’t your company that they feel loyal to. If you find a really great outsourcing firm that is very focused on customer satisfaction, this might not be the case. But a lot of the time it is.
The outsourcing firm has tons of clients, not just you. So they don’t have the same capacity to respond quickly to change or customize a process just the way your business likes it. Every outsourcing firm is different, but generally this is a problem with outsourcing certain business processes.
Insourcing has its downfalls. The cost, training required, and scalability can easily get out of control if your company is growing pretty quickly. That is where outsourcing wins in the insource vs outsource debate.
Outsourcing is a great option for containing costs over the long run. They are capable of scaling much more easily than insourcing because of the amount of resources that they have on hand. Having 20 more hours of work each week won’t phase your outsourcing company, but it would put a huge strain on your internal employees.
Outsourcing companies are also responsible for their own training. So when you need to get something done, you don’t have to worry about a ramp up time to onboard a new person to a task.
Also, since the outsourcing company specializes in said business process or task, they usually have expert level knowledge. Hiring someone with this level of knowledge at your organization might be too expensive for your bottom line, so it makes sense to rely on an outsourcing company that has that type of expertise.
Offshoring and Outsourcing: Offshoring Advantages and Disadvantages
When looking at offshoring advantages and disadvantages, it’s pretty easy to see why so many companies choose to offshore parts of their business.
The first advantage of offshoring is that the costs are generally much lower than completing the process at a facility in your location. This is why so many big manufacturing companies locate their factories overseas. The cost of labor is significantly cheaper, as well as the overhead of renting a facility.
This can increase profit margins, thus boosting your company’s competitiveness in the market.
In some areas of the world, your company might even be able to get a tax credit or break if the government is looking to stimulate a local economy. This can save you a substantial amount on taxes, which can be significantly higher in other places in the world.
Another advantage we should consider when reviewing the pros and cons of offshoring is the ability to more easily reach new markets. In my previous example, I talked about offshoring marketing operations to a marketing agency in Latin America. This could be done to better market to a Hispanic market segment. This would be an example of using offshoring to more easily reach new markets.
This example also shows another pro of offshoring: expertise. If your company is located in the United States, you’re probably experts about marketing to your audience there. But you aren’t experts on the people, consumer behaviors, and other factors that come into play when trying to market your product or service to another part of the world.
Finally, another advantage of offshoring is that it can help with human resources issues like motivation and overall job satisfaction. If your employees are stuck doing monotonous tasks in their jobs, it can be really demotivating. Especially if your employees are highly educated.
Offshoring those tasks can help with their overall job satisfaction and the productivity of your company. This will make them happier, and free them up to do more strategic things at your company, which in the long run will result in more value.
Now that you know all about the advantages, we should go over the less glamorous part of offshoring pros and cons: all the disadvantages associated with offshoring.
Before your company decides to partake in offshoring, it is very important that you review the cons associated with your particular situation, since they can have such a huge impact on your business.
The first con of offshoring has to do with ethical concerns. In recent years, ethical concerns have been raised about the process of offshoring due to the low pay and poor conditions associated with the factories that some companies use overseas.
In today’s hyper-connected world, it is very easy for news of unethical worker treatment to spread online and tarnish your brand. Consumers are more picky than ever, and are willing to stop using a brand’s products because of ethical issues like this. So make sure that you take this into account when looking into offshoring.
The second con of offshoring has to do with cultural barriers and communication. Due to the difference in time zones, it could be extremely hard to communicate with the offshoring site. Decisions that would only take a day if all parties were in the same location could now take several weeks due to the difference in working hours.
And this is just the tip of the iceberg when it comes to communication and cultural barriers. If you have someone at your company who isn’t well versed in the culture, customs, and language of a different part of the world, it can be extremely hard to operate your business there.
For example, it is customary in some countries to provide a gift to the head of a company before signing a contract. If your employees don’t know this, they could blow through several different deals, and lose your chances of operating in said location in the first place.
Finally, it can be very hard to create good working relationships when you don’t speak a common language with someone. Words get lost in translation, and mistakes happen. Multiply this by being several thousand miles away from said offshoring site, and the venture can get more and more difficult.
The last con of offshoring that we’ll cover is security. If you have expensive equipment overseas, you will need to make sure that you have security onsite to ensure the safety of the machinery. Certain countries have more volatile climates, and might be more susceptible to violence or political unrest. Because of this, you will want top notch security.
Offshoring and Outsourcing: The Ultimate Decision
If you are trying to decide between offshoring and outsourcing your business, you will need to analyze all of the pros and cons associated with the two choices.
While offshoring might be the more cost effective option, outsourcing could also be better for your overall brand if the working conditions are better than that overseas.
Whatever choice you make, always consult with your legal team, and your PR team as well to understand the impacts your choice could have on the company brand.
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