The global IT market is developing rapidly, and it triggers organisations to utilise software engineers to avail the best benefits of software development.
While the demand for tech specialists is growing, more ventures seek help from external parties.
This trend has caused outsourcing and offshoring to become major business buzzwords, and many people use them interchangeably.
So in Outsourcing vs. Offshoring, what is right for your business?
Well, in this article, I will compare them to help you determine which setup suits your needs.
Let’s get started!
Outsourcing and Offshoring are the two terms that people generally use interchangeably. But, they are not the same and describe different aspects.
Outsourcing Vs. Offshoring: The Evolution
The Industrial Revolution has completely changed the outlook of how businesses were operated. Highly productive machinery and high-end technologies meant that companies could grow at an unprecedented rate.
In the middle of 1900, many businesses were thinking out of the box, and were looking to boost their profits and market share. The technology was powerful than ever before.
It resulted in companies working hard to scale up their operations to leverage high-revenues while staying at the top of the competition. Unfortunately, this scaling leads to a complex management process lacking in agility and flexibility.
Due to this struggling, and to overcome this, companies decided to outsource their projects to third-party experts on a contract basis. It is to create a well-managed baseline of operations.
This is how outsourcing came into existence!
In the year 1990, outsourcing as a cost-saving measure, was as popular as ever. Contracts were drawn, timelines are set, and it was a smooth and hassle-free delivery of services.
So, what is outsourcing?
It is a business practice in which you hire an external organisation to perform your job or services.
The outsourcing model in the 90’s worked very well. Companies were satisfied with the results. With the profits they achieved, their expectations began to rise, leading them to make the most of their projects.
The only thing outsourcing couldn’t give them was a sense of ownership. Businesses want to take ownership of their projects and businesses-related process.
So, they began to search for a business model that was cost-efficient, scalable, and also that gives them complete ownership and control over their projects.
At the turn of the 20th century, offshoring came into play.
So, what is Offshoring?
It is the practice of shifting some of a company’s business operations to another country in order to take advantage of lower costs.
Outsourcing Vs. Offshoring: The Differences
Outsourcing involves contracting your work out to an external organisation to get special expertise. Outsourcing can be done in your country or abroad. The people performing your work will be employees of that third party. Your employees play no part in outsourced work processes.
For instance: Hiring an external firm (may or may not involve overseas) to manage your software development (can be non-core or other parts of the project) instead of maintaining an in-house team.
Offshoring is getting your work done from a different country under your company’s name. It is referred to a shift in your business operations to another country to reduce the cost of doing business. But they are still your own employees.
It is possible to offshore your work and not outsource it, and it is possible to outsource your work and not offshore it. You can see more examples of successful offshoring here.
A Dell customer service in India to serve American customers is an instance of offshoring.
When outsourcing, the main objective is to make use of the highly skilled developers. Instead of wasting time and money by hiring and training an in-house team, you can outsource it to a specialised firm.
Outsourcing is not always about reducing costs. It is to take advantage of specialised skills from third parties when your in-house team lacks knowledge in the particular task.
If you are outsourcing your software development project, you can focus on other marketing, finances, and sales related activities.
When offshoring, the objective is to reduce costs for business functions. When shifting business to a country like India, business owners like you will face:
- Lower wages
- Lower setup costs
- Fewer taxes
Outsourcing can be done within your country or abroad, while offshoring involves the decision to go overseas and hire foreign professionals.
Outsourcing suggests assigning non-core works or projects that should be completed from A to Z. While offshoring implies the relocation of complete business processes to another country like opening a software development centre, hiring a vendor there etc.
- The process is fast and efficient: If you think of training a workforce in-house, it can take months for them to start delivering results. But if you outsource to an external outsourcing agency, they will help you get faster results as they already have experts in their team. So, with outsourcing, you won’t have any downtime, the results are quick, and it speeds up your time to market.
- It allows your company to focus on its core competencies: When you outsource, you free up your employee’s time to focus on tasks they understand. So that they can undertake tasks they are well-equipped for and can focus on achieving the main goals of your business. It allows your company to focus on its core competencies, and you won’t be struggling to manage work that you are not equipped to do with.
- Contract-based work: Do you already have a team of developers? Or, do you have the requirement for a software sector?
If your team is busy with other projects, or if your company has no permanent employees for software development, outsourcing is the ideal option. It is hiring on a contract-basis option for assigning overflow tasks or for one-time product creation.
Also read: 10 Reasons Why You Should Outsource Your Mobile App Development
- You have more control: As I mentioned before in this blog, you will have complete control over the development operations when offshoring. You don’t have to rely on anyone except your trusted employees, no negotiations over contract terms or expectations. If you want to make any changes in the operations, you don’t have to go through a chain of command between two companies.
- Can keep proprietary information: Offshoring lets all your trade secrets remain in-house. It helps you avoid the risk of letting your information go public or into your competitor’s hands.
So, we have discussed the differences between Outsourcing and Offshoring. Now, let’s discuss about the combination of both, which is known as ‘Offshore Outsourcing’. It is used by many companies as it offers them the benefits of both outsourcing and offshoring.
Offshore outsourcing means, you contract your work out to a third party in a different country. It is usually done to lower costs and take advantage of the vendor’s expertise, economies of scale, and large and scalable labour pool.
In the past decade and a half of increasing globalisation, offshoring has been the fastest growing outsourcing market segment, especially in IT services, with India leading that space. Therefore, more companies are offshore outsourcing their work to Indian outsourcing companies.
With improved operational costs and tons of skilled workers, offshore outsourcing is now becoming the norm.
Offshore outsourcing help companies to take advantage of the benefits of both outsourcing and offshoring. Also, it helps you:
- Maintain quality: Quality and Innovation should be at the core of company operations. When offshoring, you get value for your money. They will help you position your business ahead of the competition and allow your business to win the market. If you notice that the quality of your products or services, and the standard of innovation are diminishing, offshoring software development is the best option.
- Utilise the top resources and technologies: With technologies such as Artificial Intelligence, Natural Language Processing, etc., the technology landscape is developing rapidly. Also, changes are happening in how industries operate.
For developers, multiple resources are available in offshore development. It enhances the developing experience and their potential to make powerful software applications that leverage disruptive technologies.
Even if you get its benefits, there are risks associated with it, such as communication issues, setting unrealistic expectations, etc. But it is possible to avoid such risks if you know how to manage your team well.
For instance, do you know GitLab? They are pretty big and successful.
They have a large remote team across the world with more than 1000 people across 60 plus countries. Quite an achievement, right?
Also, companies like Zapier, WordPress, etc., are other examples that rely entirely on remote teams. This means not only for them, it is also possible for you to implement remote work successfully.
Read more: How to Manage Remote Teams Effectively in 2021
So, to avoid the risk associated with offshore outsourcing and to achieve all of its benefits,
- You should conduct a proper research to hire a trustable outsourcing company for your startup.
- And manage them by following effective methods.
To conclude, outsourcing involves hiring an external company (abroad or in your country) to access specialised skills that your in-house team lacks knowledge in. While offshoring involves the extension of your business operations to another country to reduce costs. Also, it helps boost your operations while retaining complete control over your business process.
If you are a startup or small or medium-sized business, hiring an in-house team for software development is expensive. The periodic cost of hiring a permanent software developer can tighten your business budget while limiting efforts aimed at minimising costs.