Outsourcing vs offshoring

With globalisation, the use of new terms such as outsourcing and offshoring has increased. Many entrepreneurs are already taking advantage of these opportunities to hire employees in other countries. But what is the difference between outsourcing and offshoring? 

 

What is outsourcing?

Outsourcing in IT, as in other sectors, involves the transfer of various areas of activity to an external company or freelancer. As processes are executed in parallel and faster, the IT company can then concentrate on the core business.

Companies may in fact produce work through internal resources or purchase it from external service providers. The question of whether services should be provided internally or purchased externally arises in all areas of a company, for example in material procurement, production or sales. When one chooses to outsource business processes to an external service provider, one always speaks of 'outsourcing'.

The outsourcing contract is based on defined and measurable service level agreements (SLAs). The demands on the outsourcing partner's competence, reliability and performance are therefore high.

The idea of outsourcing originated in information technology; the pioneer was the Kodak company. In 1989, Kodak outsourced its computer and communication networks to an external service provider. In today's world of work, characterised by rapid technological change, increasing complexity and specialisation, no medium-sized or large company can do without outsourcing. By outsourcing business processes, companies can focus on their core competencies and thus achieve greater efficiency and a stronger competitive position.

 

Outsourcing models 

Outsourcing is a generic term that encompasses several variants. A distinction is made between the following outsourcing options:

 

1) Application Service Providing

This form of outsourcing describes the possibility of having an external company manage only the software. Customers can use a certain software without having to install it on their own computer. Applications are managed on external servers in data centres. This eliminates the need for installation, maintenance and data backup.

 

2) Business Process Outsourcing

In this type of outsourcing, individual business processes are outsourced to external companies. These are usually finance, human resources, recruitment, logistics or IT.

 

3) Managed services

Managed services are particularly common in the IT sector. In this case, the provider takes care of all IT systems and provides the communication link.

 

4) Outtasking

Outtasking describes outsourcing in the form of entrusting individual and clearly defined tasks to external providers. This may include small tasks such as printing certain objects and digitising documents or larger tasks such as web design or software development.

 

What is offshoring?

While it is true that in the case of both outsourcing and offshoring, the team to which you entrust IT tasks does not work on-site, what makes them different is more a matter of details.

The word 'offshore' originally meant 'off the coast' and referred, for instance, to offshore oil drilling platforms as opposed to onshore oil platforms. In the modern sense, offshoring means the relocation of business activities abroad. The term originated in the 1970s and 1980s when US companies began outsourcing simple data collection work to Caribbean islands. These regions were henceforth referred to as 'offshore regions'.

Generally, offshore operations are subsidiaries of the company and not external service providers. Offshoring is motivated by cost savings due to lower labour and material costs in the offshore region.

If, therefore, in outsourcing you are not the only business partner because the company or freelancer may also work for a number of other companies, in offshoring you only work for yourself. On the contrary, often companies or freelancers are permanently employed, but live in a country with a lower cost of living and lower average income. 

 

Offshoring models

Depending on how far your IT department is from your head office, a distinction is made between farshoring, nearshoring and onshoring.

 

1) Farshoring

With farshoring, the employees of your IT department are located in distant countries. Popular countries for farshoring are for example China and India, where employees earn much less. However, this means that your employees have a completely different culture with possible complications due to both the language barrier and the different time zones. 

2) Nearshoring

Even with nearshoring the IT department is located abroad, but not as far away as with farshoring. There are several countries in Europe that have a lower cost of living than Italy and the time difference in European countries is not excessive. The costs are naturally higher than in South-East Asia.

3) Onshoring

Onshoring consists of transferring IT activities to a team in the same country, thus eliminating any language barrier and with varying operating costs depending on location. For example, rental costs in Milan are significantly higher than in other Italian cities. The disadvantage is that expenses will be higher than with farshoring or nearshoring.

 

Outsourcing and offshoring comparison

Is outsourcing or offshoring better? This question is not easy to answer. The following comparison will help you make an informed assessment of both options.

 

Outsourcing the most important benefits:

• Short terms are also possible

• Free choice of partners

• Reduced project and training costs

• Minor risks

• Increased competence and experience

• Focus on core business

 

Offshoring the most important benefits:

• Cost Reduction

• Highly qualified talent pool

 

Possible drawbacks of outsourcing:

• Complicated communication

• Greater commitment to quality control

• Indirect costs

• Less control

• Increased staff turnover

 

Possible drawbacks of offshoring

• Difference in time zones

• Intellectual Property Protection

• Differences in work culture

• Long travel distances

• Language barriers

 

Make outsourcing a reality with DevScaling!

Now that you have a picture of the variety of outsourcing and offshowing options, you will be facilitated in making the best choice.

Ultimately, you want your projects to be implemented and followed up flexibly, transparently, safely and cost-effectively, but above all, qualitatively and quickly. Therefore, choosing a partner that understands and transparently meets your and your target group's needs is a must!

Do you want to outsource some IT services to an external partner? Then we should talk. The experts at DevScaling are at your disposal if you are looking for an outsourcing team or project management. We are also the right contact for the development of individual software products, and if you have a major project in mind but need a CTO to follow it, you can count on our CTO as a service.

Contact us now for an initial no-obligation consultation!