Software development outsourcing has been growing so fast, and it is predicted to increase by 70% globally by 2023. This is a significant increase from 61% in 2019. The main reasons for this rapid growth are numerous, but some of the most critical ones are the shortage of tech talent and the need to reduce costs while still getting the job done with the same quality. The benefits outsourcers can reap from hiring third-party companies to work on their projects vary case by case, but the most common ones are access to cheaper talent, faster turnaround, and improved quality. There are different types of IT outsourcing models, and they are categorized into three main types: Location-based models, relationship-based models, and project-based models. The most significant difference between these models is how they are structured and the way in which they operate. Among different outsourcing models, offshoring and outsourcing are two popular terms that are often used interchangeably; however, they do have some subtle differences. So, if you are planning to outsource your software development project or build an offshore software development center (ODC), it is essential for you to understand the difference between these two terms. In this article, we are going to lead you through all the differences between offshoring and outsourcing by going over their definition, benefits, and also challenges of each.
Definition of offshoring and outsourcing
First of all, let’s look at these two terms on their basis.
What is offshoring?
Offshoring is defined as the process of moving products or services to another country with the intention of reducing costs. The main reason businesses choose to offshore their operations is to leverage lower labor costs in other countries. This way, they can achieve a competitive cost advantage and improve their profitability.
What is outsourcing?
Outsourcing, on the other hand, is defined as the process of contracting with a third-party company to provide services or products that could be produced internally. The main reason businesses choose to outsource is to concentrate on their core competencies and leave non-core activities to third-party companies. Outsourcing can help businesses reduce costs, improve quality, and speed up production.
Advantages and disadvantages of offshoring and outsourcing
Now that you are able to tell the difference between offshoring and outsourcing by definition, it is time to see the difference in the pros and cons of outsourcing software development as well as offshoring:
- Access to lower labor costs: One of the main advantages of offshoring is that businesses can make use of lower labor costs in other countries. By relocating their operations to another country, businesses can cut down a significant amount of money on labor costs.
- Improved efficiency and quality: Offshoring can also help businesses improve their efficiency and quality because businesses can tap into a pool of talented workers in other countries. Also, by relocating their operations, businesses can get rid of any inefficiencies that may exist in their current processes.
- Faster production: Offshoring can also help businesses speed up production. This is because businesses can take advantage of the time difference between countries. For example, if a business in the United States outsources its operations to a company in India, the Indian company will be able to work on the project while the U.S company is sleeping. As a result, the U.S company will receive the finished product faster than if it were to produce it itself.
- Less control: One of the main disadvantages of offshoring is that businesses may have less control over their operations compared to the in-house team. This is because businesses will be relying on another company to provide them with the products or services they need. As a result, there is a risk that the quality of the products or services may not meet the standards of the business.
- Communication problems: Offshoring can also lead to communication problems. This is because businesses will be working with people from another culture. As a result, there is a risk that miscommunications may occur.
- Political instability: Another disadvantage of offshoring is that businesses may have to deal with political instability in other countries, which is difficult to operate in those countries normally.
- Cost savings: One of the main advantages of outsourcing is also saving money. This is because businesses will be able to contract with a third-party company that can provide them with the products or services they need at a lower cost.
- Improved quality: Outsourcing can also help businesses improve the quality of their products or services since you can choose to contract with a third-party company with higher expertise. As a result, the quality of the products or services will be improved.
- Faster production: This is because businesses will be able to contract with a third-party company that can provide them with the products or services they need in a shorter amount of time.
- Loss of control: One of the main disadvantages of outsourcing is that businesses may lose control over their operations. This is because businesses will be relying on another company to provide them with the products or services they need. As a result, there is a risk that the quality of the products or services may not meet the standards of the business.
- Communication problems: Outsourcing can also lead to communication problems. This is because businesses will be working with people from another culture. As a result, there is a risk that miscommunications may occur.
- Dependence on third-party companies: Another disadvantage of outsourcing is that businesses may become dependent on third-party companies. This is because businesses will be relying on those companies to provide them with the products or services they need. As a result, businesses may not be able to function if the third-party company goes out of business.
Summary: The difference between offshoring and outsourcing
In brief, there are a few key ways to tell the difference between offshoring and outsourcing:
- Location: Offshoring always involves relocating business operations to another country, while outsourcing can be done domestically or internationally, such as onshore, nearshore, and offshore.
- Control: When a company outsources a function, they typically have less control over it than if they were to handle it in-house. With offshoring, companies usually have more control over the relocated operations.
- Scope: Outsourcing typically refers to hiring a third party to handle a specific function or task, while offshoring encompasses relocating an entire business operation to an ODC.
- Cost: Both outsourcing and offshoring are selected in order to reduce labor costs and development expenditures. However, offshoring helps businesses save more money thanks to the cost disparity between the companies’ location and the offshore development center they build. Meanwhile, outsourcing does save costs, but how much it can help you cut down depends on which destinations you would like to outsource and some other factors.
- Risk: Offshoring generally entails more risk than outsourcing, as there are often cultural and language barriers to overcome. Additionally, political instability in the country where operations have been relocated can also pose a risk. That’s why a lot of companies are outsourcing their businesses to stable countries, such as Vietnam.