People commonly confuse between outsourcing and offshoring models as they suppose those terms refer to the same business idea. In reality, there are some apparent differences between them though. Distinguishing between outsourcing and offshoring helps businesses conclude the best-suited strategy for certain projects and tasks, especially in the software development sector.
What Is Outsourcing?
Outsourcing, a word frequently used in the business circles, has become quite popular in the recent past. But what does it entail? In other words, outsourcing means that some organizational activities are performed by other organizations or by other departments of the same organization. This practice enables organizations to concentrate in their areas of strength, while at the same time enjoying the skills and advantages of the outsourcing service providers.
Global outsourcing market is forecasted to reach an estimated $769.7 billion in 2024. This growth is due to factors such as; The cost of outsourcing is lower than the cost of performing the same task in-house, availability of specialized skills, and the ability to concentrate on core business processes. For instance, 57% of G2000 companies use outsourcing, 76% of companies outsource IT functions.
Recommended reading: What Is Outsourcing? Definitions, Functions, Pros and Cons
1. Outsourcing benefits
There are multiple outsourcing business ideas coming up every year. Each of them assists the business owner and senior management to tackle particular obstacles faced by the company. Despite distinctive goals and orientations, those outsourcing solutions will bring the organization several standout advantages as follows:
- Reduced Costs: In Deloitte’s 2016 Global Outsourcing Survey, 59% of the respondents suggested outsourcing as an effective tool to cut exorbitant costs. Instead of hiring in-house experts, they may work with an external agency for cheaper services, yet still good-quality products.
- Improved Efficiency: Entrusting a portion of work to outside specialists help business reduce the time needed to train employees and make them attuned to new technology or administration process. Accordingly, this results in more effective work productivity and product quality.
- Access to Talent Pool, Innovation, and Outstanding Leadership: A third-party service provider will aid your company in allocating cutting-edge technologies, intellectual property, and creative solutions. Thanks to talented and well-functioning teams, your company then can focus on managing essential tasks and completing deliverables. Therefore, attracting more leads to improve business results.
- Focus on Core Business Operations: Outsourcing is an effective way to free up resources and concentrate on the company’s main activities. For example, a US small business outsource $198,550 per year on outsourcing services, which help them focus on their core business strategies.
- Fulfillment of Business Demands: Outsourcing activities help with handling capacity problems, augmenting flexibility and scalability. Therefore, businesses will be able to catch up with ever-changing business and market conditions.
2. Outsourcing IT functions
Outsourcing and offshoring strategies are popular in IT and security domain. In terms of outsourcing, traditional IT segments that are usually outsourced are infrastructure and application.
Infrastructure outsourcing includes data center, networks, monitored security, infrastructure management, and service desk. While on the other hand, application outsourcing includes activities like new application development, packaged software implementation, testing/QA work, and maintenance of legacy systems. Some of these tasks are outsourced by many companies because their internal IT personnel might not possess adequate skills or equipment to perform these tasks.
Due to the digital transformation, new services have emerged which are based on cloud computing and are commonly known as “as-a-service”. From the latest reports, SaaS and IaaS segments are the major segments of the IT outsourcing market globally.
This growth is due to the rising need for video conferencing and teleworking solutions especially in the current COVID-19 era. As to the future outlook, it is expected that SaaS and other related services will remain as one of the leading trends and the most popular type of outsourcing business model.
For instance, Alibaba which is one of the biggest internet global e-commerce sites outsourced many of their projects to grow. They subcontracted development to web developers in the U. S., a factor that greatly helped them. Another example is WhatsApp that outsourced its iOS application development to independent developers mainly in Russia.
3. IT outsourcing models and pricing
The appropriate outsourcing model varies as per what kinds of IT functions an outsource company provides. Therefore, the complexity of the project and its requirements are the major determinants of how an IT service will be billed. Here are some popular ways to gauge an outsourcing contract’s value:
Time and materials
The most traditional method to estimate the outsourcing cost is taking into account of time and materials involved in the business. So far, this pricing plan has been widely applied for long-term software production, service maintenance, project specifications, or objectives identification.
Fixed pricing
When requirements, goals, and scope are clearly set, the business owner may outsource software development at a fixed rate. This outsourcing expense is prescribed in a contract at the beginning of the project. Having a fixed pricing model is beneficial for the company. However, this may put more strain on the outsourcing vendors, in case the number of actual resources used for work outweighs the estimated quantity.
Cost-plus
As the name states, what the outsourcing supplier receives is actual payment coupled with a pre-negotiated portion for a profit. This pricing model does tally with companies that undergo trivial changes in technologies or business objectives. Also, cost-plus is seen to less stimulate the effective performance of the provider than other pricing methods.
Gain-sharing
The gain-sharing scheme is based on how much value the outsourcing vendor strives to produce beyond their accountability. Typically, the agency may get remittances according to an amount of functionality or the number of technological solutions created. This IT pricing model is nothing short of a gamble where one party is putting money at risk while the other attempts to optimize products or services to meet the buyer’s requirements. This will reap a certain percentage of profit from such endeavors.
Shared risk/reward
Both buyer and vendor jointly finance and govern the production of a new application, packaged software, or service. The outsourcing agency may contribute innovative ideas and share financial risks with the business owner. In turn, it’ll get rewards for the collaboration. However, this pricing plan might require decent management of both parties to accomplish the desired outcomes.
Recommended reading: How to Choose a Software Outsourcing Company? Best Guidelines
What Is Offshoring?
Offshoring is the process of moving business activities, tasks, or processes from one country to another often for cost advantage. The main motivation for offshoring is the desire to reduce costs and increase the efficiency of business processes. Managers deliberately decide to relocate some activities to countries where the cost of labor is cheaper.
For example, the giants like Apple, IBM, and Microsoft have managed to outsource some of their operations to other countries. Some of the reasons why Philippines and India are the most preferred offshoring destinations by the IT companies include infrastructure and staffing.
But offshoring is not without its problems. About a quarter of offshoring contracts have been reported to have had issues because of the differences in data protection laws. More than a quarter of the firms have expressed concerns on business continuity and disaster recovery in offshoring relationships.
To learn more about offshoring you can use the following reports: Rethinking the model for offshoring services by McKinsey, Exploding the Myths About Offshoring also by McKinsey and the Global Outsourcing Survey 2022 by Deloitte.
Recommended reading: Offshore Software Development: The Pros and Cons of Offshore
1. Benefits of Offshoring
Outsourcing and offshoring strategies exert similar and different impacts on all involved participants. Like outsourcing, the company opts for offshoring strategies aim to stay focused on their core business objectives while minimizing labor costs as well as other overheads. But the business still ensures a skilled workforce and exceptional leadership to drive everything on the right track. Further, offshoring its work accompanies several merits as follows:
- Risk Reduction: Operating multi-nationally will mitigate default risks, or worse, insolvency when the world enters new economic upheavals.
- Tax and Other Benefits: Many countries, especially developing nations, provide tax benefits and other incentives to attract foreign direct investment (FDI) from offshoring companies.
- 24/7 Service: Establishing branches globally allows 24/7 operations in different time zones, which seems impossible to those merely working domestically.
- Improved Management: Offshoring supports the company to better monitor and regulate all its operations.
- Streamlined Process: The management of a dedicated team from foreign countries ensures production occurs seamlessly and effectively.
- Talented Workforce: Offshoring teams with expertise and contributions assist the head company to track each phase of the production closely. Therefore, resolve problems of your business more creatively and efficiently.
Recommended reading: Outsourcing and Offshoring: A Detailed Definition and Comparison
2. Types of Offshoring
Offshoring comes in two varieties: production offshoring and services offshoring. Choosing either strategy relies much on your business objectives, demands, capital amounts, and more.
Production Offshoring
A company conducts production offshoring by building factories and manufacturing units in different jurisdictions, then importing and selling end products in the domestic market. Tesla Inc. is such a typical offshoring company. It relocates the production and assembly of components of Tesla vehicles to China where the workforce is cheaper and qualified.
Services Offshoring
When the company adopts services offshoring, it’ll establish subsidiaries in foreign nations. Those will perform operations associated with services such as auditing, marketing, information technology, customer care, and so on.
For example, a software company like Apple Inc. opens customer care units in different countries to directly handle complaints from customers or offer technical support to them when products get faults.
Offshoring Disadvantages
Inevitably, relocating business work to other countries is occasionally challenging. There are various obstacles the offshoring company has to confront and overcome to operate well out of the country’s boundaries:
- Language and Culture Barriers: This is an inherent drawback faced by those going abroad. Nothing ensures foreign teams know the company’s native language and English well enough to boost effective communications between parties. Moreover, different cultural backgrounds may compound interaction-related problems. Also, it takes the offshoring company and foreign teams a long time to get accustomed to each other’s cultures.
- Distant Locations: Long geographical distance makes the headquarters struggle with administering the work performance in foreign branches and visiting those units so often.
- Political or Geographical Issues: The business has to face political instability, armed attacks, protests, and other political crises, which are heavy tolls on its offshoring units’ operations.
- Safety and Security Problems: Enterprises, especially software companies, should be aware of such serious issues as technology theft. This may prevail in several countries with high rates of crime. Otherwise, the organization may be compelled to close its offshoring units if locals consider its manufacturing harmful to their environment and life.
- Ethical Issues: Those matters may arise when the organization refuses to give offshoring workers satisfactory remunerations or guarantee good working conditions.
Outsourcing vs Offshoring: Which One Is Better?
Numerous enterprises apply Outsourcing and offshoring models to cope with non-core business activities or share a part of business operations. Regardless of some downsides, these two strategies still prove efficient in fostering business productivity, diminishing overhead costs, and conveying high-quality products or services to clientele.
Given the distinctive properties of outsourcing and offshoring, the company should make an intensive analysis of both solutions. Hence, your company could determine which one is more advantageous for its projects over a certain period of time. Otherwise, the business will face more losses in terms of finance, human resources, and even reputation than gains. For more complicated tasks, the management can combine these two models to reach the best outcomes for the firm.
How Designveloper can help
In the debate of outsourcing and offshoring, Designveloper is one company that has proved to be exceptional. We are a Vietnam based software development company that has been in the business for a long time and has been delivering excellent services.
Expertise in outsourcing
Outsourcing is a business strategy that can be defined as the delegation of certain business processes to external companies. At Designveloper, we know this need. We have completed more than one hundred projects and implemented more than fifty kinds of technologies. We have clients from the startup level to the enterprise level with more than 20 industries.
Lumin is one of our significant projects; it is a document platform that lets users read, write, and collaborate on PDFs. It connects with cloud storage platforms, so it is convenient to work with documents regardless of the location.
Why offshore with us
Offshoring is a process of relocating business processes to a different country usually in search of cheaper labor. Being a Vietnam-based company, we provide all the advantages of offshoring without the inconveniences. The team of specialists is familiar with different technologies, which leads to a high level of work.
For instance, Bonux which is a crypto wallet project that we designed. It enables the users of cryptocurrency to hold, transfer, and perform other operations with the help of the wallet. Our team used elements of UI-UX design and other technicalities in the construction process.
The Designveloper difference
In the context of outsourcing and offshoring, Designveloper is a company that has positioned itself as a reliable partner with high-quality services and fast results. We have a team of professionals who will ensure that you get the best solution that meets your business needs.
Thus, if you are thinking about outsourcing or offshoring, Designveloper is ready to assist you. Choose us as your guide through the world of outsourcing and offshoring services and solutions. Altogether, we can reach the objectives of your business.
Conclusion
In conclusion, the analysis of outsourcing and offshoring shows that these two concepts have certain benefits for companies. The two approaches have benefits such as lower costs, acquisition of talents from other parts of the world, and improved efficiency. However, they differ in terms of control over processes and possible cultural and communication issues.
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