According to a Research And Markets report, the global outsourcing services market is expected to reach $905 billion in 2027.
That’s almost a trillion U.S. dollars spent on outsourcing.
Offshoring, for its part, is not only a growing trend but a significant and ever more crucial element in the long-term success of any business.
But do you know the key similarities, differences, and interactions between “offshoring” and “outsourcing?”
“Outsourcing” involves contracting out tasks to third-party providers, while “offshoring” is relocating business processes to another country.
In this article, we’ll look more closely at these two, so business owners like you can decide which approach is best for your enterprise.
Section 1: What Is Outsourcing?
Outsourcing is a common practice where a company hires an external party to do specific tasks. These tasks were previously handled “in-house” or by the company itself, but for some strategic reason, the business has decided to delegate them to a third party.
BPO or Business Process Outsourcing involves the delegation of large chunks of operations to a service provider.
For example, an e-commerce retailer that experiences rapid growth may suddenly struggle with customer inquiries effectively. One way to respond to such a scenario is by contracting another company to handle customer service operations–customer interactions like phone calls, emails, and live chat.
This is exactly what many companies have done, and there are compelling reasons for doing so.
The Benefits of Outsourcing
#1 Focus on core business activities
By delegating non-core tasks to specialized service providers, companies can concentrate on their primary objectives and core competencies—significantly enhancing overall efficiency and effectiveness.
If you think a different outfit can do better at a task, you tap their expertise, so you can focus on what you’re good at.
So for example, a technology company might outsource its accounting and administrative tasks (eg. payroll processing) to an accounting firm a few blocks down the road. The tech company is saying, “We’re good at innovative and groundbreaking software products, but we’re struggling to keep our accounts straight. You’re an accounting firm, would you mind helping us?”
By delegating certain roles to a service provider, the tech company can do what it does best—refine software, accelerate product development, and improve user experience—all the while having back-office operations handled by experts.
This beats being bogged down, and investing so much time and effort in activities that only have a peripheral consequence for your company.
Outsourcing makes an enterprise more efficient and more competitive in its space.
#2 Cost savings
At first glance, it would seem like outsourcing is a cost add to the business. After all, you’re paying a third party for their services.
But this view does not account for the cost of doing things yourself. For example, keeping customer service operations in-house would mean additional costs in:
- Hiring: You need to spend time and effort to craft an employment package, post job adverts, and interview and screen candidates. The process can be lengthy and costly, especially for specialized roles. (And when employees decide to leave, you incur turnover costs of going through the process all over again and hiring new ones.)
- Training: New employees require training to get up to speed. This may involve formal training programs, mentoring, and time spent by other employees to help the hires acclimate. These involve indirect costs, like reduced productivity and mistakes incurred during training.
- Infrastructure: A customer service operation, for example, requires comprehensive investments in infrastructure as a minimum investment. This is just to ensure efficient service. This means a dedicated floor of workstations, with a full suite of computer hardware and software systems, and security infrastructure for your data.
- Maintenance: The factors mentioned above need to be maintained, and may even require a new HR department and IT support.
So when you factor in hiring, training, and maintaining infrastructure costs, outsourcing becomes less hassle and cheaper than doing things “in-house.”
#3 Flexibility to scale operations up or down
The market situation fluctuates.
In a customer service context, for example, an enterprise may experience sudden growth or seasonal spikes in demand, like when a retail company faces a surge in customer inquiries during the holiday season.
By outsourcing—and not waiting to hire, train, or invest in equipment—a retailer can quickly have the capacity to handle the increased volume, ensuring customer satisfaction without delay.
Conversely, in a period of reduced demand, outsourcing allows the flexibility to scale down without the complexities of layoffs or unused office space. Service contracts can be limited in duration and designed as “pay as you go,” so the company only spends on the actual service used.
So regardless of where the market goes, the company can quickly react and match the current needs, without large investments.
In the end, outsourcing to a company already set up for specific functions becomes cheaper and more efficient.
Challenges of Outsourcing
As we’ve seen, outsourcing is an effective strategy for businesses looking to cut costs and focus on their core competencies. It also has its share of challenges, and one has to consider them when drawing up a strategy for your company.
#1 Dependence on third-party providers
When a business outsources functions like IT services, customer support, or manufacturing, it becomes reliant on an external provider’s:
- Reliability
- Expertise
- Availability.
Any disruptions in the provider’s operations—such as labor disputes or technical failures—can directly affect the company’s ability to deliver its products or services, creating a risk often outside its control.
#2 Potential communication issues
The service provider and the outsourcing company may have different norms and practices, with their people having different work styles and expectations.
This misalignment can result in misunderstandings and miscommunication, leading to sub-par service that can harm their reputation.
So before entering into any partnership, ensure that work expectations are spelled out.
#3 Loss of direct management and oversight
When a company outsources an activity, it lets go of the day-to-day management of that task. This can be advantageous. But it can also be problematic, especially when specific standards or procedures are not met.
Without direct control, implementing changes can be a challenge. So as mentioned earlier, everything must be spelled out in a contract or SLA (Service Level Agreement).
To monitor performance, one has to rely on reports and updates from the service provider.
These are things to consider when deciding if outsourcing is the way to go.
Now let’s go to the second part of this piece and look more closely into a phenomenon called “offshoring.”
Section 2: What Is Offshoring?
Offshoring is relocating certain business processes or operations from one country to another.
Companies often offshore tasks such as manufacturing, customer service, IT support, and other back-office functions to countries where labor is cheaper or where specific expertise is more readily available.
For example, an American retailer can put up a manufacturing facility in Bangladesh or India, where labor costs are much lower.
It’s important to note that although the facility is physically located in another country, legally, and for all intents and purposes, it is still part of the company and operates under its direct supervision.
There are several reasons why Western companies are offshoring some of their business processes in other jurisdictions.
The Benefits of Offshoring
#1 Cost Savings
Labor is a big part of the costs, and by relocating business functions somewhere cheaper, companies can control costs.
Other operational expenses such as real estate and utilities are lower in offshore destinations. Setting up a manufacturing plant or an office in such a place is very attractive.
Governments may also offer reduced tax rates, grants, or other financial incentives to sweeten the pot and encourage companies to offshore operations to their country.
Add to this the pressure for higher wages in many Western countries, offshoring becomes a compelling option.
#2 Access to global talent
Companies can tap into skills and expertise not readily available or affordable in their home country.
For example, offshoring IT development to countries like the Philippines, allows companies to work with highly skilled professionals specializing in software development, data analytics, or cybersecurity.
Countries like the Philippines don’t just have lower labor rates, but also strong educational systems focused on information technology—producing a large number of qualified professionals.
By leveraging such talent, even start-ups can compete against the big boys.
#3 24/7 operations
Do you want somebody to take your product inquiry at 2 in the morning?
A company can easily maintain 24/7 operations by having a partner on the other side of the globe.
Work is done around the clock, even when the main office is closed.
When a U.S. office closes for the day, teams in offshore locations can continue working, handling customer inquiries, processing transactions, or managing IT infrastructure. (Hint: Faster response times and better service to global customers.)
With 24/7 operations, project timelines are sped up as one team hands off work to another team in a different time zone in a “follow-the-sun” model.
Quiet literally, the sun never sets on your enterprise as there’s always somebody holding the fort.
In this day and age when customers are global, it has become a must-do for businesses.
The Challenges of Offshoring
Like outsourcing, offshoring also has its share of challenges, and decision-makers have to factor them in when evaluating their options.
#1 Cultural and language barriers
Countries have their language, cultural traditions, and norms.
This gap could hinder effective communications—leading to errors, delays, or dissatisfaction.
Culture guides how business is conducted and the variance between parties can complicate collaboration.
To mitigate these issues, companies should invest in places with close cultural affinity with the home country. They should also hire local teams who are fluent in English to facilitate interaction between teams.
#2 Time zone differences
Earlier, we talked about 24/7 service as an offshore advantage. But time zones can be a two-edged sword. It can be a boon or bane…depending on how it’s handled.
Partners can find it challenging to have overlapping working hours for discussions, decision-making, or problem-solving—possibly resulting in delays in project timelines or slower responses to urgent issues.
Implementing flexible working hours, rotating shifts, and asynchronous communication tools can mitigate time zone matters.
#3 Potential quality control issues
The fact that one’s facility is in a different country can be a serious disadvantage.
Distance can complicate oversight.
It becomes harder for the home office to monitor processes closely, which could impact the quality of products and services.
Distance can also make it harder to intervene quickly when issues arise.
Companies should implement stringent quality control measures, like regular audits, and detailed process documentation. Training programs should also be constant for offshore teams.
Section 3: Key Differences Between Outsourcing and Offshoring
Now that we’ve discussed the pros and cons of outsourcing and offshoring, let’s look at their similarities and distinctions according to cost structure, location, and control.
Cost Structure
Offshoring involves setting up operations abroad, which entails significant initial investments. Considerable capital is required to acquire (or rent) physical assets like a building and equipment.
Hiring and training staff to man the offshore outfit is also needed.
The company must also abide by all its legal obligations to the offshore country. A lot is required to be up and running. So yes, the cost savings are significant offshore, but investments are required upfront.
Outsourcing, on the other hand, offers more savings immediately.
By tapping a third party with the expertise and already set up for the job, outsourcing saves a company time and money from the get-go.
Location
By definition, offshoring is out-of-country.
(If the offshore destination is near the home country, we call it “near-shoring.”)
The choice of a location will depend on the “friendliness” to business interests. Besides the hope for lower wages and cheaper materials, the company will also factor in the country’s taxes, laws, and regulations.
Outsourcing, for its part, involves contracting work to external providers. This third-party provider can be located in a building a few blocks down the road (domestic outsourcing), or it can be a third-party provider located in a different country (international outsourcing).
The key point is that the outsourced work is done by an entity legally separate from the company, regardless of where it is based.
For example, an American company might outsource its customer service operations to another U.S.-based firm, or internationally to a company in India or the Philippines.
Control
With offshoring, the company retains full authority over management and staff and implements its own processes, standards, and practices—just as it would in its home country.
Outsourcing shifts responsibility to a service provider, with the understanding that the latter will manage these tasks independently.
As a result, the company holds less direct control over day-to-day operations and has to rely on regular reports or seasonal audits of its partners.
Section 4: Factors to Consider When Choosing Between Offshoring and Outsourcing
Business owners need to answer the following set of questions to help them decide which strategy is most appropriate for their business:
- What benefit is most important for my business? (eg.Productivity? Savings? Access to skill? )
- Where will my cost savings be coming from? (eg. Labor? Tax Incentives? Low Overhead?)
- How much operational control do I need? Can I delegate limited authority to other entities?
- How important is rapid scalability and flexibility to the business?
- What types of risks can the business take? (eg. Vendor dependency? High initial investments?)
Business Goals
What does your business primarily want to gain by choosing one of these options?
Outsourcing is typically pursued when a company wants to focus on its core competencies while delegating non-core activities to external specialists.
Other goals are to improve efficiency, access specialized skills, and reduce costs by leveraging the expertise of third-party providers.
Outsourcing tasks like IT services, customer support, or payroll processing, streamlines operations and allocates freed resources to other things that provide competitive advantage.
Offshoring, on the other hand, is generally pursued to reduce costs by taking advantage of lower labor expenses, favorable tax regimes, and other economic benefits promised by foreign countries. The primary business goal in offshoring is often cost optimization, especially in labor-intensive industries like manufacturing, IT, or customer service.
Cost Savings
Although both strategies bring cost savings to companies, this may come from slightly different sources. And depending on how your company’s costs are structured, you can benefit more from the other.
Outsourcing can lead to significant cost savings in the following areas:
- Labor: Service providers often operate in lower-cost regions and have more efficient hiring practices.
- Operational Efficiency: Outsourcing allows companies to take advantage of the specialized expertise and technology of external providers.
- Scalability: Outsourcing provides flexibility, enabling companies to scale operations up or down without the fixed costs of maintaining a large, in-house workforce.
- Reduced Overhead: Service providers often can get lower rents for office space and utilities.
Offshoring typically offers even more substantial cost savings, particularly in the following areas:
- Labor: Offshoring to countries with lower wage levels can result in dramatic reductions in labor costs, especially in the labor-intensive parts of the business.
- Tax Incentives: Many countries offer tax breaks, subsidies, or other incentives to attract foreign companies.
- Production Costs: Offshoring can reduce production costs due to cheaper raw materials and lower energy costs.
- Economies of Scale: Establishing offshore operations in regions where other companies have also set up shop can lead to economies of scale, reducing the costs of logistics, supply chains, and procurement.
Operational Control
Decide on how much control you need over your operations.
As mentioned, outsourcing relinquishes direct control of outsourced operations. This can be good or bad, depending on your situation.
The company might need to invest in a vendor management team to coordinate with the provider, monitor performance, and address any issues.
Offshoring has more direct control over operations. However, this doesn’t mean it is less complex, as the company has to navigate possible cultural differences and language barriers.
So depending on the nature of the business and the level of control required, one approach will be better.
Scalability
Scalability—the ability to expand or contract operations in response to changing business needs—is an area where offshoring and outsourcing can also differ.
Outsourcing offers cost-efficient and rapid scaling. The company can quickly respond to the market.
Offshoring is a little slow in scaling up because it has to set up operations, which includes building facilities and finding manpower for the job. In scaling down, offshoring will go through the painful process of formally offboarding its own employees.
Risk Management
Offshoring and outsourcing have their own set of challenges and risks.
Outsourcing primarily introduces risks related to loss of control, vendor dependency, and data security.
But offshoring, by its very nature, will have greater risks. Because part of the company is essentially relocating to another country, it will be dependent on the political, economic, and regulatory conditions of the host country.
The significant upfront costs incurred may be put in jeopardy if something untoward happens in the offshore location. If things don’t work out as planned, all investments can become sunk costs.
Section 5: Why Outsourcing Remote Staff is the Best Choice
Now that we’ve looked closely at the advantages and disadvantages of the two options, wouldn’t it be nice if we could combine all their benefits without incurring their inherent disadvantages?
There is such a way: You outsource offshore!
Yes, you outsource, but not to a provider down the road, who plays for the same expensive rates in the same expensive city. Instead, you tap the world-class talent in countries with affordable labor rates.
Outsourcing remote staff combines the advantages of outsourcing and offshoring while mitigating their drawbacks. So you get the best of both worlds.
Here are the benefits of outsourcing remote staff:
#1 Immediate cost savings
By hiring remote staff from countries with lower living costs, businesses can pay competitive wages that are still below what they would need to offer in their home country.
For example, the salary expectations in destination countries like the Philippines are generally lower than in the U.S. or Western Europe, allowing companies to reduce their payroll expenses.
Companies can save, on average, 70% of their labor costs alone.
#2 Access to skilled professionals
The international pool of talent is larger than what you have available in your city.
Kinetic Innovative Staffing, for example, has a talent pool of over 4 million professionals—from software developers, data analysts, and social media managers, to accountants, lawyers, and engineers.
These remote professionals are just as skilled and seasoned but are friendlier to the company’s bottom line.
#3 Focus on core activities
Tasks like research, data entry, and document preparation, take so much time and can pull attention on critical areas. Outsourcing remote staff allows business owners to concentrate on their core competencies.
Focusing on core competencies is crucial for businesses because it allows them to maximize their inherent strengths, maintain their competitive edge and deliver exceptional value to customers.
#4 Significant Increases In Productivity
The increases in productivity comes from the fact that people with specialized skills is working on the business round the clock.
The enterprise benefits from continuous operations, as the different time zones come into play. Collaboration across distance and time is easily managed through software tools that allow flexibility and asynchronous work.
Kinetic, for example, has a full suite of software tools that allow employers manage remote teams effectively. So even if your team is working remotely, you have full visibility and can track the progress of different projects and tasks.
#5 Flexibility and scalability
“Offshoring” sounds like a big company operation. You’re asked to build or rent actual facilities in other countries, maintain those facilities, and pay for utilities.
But by outsourcing remotely—your remote employee works at home, so you don’t have to provide an office for him or her to work in. They are independent contractors and you can design work arrangements as you see fit.
With this model, even start-ups, small business owners, and one-man operations, can enjoy the benefits that big companies have, without the capital outlays.
You can start as small as one remote employee and scale up as the business grows.
Outsourcing remote staff has been a go-to solution for many successful brands. Here’s a list of businesses that have outsourced remote staff from the Philippines and have reaped significant benefits.
Amazon: The e-commerce giant outsources customer service and data entry tasks to Filipino BPO firms, leveraging the country’s skilled workforce and cost-efficiency.
Apple: The technology company utilizes outsourcing in various capacities, including customer support and technical assistance.
American Express: This financial services corporation outsources customer service operations to enhance efficiency and reduce costs.
Google: The tech leader outsources certain operational tasks, benefiting from the Philippines‘ English-speaking workforce.
WhatsApp: The messaging platform leverages outsourcing for customer support and operational tasks to manage its global user base.
Skype: The communication platform has outsourced customer support services to the Philippines.
Slack: The messaging service has also engaged in outsourcing to enhance its customer support capabilities.
Outsourcing remote staff significantly improves efficiency by bringing world-class talent at affordable rates. If these big brands are any guide, companies big or small, should look into outsourcing remote staff as the smart option.
Outsourcing remotely combines the advantages of simple “outsourcing” and “offshoring” and is the single best way small businesses and start-ups can play with the big boys.
If this is something you would like to explore for your business, do not hesitate to contact Kinetic Innovative Staffing and we’ll get you the help you need.
Kinetic Innovative Staffing has been providing hundreds of companies in the Asia Pacific, North America, the Middle East, and Europe with professionals working remotely from the Philippines since 2013. Get in touch to know more.
