Outsourcing or offshoring – what’s the difference?

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Article by Stefanie Lowe You have heard the terms outsourcing and offshoring – but what do they really mean? With the rise in globalisation, mobile internet and cloud technology and pressure on business efficiencies with increased competition and business costs, outsourcing and offshoring have become normal business practice.

What is outsourcing?

According to the Oxford dictionary, outsourcing by definition is;

‘Obtain (goods or a service) by contract from an outside supplier’ or to ‘Contract (work) out’.

All number of business processes like back office functions, accounting, legal advice, medical analysis, engineering, science, architecture, customer service or information technology can be contracted to another business. Usually it is tasks or functions that the company cannot perform efficiently, does not have the tools, equipment or knowledge to perform or it is a cost effective decision to contract this part of their business.

Outsourcing of businesses processes can include either domestic or foreign businesses, with new developments in faster mobile internet, more intelligent smartphones and development of cloud computing enabling foreign outsourcing to be efficient and cost effective.

Traditionally, outsourcing began when manufacturers outsourced the production of some of their components because they did not have the equipment, machinery or expertise to make every component for their finished product.

Outsourcing has now moved beyond goods to the provision of services across whole business sectors, from marketing to accounting, information technology, software development to customer service. Outsourcing comes in all sizes – from a small graphic design project to whole departments being outsourced, such as a hospital contracting the catering and cafeteria division of their hospital.

What is offshoring?

Offshoring according to the Oxford Dictionary is;

‘the practice of basing some of a company’s processes or services overseas, so as to take advantage of lower costs’.

For example, a telecommunications company may relocate the customer service business process to a foreign country or a software company may move its technical support business process overseas. This overseas entity is owned by the business and has the responsibility of performing certain business processes.

Offshoring one’s business processes has key advantages of increasing efficiency, scalability, improving supply chains and lower labour costs leading to an overall impact of lower cost of operations.

The new free trade agreements set by Australia with other countries have further benefitted offshoring as a viable business strategy. Have a look at the information and seminars available to help you maximise benefits from Australia’s free trade agreements.

Then there is offshore outsourcing

These two terms are not always mutually exclusive. Offshore outsourcing refers to when a company contracts a business process to a foreign company.

Still confused?

Here’s an example which may help -

Outsourcing – When Australian company, ABCD outsources its legal contract work to an Australian or foreign (when it is a foreign company, it is called offshoring outsourcing) law firm instead of hiring a team of in-house lawyers.

Offshoring – When Australian company, ABCD, sets up a foreign entity overseas to create its own legal department with a team of in-house lawyers.

Offshore Outsourcing – When Australian company, ABCD, contracts an overseas third party company to complete its legal contract work.

If you are seeking to outsource some of your business processes, you need to carefully investigate the company you are contracting the work to. Benefits include lower costs, efficiency, labour flexibility and allows your business to focus on its core competencies. However, the flip side is there may be communication problems, cultural differences, legal differences, security and proprietary information issues.

As an outsource accounting company, Penguin Management Services  include a full suite of accounting services, payroll and HR, virtual CFO and business advisory and setting up a business in Australia. Employing these customised services can be a time and cost effective way to run your business – we can work together as a team directing the focus on your business’s core competencies and reaching your success goals.