Offshoring vs Outsourcing: What Delivers Most Value?
And which will be more beneficial for you?
Foreword
When comparing offshoring vs outsourcing, you likely have arrived here because you wish to know what will be more beneficial to your company. Well, let us explain!
To help you understand the differences between the options and decide which one is better for you, we will break down the pros and cons of both. Read on.
On the spot
Offshoring benefits are:
⦿ Cost cutting
⦿ In-house staff can focus on core business
⦿ Creation of a much more diverse culture
⦿ Entering new markets is easier
Offshoring disadvantages are:
⦿ The choice of a destination is final
⦿ HR management is on you
⦿ Huge time commitments
⦿ Increased liability
Meanwhile, outsourcing offers these advantages:
⦿ Far easier research
⦿ Getting things moving faster
⦿ No additional liability
⦿ No HR headaches
⦿ Instant access to expert talent
⦿ Smart cost optimization
However, nothing goes without drawbacks. With outsourcing, the potential ones are:
⦿ Vague control over the end product
⦿ Lack of flexibility
⦿ Communication problems
⦿ Data risks
⦿ Hidden costs
If you want to get more insight on all of this — welcome reading further!
Offshoring
Offshoring can be met in just about every industry today. Indeed, around 71% of financial service executives today will offshore at least some of their key services. A 2021 survey found that India was the most popular nation for offshore business services, followed by countries like China, Malaysia, Indonesia, and Brazil.
Offshoring Gains
There are many benefits to offshoring. What, though, are the main ones?
- You can cut costs. Keeping your costs down is essential to any business, and the main benefit of offshoring is exactly cutting them. Since you are hiring staff from a foreign market, it is easy to find professional help for a comparatively excellent rate.
- You can assign in-house staff with most value-generating tasks. Another major benefit of offshoring is that it allows you to spend more time on your key tasks. Instead of standing in to complete a job yourself or asking another staff member to moonlight, it is handled by a professional.
- You can create a much more diverse culture. Your workplace will only benefit from offshoring because it introduces people from different backgrounds. This gives your staff more variety, improves intercultural communication and problem-solving, creating a more inclusive environment built upon a wider experience.
- You can enter new markets easier. When you open your branch in an offshore location, you study its market, business practices and operation peculiarities. Doing this, you find some business opportunities from bringing your product to this market, not only hire people from there to develop your product for your market. And, since you have a registered representative office in the country and its staff working there, promoting your product there will be way easier for you.
Offshoring Downsides
Of course, not everything about offshoring is beneficial. Just some of the concerns include:
- Your choice of destination is final. Since you physically open a branch in an offshore location, this entails applying significant effort (registering legal entity, hiring, renting office(s), etc.)
For this reason, you should choose a future location with all responsibility and ensure that you are satisfied with everything (developers rates, tax legislation, other legal matters, culture differences, etc.) If you fail to do it and something goes wrong — you won’t be able to withdraw business fast and termination will cause significant costs. - HR management is on you. You have to personally adapt your organisation’s corporate culture to account for the peculiarities of an offshore destination. All potential language and culture differences and resulting obstacles are also your field of responsibility.
- Offshoring requires huge time commitments. Building a new wing of your business in a new location is hugely time-consuming. You will need to get your office in place, hire staff, onboard them in your company systems, train your team, and enrol them in the company systems. If you are looking to set up an overseas team fast — offshoring is definitely not your option.
- You face increased liability. Since you are starting up a new arm of your business, that adds responsibility to your agenda. Now, you are fully accountable for not only what happens in your domestic HQ, but also for what takes place in your offshore setting.
Offshoring is all about aiming for countries with lower living and business costs. In some cases, it could also come down to regulatory decisions. Your business might have new opportunities in a different part of the world, but you are still 100% liable.
Outsourcing
There are many reasons to consider outsourcing, but for most companies, everything revolves around cost. Indeed, around 70% of companies will look to outsource at least part of their work to help reduce costs.
Outsourcing Gains
When comparing outsourcing and offshoring, the benefits of going for the former are clear. Basically, the benefits of outsourcing address all the difficulties of offshoring:
- Far easier research. When you decide to outsource, it's enough to find a good outsourcing partner who will then supply you with all information of your interest (rates, taxes, etc.) in contrast to offshoring, where you need to do all of this on your own.
- You can get things moving forward faster. If you choose to go for offshoring, it can take months to get business legislation in place, set up an office, staff it, hire staff and get it ready to work. With outsourcing, you provide the requirements, interview candidates and start.
- No additional liability. When you go for outsourcing, you do not burden additional responsibility for your overseas team. Instead, everything that they provide and deliver is on them. Force-majeure cases are also listed in detail in an outsourcing contract, so if anything happens because of the provider — they will be held liable to fix it, not you. We have a dedicated article that goes into the nitty-gritty of concluding winning outsourcing contracts, so if you wonder how to rest assured when you transfer your software development to a third party, be sure to study it.
- Remove HR headaches. The outsourcing partner you turn to finds, interviews, recruits and educates tech talent themselves, you do not have to go through this lengthy process yourself. What’s on you with this type of business cooperation is to cherry pick the experts, carefully nurtured for you by the provider.
- Get access to expert talent. Another big benefit of going outsource is that you open your business to a vast array of top-notch international talent even in niche specific industries or skill groups, which may not be available in your home location. Outsourcing IT companies’ main asset in high-quality tech talent, therefore, they always strive to bring you the best possible experts in their respective areas.
- Reduce costs for the project. Not only IT outsourcing cuts expenses compared to in-house development, but it also drives a better cost optimization than offshoring. This is because a provider supplies all the tools, equipment, office space, and staff. This means that you are free from going through all this drudgery (with all possible overheads) and only pay an agreed-over fee which already encompasses all the provider’s operational costs.
Potential Outsourcing Downsides
The first thing to mention here is that basically, successful outsourcing comes down to choosing a reliable provider — they care about their reputation and will do their absolute best to give you exactly what you want.
So, if you’ve done this — you can feel safe now for the quality of your end product. If you want to learn how to pick a trustworthy outsourcing partner — read our article on the topic.
But to give you a full view on IT outsourcing, here’s what you can encounter when partnering with a mediocre services provider.
- Vague control over the end product. While you can provide as much direction and insight as possible, the result is down to the quality of the vendor. So, if they don’t have all the latest project management tools and practices in place that will allow you to be dynamically involved in development — an unpleasant surprise might wait for you at the end.
- Lack of flexibility. Depending on how you organise cooperation, changes may not be tolerated amidst development. For this reason, we strongly recommend negotiating everything inside-out before enrolling in action and laying the agreements in your outsourcing contract to solidify them.
- Communication problems. An outsourcing partner might work in a different time zone from you. This means that again, if they don’t have strong, client-oriented practices, you could be waiting for prolonged periods to communicate. We have an in-depth article on building effective outsourcing communication, so be sure to read it if you want to wipe this point off the list of drawbacks.
- Data risks. Faulty vendors may have poor security practices that may lead to compromising project data or, what’s worse, compromising your customer’s private data. There’s no need to tell you how much of a headache dealing with the consequences will be.
For this reason, it’s crucial to avoid the trap of fake IT outsourcing by carefully researching your prospective partners and enforcing your cooperation with a strong outsourcing contract. - Hidden costs. Beware of everything that stays unnoticed! While IT outsourcing, undoubtedly, helps optimise a great deal of your costs, it still has those on its own that, apart from direct developers’ salaries and services fees, may remain under the surface.
But don’t rush to panic! These are not the ones that will shadily drain your budget because of the vaguely formulated cooperation conditions. These are rather the ones that are present throughout each partnership but are not-so-obvious for initial understanding. They include, for instance, the costs incurred during a team’s onboarding or exiting a poor partnership. We have an article on the cost of outsourcing that encompasses all expenses that you may face entering a partnership, both direct and hidden. Be sure to check it out if you want to be fully aware of the matter’s financial side!
These potential pitfalls brightly illustrate the fact that the importance of choosing a reliable outsourcing partner cannot be overestimated. So choose wisely!
Outsourcing and Offshoring Combined
If you want the benefits of both models combined (those are: physical presence in an offshore location with lower costs AND liability & burden lying on a provider) - then our Offshore Development Center (ODC) is what you need.
This is basically your offshore office, just virtual and within our premises. All the staff that you choose are assigned exclusively to your projects and are not involved anywhere else thus being solely your remote full-time staff. Upon your decision, the teams may reside in a detached space and even have your branding there — we are highly supportive of everything that helps our Clients feel comfortable working with us.
All you have to do to open an ODC is to tell us your requirements. Really, that’s just it. Everything else is on us. We’ll assemble an entire team of BAs, developers, PMs - everyone needed for your project, exceptional quality guaranteed. We’ll carefully treat your requirements and offer the best way to implement them based on our broad IT experience of over 10 years.
The ODC also supports all your scaling plans, simultaneously optimising their costs, by being able to give out up to 100 all needed SDLC experts per year. So you can be sure, we’ve got you covered.
If you would like to know more about this engagement model, visit our guide. Or, if you want to get a personal consultation to account for all your business’ peculiarities, fill in the form below and within just one business day, we will be in touch to start consulting on your offshoring and outsourcing ambitions!