Outsourcing vs Offshoring – Examples. Differences, Pros And Cons

Despite encountering some challenges in recent years, globalization continues to define how products and services are created and delivered around the world. But unlike in decades past, the increasing trends towards outsourcing and offshoring are about far more than just lower costs. Alongside more cost-effective solutions, businesses are seeking greater flexibility, access to critical skills, […]

by Dilyan Dimitrov

June 7, 2024

9 min read

Outsourcing vs Offshoring

Despite encountering some challenges in recent years, globalization continues to define how products and services are created and delivered around the world. But unlike in decades past, the increasing trends towards outsourcing and offshoring are about far more than just lower costs.

Alongside more cost-effective solutions, businesses are seeking greater flexibility, access to critical skills, and scale that are often not available at home. But accessing all of these benefits requires understanding the key differences of outsourcing vs offshoring as well as how you can make the right choice.

What Is Outsourcing?

Outsourcing is an umbrella term covering any case where a business delegates some function to an outside organization. This might mean the manufacturing of physical products, customer support, or even high-end custom software development.

Importantly, the outside organization you delegate this work to may be within your country or on the other side of the world. However, when looking at outsourcing vs offshoring, the implication is generally that outsourcing refers specifically to working with partners based in the same country. So bear in mind that while outsourcing can technically refer to any kind of external work, it usually implies working with partners outside your country.

What Is Offshoring?

While outsourcing is more of a general term, offshoring gets more specific. It refers to moving some function to an external partner based in another country. That could be a country nearby with a similar culture, often referred to as nearshoring, or a place far away with a very different culture and language.

So in common usage, people may actually mean the same thing when they talk about outsourcing vs offshoring. But there are a few other types of outsourcing and offshoring you will want to be familiar with and which are discussed below.

Outsourcing vs offshoring examples

Outsourcing vs offshoring

The most common example for outsourcing and offshoring has traditionally been manufacturing. The best-known example is the large-scale movement of consumer goods manufacturing from Europe and North America to East Asia beginning in the late 20th century.

However, today that simple story has become far more complicated as supply chains have grown in complexity. Offshoring may involve placing different stages of the manufacturing process in many different countries. Rising wages in East Asia has also pushed many businesses to find new offshoring locations as well.

But, as mentioned, outsourcing and offshoring are also commonly applied to services and the production of non-physical goods like software. For example, if a business needs a piece of custom software to be developed but does not have the internal capabilities to do so, they may outsource that work to a partner that specializes in it.

Ultimately, outsourcing and offshoring can each provide many of the same types of services. That’s why really understanding outsourcing vs offshoring requires looking more closely at the pros and cons of each approach.

Outsourcing vs offshoring pros and cons

Let’s start with understanding the benefits of outsourcing specifically within your country. The first and most significant is the ease of doing business. This refers both to the lack of any legal issues which often come with doing business across borders and to the lack of cultural or language barriers.

While they may be easy to discount, the sheer variety of cross-cultural communication challenges you may encounter is daunting. In addition, these challenges may not be obvious until well into the project, so it’s worth familiarizing yourself with them from the start.

However, outsourcing within your country usually comes with higher costs. In some cases, significantly higher costs. Importantly, it also greatly limits your potential partners. It’s possible there simply aren’t any companies within your country that can offer the specific skills, scale, or other capabilities you require.

Looking at offshoring, the biggest and most important advantage is choice. By searching on a truly global scale, you’re able to work with vastly more potential partners. This makes it far more likely you can find someone with all the capabilities you need to meet your goals. That said, this vast array of choice can also make actually finding the right partner its own challenge.

By offering greater choice, offshoring typically provides lower cost options relative to outsourcing within your country. That said, depending on the country, there may be cultural, language, or legal barriers to partnering. This could be anything from simple time zone differences to the impossibility of making cross-border payments.

Outsourcing vs Offshoring Key Differences

With an understanding of the pros and cons of outsourcing vs offshoring, we can go deeper to explore their other key differences.

On a practical level, these differences usually boil down to what is most important for you. Are you looking for the lowest possible cost even if that entails working with a partner in a difficult time zone? Are you focused largely on finding a partner with lots of experience building a very specific type of software?

In other words, the most important outsourcing vs offshoring differences will always stem from the potential partners available to you. All the other pros and cons mentioned will still play a role, but none will make as big a difference as the partner you work with.

But because outsourcing and offshoring are ultimately so similar, there are a few other comparisons you’ll want to make as well.

What is the difference between offshoring and outsourcing?

Let’s start with one important consideration: all offshoring is outsourcing but not all outsourcing is offshoring. This is because outsourcing is a more general term covering all instances when a company hires an outside organization to perform some function.

Within the broader realm of outsourcing, offshoring specifically refers to hiring an outside organization based overseas.

For example, if you are a company based in Toronto, Canada and you hire an accounting firm in Montreal, Canada then you are outsourcing but not offshoring. On the other hand, if that accounting firm was based just over the border in Detroit, USA, then you would be both outsourcing and offshoring. If the accounting firm were based in Singapore or Germany, it would likewise be both outsourcing and offshoring.

What is the difference between insourcing and offshoring?

Insourcing describes when a company takes a function that could be outsourced and instead assigns it to an internal team or division. This raises the question, what’s the difference between insourcing and everyday business operations within an organization?

The answer is simply that a function that is insourced could have potentially been outsourced. In this way, the definition can be in the eye of the beholder. This could include anything from customer success teams or an entire marketing department to hiring a person or two with skills your team needs.

Obviously it’s difficult to generalize about the benefits insourcing provides as it may be more or less expensive, easier or more difficult depending on your organization’s dynamics. For this reason, you should probably at least consider insourcing as an option when looking at offshoring and outsourcing options.

What is the difference between nearshoring and offshoring?

While the term “nearshoring” isn’t as widely known, it creates one of the most important distinctions in outsourcing. In fact, understanding the differences between nearshoring and offshoring is an essential prerequisite for finding the right partner for your project.

Most critically, nearshoring involves working with companies in foreign countries that are close to yours. This may mean physical proximity or simply cultural and linguistic closeness. This proximity makes many aspects of the outsourcing process simpler, from ease of travel to simpler working relationships.

However, this often translates to higher costs. So it’s worth considering the value that proximity may bring and whether the potential costs offset that added value.

What is the difference between domestic and offshore outsourcing?

business connections

In fact, the differences here aren’t as significant as you may have assumed. You’re likely to find a wide range of costs, capabilities, experience, levels, etc. in both domestic and offshore outsourcing companies. True, domestic options are likely to be more expensive on average, but low-cost alternatives likely exist here as well.

The more important differences lay in the practical realities of doing business in another country. Taxes, regulations, working culture, languages, and time zones are all likely to come up as important differences you will need to account for. The key is identifying what differences will be relevant in your case and quantifying the impact they are likely to have on your work.

What is the difference between onshore and offshore outsourcing?

Here, the difference is the same as that between domestic and offshore outsourcing. Onshore outsourcing refers specifically to hiring an external partner within the same country. Offshore outsourcing refers to hiring a partner from another country. For that reason, the same important differences like time zones, language, culture, etc. are all relevant here as well.

How to Determine Whether Outsourcing or Offshoring Is Right for You

Clearly there are a wide range of outsourcing options available. Whether you want to work with partners within your country, a nearby country, or somewhere on the other side of the planet can have an enormous impact. So what factors should you prioritize when making your decision?

Start with Internal Considerations

Before you begin looking at countries, regions, or even specific potential partners, you need to start with internal considerations. The best place to start is with what you want to accomplish. For example, instead of beginning with “we need software to enable our teams to do X,” you should focus on the task itself.

The reason?

It’s entirely possible that custom software may be able to automate that task. In other words, avoid being too prescriptive when searching for a solution. Instead, when looking at prospective partners, lead with the job that needs to be done. This enables you to work with those partners, accessing their unique skills and perspective to develop an ideal solution.

Focus on Processes, Not Just Outcomes

Once you’ve worked with a prospective outsourcing partner to consider the outcome you’d like, don’t forget to think about processes. It’s inevitable that circumstances will change over the course of your working relationship with any outsourcing partner. The way you handle these changes makes a huge difference in the project’s success.

Let’s say a new competitor enters your market partway through a project, meaning your requirements have to change. How will your partner adapt to this? The way they structure their work can easily mean the difference between adapting easily and having to redo a massive quantity of work at great expense.

Because falling into the trap of only envisioning your partnerships under ideal conditions is always dangerous. By considering how you will adapt as your needs change from the start, you can minimize unexpected costs and ensure a smoother working relationship.

Look at Case Studies and Ask Questions

Whether you’re considering an outsourcing partner close to home or far away, it’s easy to simply say your company can do something. Asking to see case studies or even speak with recent clients can help prevent unwanted surprises.

You may also want to ask about how they would react to some scenarios. For example, if the requirements change halfway through or if they encounter an unexpected delay. If you’re particularly concerned about a specific scenario, this is a good time to figure out how it will be addressed in the moment.

Build a Short List and Do Your Research

Once you have a firm understanding of your own requirements, you can start researching potential partners. You may want to only look at nearshore options or consider a wider variety of partners in various offshoring locations. Either way, now you can build a short list of prospects and begin talking with them about your needs.

It’s at this stage that you can really dive into a cost-benefit analysis. Look at costs, location, working style/processes, specialties and skill sets, etc., weighing what each means to you. From here, you’ll be well-equipped to make a great choice.

A reader who loves writing, a marketer who loves tech, a nerd who loves sports. Dilyan, our resident writer, half-jokes that his days are filled with everything you can think of - except free time. He joined our team several years into his copywriting career - and he seems to feel at home here. Because, as he puts it, “there’s always cake at the office”.  If he doesn’t have his nose buried in a book, you can typically find Dilyan writing his latest piece, tinkering with his PC, or off swimming/cycling somewhere.