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Software Outsourcing
Updated: Aug 9, 2024

Offshoring vs Outsourcing: Decoding the Dilemma

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Verified Expert in Engineering
Ravikumar is a Program Guru with 7 years of experience in the tech industry. He has a strong hold on Angular, Dot net core, Web API, MVC, C#, LINQ, Entity Framework, jQuery, JavaScript, and MSSQL.
Offshoring vs Outsourcing

A Quick Overview: This blog is going to address the perpetual dilemma: To outsource or offshore? Although there are surface-level similarities between these two proven business strategies, they are inherently different from each other. We're going to talk about that exact topic, exploring the advantages and disadvantages of each approach and concluding on their differences. As a bonus, we’ve also laid out some tricks and tips at the end to help you make a better decision. Read on!

Your company is facing a serious problem.

There's a development project you need to complete but you lack the skill sets, resources, or time to do it.

When it comes to software development, a competent in-house team becomes the lifeblood of the business. But hiring employees at your main office might not be the best solution for various reasons. It could be that the task is not significant enough to afford a lot of talent on payroll, or maybe it's a short-term project that needs a temporary solution.

Nevertheless, this doesn't mean you should compromise on the quality of your work. Instead, to find top-notch talent with more convenience, you can explore alternative approaches like offshoring and outsourcing software development services.

While people boldly assume that outsourcing and offshoring are simply interchangeable terms for "assigning work to someone else", this is awfully far from the truth. Sure, remote work is a common element in both approaches, but outsourcing and offshore software development services actually represent two distinct business models.

So, what is the difference between outsourcing and offshoring? If you have ever considered expanding your team through a global workforce, keep reading to determine whether outsourcing or offshoring is the most suitable option for your company. We’ll compare outsourcing and offshoring, exploring their respective advantages and disadvantages.

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On This Page
  1. What is Outsourcing?
  2. What is Offshoring?
  3. Offshoring vs Outsourcing: Key Benefits
  4. Offshoring vs Outsourcing: Major Drawbacks
  5. Offshoring vs Outsourcing: Differences You Should Know
  6. When Should You Offshore vs Outsource Your Business?
  7. A Few Tips for Choosing Between Offshoring and Outsourcing
  8. Offshoring vs Outsourcing: What’s Your Pick?

What is Outsourcing?

Let's start with - what does it mean to outsource?

The concept originated from the phrase "outside resourcing." Outsourcing refers to the practice of engaging with a service provider to handle specific tasks for your business.

The key components of the outsourcing model are as follows:

  • Delegating a business process, product, or project to a third-party company.
  • The contracting company selects a team from its own pool of employees.
  • The provider may continue supporting the product even after the contract period ends.
  • Or they may halt their collaboration until they sign a new contract.
  • This model encompasses both local and international contracting arrangements.

Regarding software development, outsourcing means hiring a team of experts to handle various development tasks on your behalf. Software development outsourcing can involve taking on an entire project and developing a software system from scratch or addressing specific issues, such as designing interfaces or creating a specific feature.

Hope you now have a clear understanding of outsourcing, which takes us to the next part – offshoring.

What is Offshoring?

Offshoring involves transferring an organization's operations to an external company located in a foreign country. This strategy is effective for various reasons, including cost reduction, access to a larger workforce, and enhancement of workforce quality.

It’s particularly useful for multinational corporations aiming for rapid growth and specialized skills in their business activities. Independent offshore services include accounting, marketing, manufacturing, or anything that you don’t need to do domestically.

In software development, the process typically refers to establishing an offshore development center in a distant country and hiring developers there. Whether it’s for an ongoing basis or a single project, offshore service providers can help you scale quickly and efficiently without the need to build a remote infrastructure.

Offshoring vs Outsourcing: Key Benefits

Let's start our comparing and contrasting discussion by talking about the distinct advantages of both these models.

Benefits of Outsourcing

So, what are the benefits of outsourcing in business? It has been proven to be a tried-and-true strategy for both large corporations and small businesses. According to Statista, the global spending on IT outsourcing could hit $587 billion in 2027 and 92% of G2000 companies outsource their business functions.

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Let's go through the top reasons behind these big numbers:

Advantages of Outsourcing

  • Flexibility

One of the standout advantages of outsourcing is the flexibility it provides.

For example, if you hire offshore developers, you employ them permanently. This means that even during periods of low activity when there is no substantial work, you still have to pay for their idle time.

In contrast, overseas outsourcing allows for greater flexibility, as you can manage the payroll for as little as a few hours or days at a time. You only engage the outsourced team when you actually need their services, and you can scale up/down the team size as well based on the project demands.

This level of flexibility and scalability is especially valuable for companies that have changing work patterns.

  • Efficiency

Another reason why software development outsourcing is a good choice is improved productivity. By delegating your work to experts, you can avoid time-consuming periods of training employees and acquainting them with the project.

This reduction in time leads to decreased production time, which can have a positive impact on both the quality and quantity of the output.

  • Business Orientation

Your company must have multiple business functions, many of which are non-core activities that don’t provide a distinct competitive advantage. These non-core functions can divert the attention of your team away from their primary tasks, resulting in a waste of resources.

By outsourcing these non-core functions to a third party, you can free up your resources and get the freedom to focus entirely on your core business competencies.

  • Cost-Effectiveness

The IT outsourcing model typically follows a business strategy that offers significant cost advantages and substantial savings. This eliminates or significantly reduces the costs associated with maintaining infrastructure and administration.

As a matter of fact, Deloitte reported that outsourcing software development services to an external party can reduce overall costs by nearly 45%.

Benefits of Offshoring

There are numerous factors that make offshoring a popular strategy for businesses. Some choose this approach to increase production, while others use outsourcing to easily expand their operations.

Regardless of whether the reasons are specific to a particular situation or more general in nature, let's explore them further.

Advantages of Offshoring

  • Scalability

Offshoring and scalability go hand in hand. By effectively hiring a company specializing in offshore software development, you can create remote centers in various parts of the world.

This presents an excellent opportunity for you to expand your business presence and provide support to clients whenever and wherever it is needed.

  • Talent

One significant advantage of offshore software development is access to a vast pool of talent. Developed countries face considerable pressure in finding and hiring individuals with the right skill set.

For example, there are multiple advantages of outsourcing software development to India. They have a large number of highly skilled, well-educated, English-speaking professionals who are readily available for employment. This is the quality that offshoring provides.

  • Ownership

When it comes to the offshore business model, there's a notable distinction from outsourcing: the company retains complete control over its core operations. It is solely responsible for the task of recruiting a top-notch offshore team, as well as guiding and training them.

  • Cost Reduction

Undoubtedly, cost-effectiveness plays a crucial role in influencing companies to consider offshoring. Offshore development teams in countries like India possess incredible talent and a strong passion for their work.

And due to the lower cost of living in comparison to the West, the cost of hiring software developers is quite low. Offshoring enables companies to access this exceptional talent without incurring the same high expenses they would face domestically.

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Offshoring vs Outsourcing: Major Drawbacks

So, how are outsourcing and offshoring different in terms of their disadvantages? Now that you’re familiar with the bright sides of both these models, it’s time to understand their downsides:

Disadvantages of Outsourcing

Outsourcing involves controlling a business process or function directly to a third party.

There are a number of advantages of this approach, but it's important to be aware of certain risks of outsourcing that you should avoid:

  • Lack of focus

Outsourcing service providers often have multiple clients. This can lead to decreased focus and lower quality output due to handling various projects simultaneously.

  • Less control

When working with a service provider, you basically become one of their customers, which might result in less control over your project compared to in-house teammates.

  • Communication challenges

Establishing effective communication channels with a remote development team can be difficult since there are cultural, language, and time-zone differences.

Disadvantages of Offshoring

While there are notable benefits, it's crucial to consider the associated risks of offshoring:

  • Language barriers

Offshore teams may speak a different language. If you hire software developers with a different language, you'll need to invest effort in translating and localizing documentation, instructions, and work notes.

  • Distance

Managing a team located in a different time zone can pose challenges in terms of coordination and collaboration.

  • Quality control complexities

Ensuring real-time quality control becomes more challenging when your production house is in a distant location.

Offshoring vs Outsourcing: Differences You Should Know

Businesses often get confused when it comes to understanding the difference between offshoring vs outsourcing in the IT software landscape. So, let's clarify these terms once and for all.

We'll break down the key distinctions between these models for you. Instead of explaining it in a conventional manner, we've put together a table that highlights the contrasting aspects. Have a look:

ParameterOffshoringOutsourcing
DefinitionOffshoring involves relocating operational activities or production processes to a foreign country. It typically means establishing subsidiaries or branches in the offshore location.Outsourcing refers to the practice of delegating specific tasks, functions, or services to a third-party provider. It can be either within the same country or internationally.
ExpertiseOffshoring allows you to access specific skills or knowledge available in the offshore location. You may choose to offshore operations to take advantage of specialized talent or expertise not readily available in your home country.Outsourcing provides access to specialized skills or expertise that may not exist within your company. By hiring a dedicated development team, you tap into a pool of professionals who are experts in specific outsourced services.
ControlOffshoring provides the parent company with a high level of control. You have direct authority and decision-making power over the offshore team.Outsourcing comes with shared control between the client company and the service provider. You’ll have a significant role in managing and executing the outsourced services.
LocationThe choice of finding the best destinations for offshore software development is strategic and depends on multiple factors such as labor costs, market access, and regulatory environment.Outsourcing allows for a broader range of location options. You can find providers globally, including both domestic and international agencies.
CommunicationOffshoring may present communication challenges due to language barriers, cultural differences, and geographical distance.

Outsourcing emphasizes clear communication between the client company and the service provider to ensure collaboration and alignment of goals.

Time ZonesOffshoring to locations with significant time zone differences can require adjustments in work schedules and coordination. You need to effectively manage the overlapping work hours between your company and the offshore location.Outsourcing to different time zones may also involve considerations of work hours. However, you might localize the impact to the outsourced location, while your company can maintain its regular business hours.
InfrastructureOffshoring often involves significant investments in setting up infrastructure in the offshore location.The client company leverages the service provider's infrastructure, including technology platforms, equipment, and facilities.
Risk ManagementOffshoring exposes the parent company to certain risks associated with operating in a foreign country, such as regulatory compliance, political instability, and legal complexities.Outsourcing involves shared risk with the service provider. The service provider takes complete responsibility for managing the risks associated with the services.
Cost ControlOffshoring offers drastic cost savings due to labor cost differences between the home country and the offshore location. Companies can take advantage of lower wages in the offshore location.Outsourcing offers cost control through competitive bidding and contract negotiation. You can hire remote developers based on their experience and charges.

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When Should You Offshore vs Outsource Your Business?

If you run a small company with a tight budget or limited resources, outsourcing software development projects is often the most favorable choice. It enables you to concentrate on your main strengths while entrusting other technical tasks to external experts.

On the other hand, if you're a large enterprise aiming to cut costs and enhance efficiency, offshoring might be a suitable solution.

Okay, that’s a lot of generalization right there. It's important to note that there isn't a straightforward answer to this question, as it depends on various factors like the project scope, required skill sets, tech stack used, etc.

Nevertheless, here are some general considerations to help you in making a decision on whether between Offshoring vs outsourcing:

Outsourcing can be a viable option when businesses need to:

  • Focus on their core competencies by sourcing out non-core functions.
  • Benefit from lower labor and operational expenses.
  • Access specialized skills or knowledge that is not available in-house.

On the other hand, consider offshoring when you need to:

  • Expand into new international markets and set up local offices.
  • Provide around-the-clock customer assistance.
  • Utilize a broader talent pool with diverse resources.

Ultimately, the decision to outsource or offshore should align with your company's strategic goals, operational requirements, and the specific pros and cons offered by each approach.

A Few Tips for Choosing Between Offshoring and Outsourcing

If you've made the decision to outsource or offshore, it's important to grasp the process involved in order to kickstart your journey successfully. Here are some important points to keep in mind when it comes to outsourcing vs offshoring:

  1. Define your business objectives and compare them with the advantages offered by offshoring and outsourcing.
  2. Make the most of time zone differences and their impact on collaboration and project timelines.
  3. Evaluate the availability of specialized skills and expertise required for your specific projects or tasks.
  4. Conduct a thorough cost analysis, considering labor expenses, infrastructure costs, and management overhead.
  5. Consider the scalability and flexibility needed for your operations, both in the short and long term.
  6. Assess the potential risks associated with offshoring or outsourcing, such as data security and quality control.
  7. Research the cultural compatibility and communication capabilities of potential offshoring or outsourcing partners.
  8. Seek recommendations and insights from businesses that have successfully implemented any or both of the strategies.
  9. Develop a clear plan for managing the transition, including knowledge transfer and ongoing monitoring of performance and results.
  10. Take into account the legal and regulatory requirements of the outsourcing or offshoring destination.

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Offshoring vs Outsourcing: What’s Your Pick?If the shoe fits, wear it.There's no clear winner between offshoring and outsourcing because they are distinctly different, and both strategies can bring real benefits to your business. It's important to note that offshoring and outsourcing can have overlapping characteristics and the ultimate trick is to combine them.By understanding how each approach works and considering the benefits and drawbacks they present, you can make a well-informed decision on which approach aligns best with your company. Selecting the most suitable option for your needs depends on having a clear business strategy, asking the right questions, and determining the specific areas where you want your team members to concentrate their efforts.So, if you're interested in discovering more about how to achieve profitable growth through the utilization of seasoned, proficient, global teams, we invite you to reach out to us at Radixweb, an industry-reckoned outsourcing and offshoring consulting partner.We can have a conversation to discuss your requirements, whether you need to outsource your project or build an offshore team and find the optimal solution!

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Ravikumar Patel

Ravikumar Patel

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Verified Expert in Engineering
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About the Author

Ravikumar is a seasoned Program Guru known for his expertise in streamlining SDLCs, configuration management, identifying performance and compliance issues. With 7 years of experience in Angular, Dot.NET Core, Web API MVC, and C#, he brings a comprehensive skill set to every project. Having a deep understanding of jQuery, JavaScript, and MySQL, he delivers efficient and scalable solutions that exceed client expectations.

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Radixweb is a product engineering company, driving start-to-end software product development success.

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