IT Outsourcing vs Offshoring: are they the same thing?
The time has come, hasn’t it? Once your enterprise is confidently and officially past the “cozy local business stage”, some things just can’t be done in-house anymore. At this point, a smart executive officer is bound to consider outsourcing (or offshoring?) some activities. Viable reasons to outsource are abundant to the point of overflow. Maybe you need an app developed for your business or another feat requiring expertise that’s foreign to your core competency. Maybe you just heard of the cost savings.
Routinely, we all hear the words “outsourcing” and “offshoring” casually interchanged. “The such-and-such Ltd. have o…ed [insert activity]”. Are these two really the same thing?
In short: no. These terms are not the same, and not mutually exclusive, but rather denote commonly intertwined practices, with success cases of combining them. The bottom line is:
Outsourcing is when you choose to delegate an activity (such as creative design, software development, etc.) to a third party. No matter where that other organization resides geographically.
Offshoring, on the other hand, is when you get the activity done in a foreign country – no matter whether in-house or not.
Technically, you could set up a team on the other side of the Earth that still belongs to your company, and that would be considered offshoring. However, this is done by a considerably small club of bigger enterprises. Typically, offshoring comes hand in hand with outsourced labor, with a whole market at your fingertips when you google for it.
Cost-saving paradise… Really?
In 2018, the global market for IT outsourcing was worth a staggering $62 bln. What gives? The legends of cost efficiency that comes with offshoring development are not without their reasons. First of all, there’s the gap in expected payment rates across regions, depending on market saturation, social conditions and other factors. You could pay an outsource middle developer in India at an average rate of about $24, while a similar professional in North America will charge anywhere above $120. This is the power of offshoring, where prices are dictated by the available human resources and local conditions, no matter whether you contract another company or set up an offshore team.
The “pure outsourcing” financial benefits are also impressive. Even if the contractor is next door (read: within your local price grid), you save on corporate perks, onboarding and many things that employees are granted, so that the savings companies achieve are typically around 40% (from appr. $60 to $35 in terms of rate).
A SWOT analysis for the pragmatically minded
Is it all flowers and unicorns, though? Of course not. If you are anywhere near serious about the matter, you should compare what outsourcing/offshoring has to offer with what you expect. Here is a nutshell SWOT analysis of both practices, in a slightly uncommon form.
|Strengths||Burden of social responsibility is not yours||Stronger narrow field expertise|
|Lower production costs|
|Weaknesses||You have less control and transparency over the workflow|
|Cumbersome supervision/coordination||In project-based approach, assignments need to be carefully evaluated|
|Travel expenses (trainers, etc.)||Need to inform the outsource company about minute specifics|
|Culture and language gaps||Negotiations may take up time and effort|
|Opportunities||HR resource pool is richer||Valuable insights from the field provide opportunity for growth|
|You can focus on your business’ core competency|
|Threats||Confidential information concerns|
|PR issues about transferring jobs abroad||“Feeding the competitor”: the other company learns on your projects to potentially serve your competitor|
Not all of these factors may be of concern to your enterprise or the nature of the project you want to try and outsource/offshore. You are free to consider only the relevant ones and weigh your decision in favor of one or both approaches.
The question of industry expertise offered will likely matter to you in two ways. Either you want someone to perform tasks that are far beyond what’s your company is doing (and it may be a narrow field) – or you simply want to ensure that the quality of the work is good enough. (Okay, the first case actually includes the second.)
In the former situation, things are clear enough – if you are a retail or logistics company, and your IT department does not develop mobile apps or websites, then why not outsource it to a team of dedicated professionals “fluent in Kotlin” and proficient in APIs intricacies? In this case, outsourcing is the basis, offshoring an option.
Another case is when companies choose to offshore for cost efficiency and want their expert level to cover the quality requirements. In this case, the question of where to offshore becomes relevant once more.
While Asia and developing countries can offer many highly qualified offshore professionals, they are often regarded as a marketplace for cheaper options. With these, companies outsourcing (or rather offshoring) there can sometimes be heard complaining about dubious outcomes. Some jobs do not require scrupulous implementation, some do. A skilled consultant may be required to navigate the market.
Enter regions like Eastern Europe. While a middle dev here charges at about $35, which is higher than their Indian counterpart, this corresponds to higher quality, making countries like Ukraine and Russia a popular “golden means” choice. For example, Ukraine’s got strong tradition of technical education, and IT is a popular choice for reprofiling, often done based on the same facilities. This accounts for about 90,000 IT professionals in the country, keeping the high plank to keep their competitive advantage.
Caveats and scarecrows
Every successful business practice comes with its fair share of scary urban legends. Sometimes these are real caveats, actual warnings. In other cases, they may act as a sort of “scarecrow” used by unscrupulous market players to reserve their place. Often, it all depends on where to look. Here are some of the common themes:
#1. Culture & language gap (offshoring) / Corporate values gap (outsourcing)
Globalization or not, there are still different approaches to workplace. It is small wonder that with some foreign teams, you will find their attitude to, say, overtiming or working on weekends differs from yours. However, this issue can be solved with the help of specialists who know the market well and possess the references.
English is more crucial, with poor communication sometimes hindering the workflow. This is a potential point of investigation in case with offshoring.
Outsource has the inherent problem of corporate values – but this is just the question of how competitive the contractor wants to stay.
#2. Confidential data: when sharing is NOT caring
There is a lot of talk on this one. Yes, with outsourcing the risk can be mitigated with NDAs. Still yes, those NDAs will not always mean anything in a different country. However, there are solutions. Sometimes, work is outsourced to a company located within the sphere of compliance to regulations, which in turn has offshore employees who sign NDAs according to their local legislation. In many cases, you don’t really need to share that sort of information at all.
#3. PR concerns
The anti-offshoring talk about “transferring jobs away from fellow citizens” is not widespread everywhere, and in many places, the public is really indifferent. At any rate, the usefulness of the service your business provides to the clients, and the competitive price, most likely outweigh this argument. A good PR campaign is always victorious in the end.
In the end, it all boils down to the simple question: what do you really need to accomplish with your outsourcing/offshoring tactics? Is it cost-efficiency? Your hands free to do the main thing that’s the soul of your enterprise?
Once you have answered this, you can start orienting yourself towards the best solution the market can offer to your company’s individual needs. You can think of exactly how much control you want to leave to yourself, and how much responsibility you want to alleviate. There are many models of collaboration available to you today, with “default” project-based approach only one of them. With qualified assistance from specialists who breathe the air of the outsource world, you can achieve your current business goals and gain an understanding of future opportunities.