In recent years, new terms have taken root in our minds – offshore, outsourcing, outstaffing, personnel leasing. These new approaches to business running have important meanings for entrepreneurs. But, what is the relevance of these meanings for small and middle businesses? Let’s start by looking at this big topic by analyzing the specific features of outsourcing and offshoring. In this article, we will discuss the difference between offshore software development and outsourcing and define why businesses should pay attention to these models.

Why outsourcing vs offshoring

Most of us aren’t used to it yet, but in many ways, the two terms “offshoring” and “outsourcing” have the same meaning: outsourcing some work to freelancers.

Over the past decades, due to globalization in the field of production, large and medium-sized Western companies have begun to transfer part of their business to developing countries, for example, China, India, Ukraine, Poland, etc. They do this to reduce costs for similar services in their market. However, the costs of offshore software development are on the rise, and companies have new reasons to refuse to transfer control of certain operations abroad. For example, one of the reasons is the desire of companies to improve the brand image or restore it, since the quality of work performed by outsourcing is not always high.

Reshoring trends also pose some challenges, such as the risks associated with investing large amounts of money in process optimization, as well as issues with the qualifications of staff.

For these reasons, outsourcing still is a relevant solution for many businesses. It remains obvious that the withdrawal of capital can provoke stagnation in developing countries.

What is outsourcing?

Outsourcing is a cost-saving way for customers to get the result of some work from another company. In other words, this is a subcontract, but the main difference is the period of cooperation. The outsourcing company should become a part of the customer’s business process for quite a long time.

The principle of outsourcing is to save money by attracting skilled labor to support business processes. The quality control of the provision of such services is determined by existing regulations and is also transferred to an outsourcing company, which, in turn, seeks to reduce the financial burden by:

• release of the customer’s production space;
• reduction of time and necessary resources of the customer;
• allows the customer the opportunity to focus on their key tasks.

Obvious examples: audit services, marketing services, IT services, cleaning services, etc.

At its core, offshoring can be compared with outsourcing, as to reduce costs for certain business tasks and processes, another organization, but from another country, becomes a service provider. Offshoring seeks to take advantage of low labor costs, tax relief, and a range of other benefits that such a model can provide.

Comparison of business management models

Offshoring means placing part of the business in another country. Offshoring is often criticized for transferring finances or jobs to other countries. There are geopolitical risks, language differences, poor communication, etc. The benefits of offshoring are generally lower cost of production, higher availability of skilled people at low cost, and more efficient operation through a global talent pool. 

Outsourcing means the partnership with external organizations. Outsourcing risks include inconsistency between the interests of customers and suppliers, increased dependence of the customer on a third-party company, lack of own highly professional knowledge of outsourced business operations, etc.

Typically, companies turn to outsourcing firms to take advantage of specialized skills, cost efficiency, and manufacturing flexibility.

Industry tendencies

The global economic crisis has forced many enterprises to look for all possible ways to improve efficiency and reduce expenditures. Consolidation processes are taking place, large companies are absorbing small service providers. The political events are not in favor of developing countries. But even in this challenging environment, outsourcing is on the rise.

The service provider market is gradually expanding and structuring. The professional qualities of small companies and the strengthening of their specialization make it possible to create prerequisites for business growth.

After all, the best solution for the market as a whole depends on the requests of customers. If a high level of quality and control is needed, outsourcing may be the best solution. For those, who prefer low costs and a distributed business the offshoring model is more suitable.

Factors entrepreneurs consider when making a choice between outsourcing and offshoring

An important question the company must answer itself is: “What do we want to achieve?”. As a rule, the answer to this question predetermines the choice in favor of a particular strategy. If the company just wants to save money, then the choice is obvious: transfer some of the functions to some company from Southeast Asia and that’s it. If the desire to save money is diluted by the desire to receive quality services, or if this desire prevails, then most entrepreneurs tend to opt for local companies. Moreover, companies operating in the domestic market have a good knowledge of the English language, and it is much easier to cooperate with them, as well as control them since they are usually within reach. It is another matter if the company wants, first of all, to keep its reputation intact and not to harm its precious brand. In this case, outsourcing in the domestic market will be out of competition.

Final thoughts

Maintaining your own IT department is very expensive, it takes a lot of time and effort. Therefore, outsourcing and offshoring are popular not only among large but also among small companies. Offshoring and outsourcing are used in all areas of business, but the most demanded is the IT sector. For over 14 years, Intellectsoft has been helping companies build solid software foundations for their businesses. The company provides customers with offshore and outsourcing software development services. If you have doubts concerning the type of cooperation, the company’s specialists will help you to make the right choice. Intellectsoft is developing IT solutions for the following industries: healthcare, insurance, fintech, hospitality, e-commerce, etc.