Outsourcing vs Offshoring Everything you need to know

Outsourcing vs Offshoring Everything you need to know

What is the difference between outsourcing and offshoring? If I want to engage in one of these, do I need a BPO, Captive or Shared Service Centre? These terms are used frequently by companies already reaping the benefits of strategic sourcing models and by business owners in the industry. But if you are new on the scene, it can be confusing to understand what is what, especially when many are used interchangeably. In this article, we explain what the terms are, and how implementing a resourcing strategy that uses them, can benefit you.

1. Outsourcing

Many business owners outsource in one form or another. From short term, specific task to full blown outcome-based outsourcing, this is an effective mechanism for reducing costs and gaining specialist skills. Your outsourcing experience may involve utilising a firm or talent in your own location, or in a low-cost overseas country.

Example: When your local bank starts using IBM to provide IT solutions, they are outsourcing.

Some common tasks and functions to outsource include:

Financial and Legal
Rather than hiring an accountant or bookkeeper in your company, you can engage an accounting firm to complete your monthly and annual reporting, and even your payroll. Legal advice is available ad-hoc, or on a retainer basis.

IT Support
IT Outsourcers can offer a range of services to you. If you need a website built, or need regular on-site assistance, or a help-desk service, a specialised firm can provide you with a wide range of support from trained professionals.

A marketing firm can assist you with logo development, brand book, development and execution of your social media and SEO strategy.

Staff Based Outsourcing
A staffing based outsourcing firm can provide you with full-time resources dedicated to you company without the overhead associated with staff on your own payroll. This can massively reduce your operational and capital costs well beyond employee expenses. You can avoid office space, furniture, fittings, infrastructure upgrades and management overhead.

2. Offshoring

Offshoring refers to moving functions to a lower cost location, typically the Philippines, India, Malaysia or China, depending on the requirements. To be strictly accurate, it involves an organisation establishing a presence in another location and hiring their own staff to work on their functions.

Offshoring is sometimes used to describe outsourcing to an offshore location, which is where outsourcing and offshoring can be confusingly used interchangeably.

Example: When your bank sets up its own office in India to perform credit card activations, they are offshoring. If your bank engages IBM in India to perform this function, they may call it offshore outsourcing.

The benefits of offshoring are that you can leverage a considerably lower cost workforce, though this can be offset by the high cost of establishing and maintaining your own legal entity if you choose that route.

3. BPO

BPO stands for Business Process Outsourcing, a term originally used by manufacturing firms that outsourced segments of their supply chain to low-cost, offshore locations.

BPOs provide both back office outsourcing such as Finance, IT and HR functions, and front office outsourcing which is customer facing. The customer facing outsourcing is most commonly associated with Call Centres however. If you select a BPO for back office functions, check on their history as they may not have the depth of experience for outsourcing of professional functions.

Using a BPO in your own country is referred to as nearshore outsourcing, while utilising a centre in another country is known as offshore outsourcing.

Example: When your bank engages with a third party company to answer all support calls, they will typically be using a BPO in India or the Philippines. The BPO may specialise in call centre services for the banking industry.

4. Captive and Shared Service Centre

A captive centre is sometimes used to describe a company’s in-house offshore operation. They are centres operating in low-cost locations whereby the company has set up a legal entity to house its own offshore staff. It may also be known as a shared service centre as it handles specific back office tasks that are shared amongst divisions that maybe siloed back in the home country.

About the Author: Michelle Fiegehen is the CEO of Yempo, a boutique offshoring company in three locations in the Philippines. She has lived and worked in the Philippines and India since 2009, building offshore capability for clients in Australia, United States, Canada, United Kingdom, Singapore and Hong Kong.