In the past ten years, offshoring has firmly entered the business world’s lexicon, becoming as pervasive a buzzword as outsourcing was in the 1990s. While the two terms have become practically synonymous, they remain distinct practices, with many different approaches possible within and across each model. The pros and cons of outsourcing vs offshoring can vary widely depending on a range of factors, but the overall aim of both remains constant. Increased efficiency, driven through production, development or supply of services.
Outsourcing is when a company contracts out a business function or obtains a product or service from a third-party provider. Offshoring means to shift a portion of your activities or the entirety of them to a foreign country. And then, of course, there is offshore outsourcing.
According to the Deloitte 2018 Global Outsourcing Survey, IT is the most prolific industry for outsourcing, with the vast majority of respondents planning to maintain or increase the volume of their externally sourced activities. With the advance of communication technology and global infrastructure, companies of all shapes and sizes now find themselves examining the upsides and downsides of outsourcing vs offshoring for their own business.
Outsourcing vs offshoring pros and cons
Why does it?
The lure of increased cost-effectiveness and efficiency is what draws most companies in the first place. If an outsourcer can deliver a product at a reduced cost, without a drop-off in quality, the company will have saved itself valuable resources to be used elsewhere. Most big companies outsource non-core business activities to one degree or another, leaving their own staff to focus on their core business operations.
A prime example of the successful outsourcing of software solutions is IKEA’s 2013 deal, where their outsourcing partner installed and set 12000 POS-systems in 300 IKEA stores in 25 countries. IKEA know where their strengths lie and realized the potential benefits of outsourcing to their overall operational efficiency.
What could possibly go wrong?
By sourcing experts in the POS industry, the furniture giant successfully navigated the inherent risks of relying on a third party to meet their own company standards. But the danger of choosing the wrong partner remains, horror stories such as IBM and the New Zealand Health Board serve as a reminder. A 16000% overrun of costs is certainly on the extreme end of the scale, but an ill-equipped outsourcer can wreak havoc on a company’s best-laid plans.
The rising demand for outsourced services and the responding increased supply means there is a greater variety of competency on offer. Dedicated teams from established, reputable firms can ensure that the risk of varying quality is mitigated. The cost of finding and engaging these firms onshore or nearshore can be prohibitively high, which is one of the main reasons for the prevalence of offshoring vs outsourcing closer to home.
Outsourcing vs offshoring
Utilizing the global market
An alternative to externalized production and manufacturing is to cut out the middlemen and move the entire operation offshore. Taking advantage of low labor costs and mouthwatering tax breaks to set up factories and headquarters is the modus operandi of many giants of industry such as Apple. Robust and efficient production processes give them a competitive advantage in their industry, outsourcing does not offer the same benefits to a multi-billion dollar company as it does to a start-up or to a mid-sized company with limited resources and a narrower workforce in terms of a range of expertise.
For these smaller companies, being able to find developers with specialized skills to fit their project, at a fraction of the cost of domestic labor rates may actually improve their end product. Finding the right personnel remains a challenge, so many companies forge partnerships with reputable international offshore outsourcers, who recruit and maintain the teams for each project and ensure the delivery of the final product.
Is it a choice of cost over quality?
Any company that routinely prioritizes cost over quality, will eventually pay a heavy price. Although most companies would prefer not to make any choice on price over quality at all, the amount of potential savings can in some cases make up for a shortfall. Rather than focus entirely on cost, in the development of software, it is becoming more common to focus on the intellectual capital within the standing team. Tech hubs such as Vietnam have an abundance of talented developers, with low average wages but the required talent to deliver on time and to the desired quality.
This approach captures the upsides of offshoring; increased productivity and lower labor costs, along with those of outsourcing; increased specialization offshore and minimum disruption to their other operations. The end result should be greater market competitiveness or higher profit margins for the company and their product.
An effectively managed offshore team can greatly increase the speed and efficiency of software development. Rather than seeing issues such as time differences as drawbacks to remote teams, they can view them as an opportunity to use more hours of the day for coding. The flexibility of offshore outsourced teams is a huge advantage compared to traditional in-house teams, a purpose-built team of developers is going to have more relevant niche skills than the broader, wide-ranging skill sets of an in-house IT team. Labor costs mean onshore or nearshore outsourcing is often not practical due to financial reasons.
With a wide geographical divide comes to the risk of a communication disconnect between the vendor and the offshore outsourcing software development company. The sharing and transfer of skills, knowledge, and experience between the parties need to be an ongoing and open process if fulfillment to the desired quality is to be achieved. Developing countries may have plentiful human resources, but unless the right personnel recruited, retained and given the infrastructure to thrive, problems will arise with reliability, consistency and ultimately quality.
There are also cultural differences to be considered between the parties involved, choosing a vendor insensitive to these pitfalls can be a costly endeavor. Offshore outsourcers need not only the talent with the right domain knowledge on their team but also need to possess the right organizational nous and local understanding to allow for a consistent yet flexible development process.
Outsourcing vs offshoring pros and cons – conclusions
Choose the right vendor
Finding a competent offshore development outsourcing partner can be a long-term solution for a company’s production or development needs. It can provide previously unobtainable access to specialized skill sets which in turn leads to scalability and better risk analysis and avoidance. Many internationally founded and operated outsourcing specialists are now based in developing countries, allowing them to develop a deep understanding of the cultural and technical elements that can come into play.
The importance of clear communication
One of the most famous cases of outsourcing gone awry is when the US Navy contracted a Texas-based vendor to manage, replace or integrate their existing applications across some 350,000 of their users’ desktops. Scrambling to win the contract without fully understanding the full scale of the project or the competency required to fulfill it, would eventually see the vendor writing off million dollars. Both parties admitted that clear communication channels had not been established, leading to an array of problems, all the way from the contract itself through to the quality of the instruction and directions given by the US Navy. The case highlights how vital communication is in remote teams and that it is a vendor’s competency, rather than geographical location which should be considered of paramount importance when choosing a software development company.
Communication technology behemoth Whatsapp had very humble beginnings, with just $250,000 in seed capital in 2012 and only 30 full-time employees. Few would have predicted that it would become a market-leading chat platform, leading to its purchase by Facebook for $19 billion, only two years after launching. Back in 2012 with limited resources, they chose to offshore outsource their app’s development and launch, allowing them to focus on customer service and operations in-house.
They are not the only prominent player to have benefitted from outsourcing development in recent years, with Skype, Jaypay.com, and Github just a few other big names that have relied on outsourcing providers.
As international barriers to a global market continue to diminish, outsourcing vs offshoring or marrying the benefits of both is increasingly becoming the norm. Changing expectations, demographics and wage levels in developing countries mean that there are always new markets to explore in order to find the optimal balance of cost and quality. Dedicated teams of specialists are available at a cost effective rate, with effective management structures which can lessen or remove issues involving language, culture or communication.
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