Outsourcing and offshoring have two separate functions each with its own advantages and disadvantages. Outsourcing, that is subcontracting to a third party is considered to be far less costly, it minimizes capital expenditure as that is handled by the third party itself. Specialized skills in terms of customer services, technical and production operations through the respective expertise can be obtained to further improve quality standards.
Through outsourcing, companies can better utilize their time and energy costs by conserving them. Thus it makes more efficient use of its resources i.e. land, labor and capital. Therefore, focus on core business activity; cost restructuring, improved quality and access to expertise and talent are the pros of outsourcing. However, it does have some limitations. The major risks involved with outsourcing are the quality risks.
With the gap in the distance with the headquarters, monitoring is difficult and there is a chance that the third-party company may not produce according to standards set and a quality fade might occur whereby the third party company will purposely further reduce costs and produce cheaper products to increase profit margins. Moreover, cultural, language and communication barriers will exist which would further complicate matters for a company.
Offshoring on the other hand is a different strategy, whereby a business process in relocated to another country with the same notion of restructuring costs, more specifically, reducing costs. The process depends upon how easily labor and capital can be repurposed. Due to shortages of qualified workers in the domestic market, jobs and processes have to be moved overseas.
Through offshoring companies can utilize and access a qualified labor force, low cost, pleasing time zones and easy access to the host country’s markets, this cannot be achieved through outsourcing. As with outsourcing cultural, language and time-zone challenges exist. It also results in companies losing control and their grip with such an extended supply chain increasing overall operational risks. The job market in the home country worsens and domestic workers either have to leave or are forced out of their jobs, some of them leave a particular industry for good.