Outsourcing vs. Offshoring
Outsourcing is used by companies to contract specific tasks or processes out to a third party.
Offshoring, on the other hand, is the process of moving tasks or processes overseas that were once performed in-house.
In truth, there are a few different outsourcing strategies and offshoring is one of them.
Both practices are similar in that the work is assigned to a third party that operates externally.
Both also increase productivity, reduce costs, and provide access to specialist labor or knowledge.
Despite these similarities, there do exist a few differences. These are explained below.
Understanding OutsourcingIn essence, outsourcing refers to the practice of contracting work out to individuals (freelancers) or companies in another country.
These entities are not considered part of the organization and usually have the freedom to work as they please under the proviso that deadlines are met and adequate results are produced.
Outsourcing benefitsIn a 2020 global survey on why companies outsource, Deloitte found that the following reasons were most popular:
Cost reduction (70% of respondents). Hiring in-house specialists increase overheads.Flexibility (40%). This pertains to shorter, more flexible contracts and the commoditization of services.Speed to market (20%). This is influenced by the microservice architecture which enables the continuous deployment of complex applications.Access to tools and processes (15%), andAgility (15%).Outsourcing risksCompanies are sometimes forced to share proprietary information with third parties during their relationship.
To minimize the chances of theft, prior due diligence on a contractor is vital.
There may also be communication issues that arise from differences in time zone, culture, or language.
Understanding offshoringOffshoring is perhaps a more substantial initiative where crucial business processes or operations are moved to another country.
Unlike outsourcing, where work is performed by external entities, offshoring operations remain under the control of the company.
Offshoring benefitsMany companies use offshoring to reduce manufacturing costs, but there are other important benefits such as:
Less stringent rules and regulations – with fewer impediments to production, the company can increase revenue and profit.Incentives – some countries offer incentives to companies willing to establish a presence there. In the wake of COVID-19, India and some countries in Europe and Africa are offering various tax deductions, subsidies, and cash grants to lure foreign investment.Offshoring risksThe risks of offshoring are similar to those that are present in outsourcing – particularly if either operation is conducted in a vastly different culture or region.
Organizations that move core operations overseas sometimes suffer reputational damage as employees lose their jobs in the domestic market.
They can also be subject to various geopolitical risks, with labor unions in the United States actively lobbying Congress against offshoring.
Other states in the USA are considering legislation to avoid working with firms that offshore to developing countries with cheap labor.
Key takeaways:Outsourcing is used by companies to contract specific tasks or processes out to a third party. Offshoring is the process of moving tasks or processes overseas that were once performed in-house.Offshoring is one of a few different forms of outsourcing, which means they share similarities. Both involve work assigned to a third party that operates externally and both share similar cost reduction benefits.The key difference between offshoring and outsourcing is that in the former, operations remain under the control of the company in question. Offshoring also tends to be used for core operations such as manufacturing, while outsourcing is popular for smaller tasks and services that help a business remain flexible and agile.Connected Business Concepts
In business, vertical integration means a whole supply chain of the company is controlled and owned by the organization. Thus, making it possible to control each step through customers. in the digital world, vertical integration happens when a company can control the primary access points to acquire data from consumers.
Backward chaining, also called backward integration, describes a process where a company expands to fulfill roles previously held by other businesses further up the supply chain. It is a form of vertical integration where a company owns or controls its suppliers, distributors, or retail locations.
The supply chain is the set of steps between the sourcing, manufacturing, distribution of a product up to the steps it takes to reach the final customer. It’s the set of step it takes to bring a product from raw material (for physical products) to final customers and how companies manage those processes.
A classic supply chain moves from upstream to downstream, where the raw material is transformed into products, moved through logistics and distribution to final customers. A data supply chain moves in the opposite direction. The raw data is “sourced” from the customer/user. As it moves downstream, it gets processed and refined by proprietary algorithms and stored in data centers. Horizontal vs. Vertical Integration
Horizontal integration refers to the process of increasing market shares or expanding by integrating at the same level of the supply chain, and within the same industry. Vertical integration happens when a company takes control of more parts of the supply chain, thus covering more parts of it.
According to the book, Unlocking The Value Chain, Harvard professor Thales Teixeira identified three waves of disruption (unbundling, disintermediation, and decoupling). Decoupling is the third wave (2006-still ongoing) where companies break apart the customer value chain to deliver part of the value, without bearing the costs to sustain the whole value chain.
When entering the market, as a startup you can use different approaches. Some of them can be based on the product, distribution, or value. A product approach takes existing alternatives and it offers only the most valuable part of that product. A distribution approach cuts out intermediaries from the market. A value approach offers only the most valuable part of the experience.
Disintermediation is the process in which intermediaries are removed from the supply chain, so that the middlemen who get cut out, make the market overall more accessible and transparent to the final customers. Therefore, in theory, the supply chain gets more efficient and, all in all, can produce products that customers want.
Reintermediation consists in the process of introducing again an intermediary that had previously been cut out from the supply chain. Or perhaps by creating a new intermediary that once didn’t exist. Usually, as a market is redefined, old players get cut out, and new players within the supply chain are born as a result.
Scientific Management Theory was created by Frederick Winslow Taylor in 1911 as a means of encouraging industrial companies to switch to mass production. With a background in mechanical engineering, he applied engineering principles to workplace productivity on the factory floor. Scientific Management Theory seeks to find the most efficient way of performing a job in the workplace.
Poka-yoke is a Japanese quality control technique developed by former Toyota engineer Shigeo Shingo. Translated as “mistake-proofing”, poka-yoke aims to prevent defects in the manufacturing process that are the result of human error. Poka-yoke is a lean manufacturing technique that ensures that the right conditions exist before a step in the process is executed. This makes it a preventative form of quality control since errors are detected and then rectified before they occur.
A Gemba Walk is a fundamental component of lean management. It describes the personal observation of work to learn more about it. Gemba is a Japanese word that loosely translates as “the real place”, or in business, “the place where value is created”. The Gemba Walk as a concept was created by Taiichi Ohno, the father of the Toyota Production System of lean manufacturing. Ohno wanted to encourage management executives to leave their offices and see where the real work happened. This, he hoped, would build relationships between employees with vastly different skillsets and build trust.
Product discovery is a critical part of agile methodologies, as its aim is to ensure that products customers love are built. Product discovery involves learning through a raft of methods, including design thinking, lean start-up, and A/B testing to name a few. Dual Track Agile is an agile methodology containing two separate tracks: the “discovery” track and the “delivery” track.
Scaled Agile Lean Development (ScALeD) helps businesses discover a balanced approach to agile transition and scaling questions. The ScALed approach helps businesses successfully respond to change. Inspired by a combination of lean and agile values, ScALed is practitioner-based and can be completed through various agile frameworks and practices.
Kanban is a lean manufacturing framework first developed by Toyota in the late 1940s. The Kanban framework is a means of visualizing work as it moves through identifying potential bottlenecks. It does that through a process called just-in-time (JIT) manufacturing to optimize engineering processes, speed up manufacturing products, and improve the go-to-market strategy.
The Toyota Production System (TPS) is an early form of lean manufacturing created by auto-manufacturer Toyota. Created by the Toyota Motor Corporation in the 1940s and 50s, the Toyota Production System seeks to manufacture vehicles ordered by customers most quickly and efficiently possible.
Six Sigma is a data-driven approach and methodology for eliminating errors or defects in a product, service, or process. Six Sigma was developed by Motorola as a management approach based on quality fundamentals in the early 1980s. A decade later, it was popularized by General Electric who estimated that the methodology saved them $12 billion in the first five years of operation.Read Also: Vertical Integration, Horizontal Integration, Supply Chain,
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