Q&A - What is the difference between outsourcing and offshoring?

Although the two terms sound similar, and are connected, offshoring” is is not the same as outsourcing! Here is a simple way to remember the difference between these two terms:

Looking at these two definitions, it is possible to illustrate some different options for a business looking to change its operations:

The fundamental advantage of offshoring is the potential gains for competitiveness:

• Access to lower unit costs
• Access to more specialised suppliers and services
• Economies of scale from operating in larger international markets

However, the decision to take operations offshore should not be taken lightly. There are many examples of businesses that have undertaken offshoring and experienced problems relating to:

• Customer service: a combination of poor training, cultural differences and local management sometimes lead to worse customer satisfaction

• Higher than expected costs: low-wage economies like India and China might seem attractive, but there are many hidden costs associated with offshoring and some firms find that lower productivity from the overseas location actually means higher unit costs

• Public and employee relations: a decision to “move jobs” from the UK to a low-wage economy is a sensitive one. Handled poorly, the damage to public and employee goodwill can be significant

• Protection of intellectual property: the legal protections for business information, processes and brands are not as strong in many countries as they are in the UK. A risk of offshoring is that intellectual property (know-how, trade secrets) is lost and that a potentially stronger future competitor is born.