A Strategic Guide to Outsourcing and Offshoring

Technology has been rapidly evolving at a pace where most organizations are struggling to keep up with the consistent change occurring in the industries, they operate in. While all these technologies help us save time & costs, and increase the efficiency and effectiveness of businesses. Technology at one point was a way to gain an edge over the competition but now inability to rapidly adapt to the changing tech landscape is a fatal flaw for any business, small or large. The last two decades have been especially critical in this regard when we saw quite a few long-established behemoths of the brands going bankrupt due to failure at keeping up with the technological advancement, their much smaller competitors brought to the industry. Nokia, Toys ‘R’ Us and Debenhams are just a few fairly recent examples.

Nevertheless, technological advancement also comes with costs associated with it. The two most important of which are monetary and human resources. It’s difficult for companies to spend monetary resources to modernize tools and processes in every department besides incurring the regular operating costs of their businesses. Moreover, not only do businesses need experts to build and deploy new technologies but a lot they also need to spend a significant amount of their time training the rest of their personnel on how to effectively use and leverage those technologies.

And the reality is that many businesses just do not have the resources to be able to consistently invest in new technology. Every problem has a solution and the solution for this problem is outsourcing. In recent years it has become increasingly common for large corporations, SMEs, and startups alike to outsource a lot of their IT and tech needs to other organizations so that can focus most of their resources and energy on running their core business.

So, in this article, we will have a brief look at everything a company needs to know about outsourcing.

Types of Outsourcing: Geography

As more companies move towards outsourcing, multiple outsourcing strategies have emerged. Below we will have a look at the different outsourcing strategies.

Onshore Outsourcing

Onshore outsourcing (a.k.a. domestic outsourcing) is the strategy of obtaining services from a firm within your own country. Onshore outsourcing is usually more common if the personnel of the firm, to which the services were outsourced, are needed to be on the premises at least once, e.g., to deploy hardware, or when cultural differences or communication gaps can hurt the project.

Nearshore Outsourcing

Nearshore outsourcing is the practice of obtaining services from firms from neighboring countries. Nearshore outsourcing has some benefits of both, onshore and offshore outsourcing. For example, in Europe, a western European country can outsource its processes or projects to a company in central Europe. They will be able to get relatively cheaper pricing for the project yet the issues regarding cultural differences and time zone will be minimal relative to offshore outsourcing.

Offshore Outsourcing

Offshore outsourcing refers to the strategy of obtaining services from firms based in distant countries. Primarily the countries chosen for offshore outsourcing are the ones where the cost advantage of choosing a firm there is massive as compared to nearshore or onshore companies.

Strategic Considerations

When deciding whether you should choose an onshore, nearshore, or offshore company to outsource your projects or processes, you make the following strategical considerations:

1. Language Barrier

You should contemplate whether good communication is a critical factor for the success of your project. While communication is a key to successful business operations, it tends to be less critical for certain projects as compared to others.

2. Cultural Differences

Another key consideration is cultural differences between your firm and the outsourcing firm. There are certain industries, products, and projects where culture plays a central role. For example, ethnicity-centric businesses, culturally sensitive products, and projects. Outsourcing such a project to a country where cultural differences can cause critical issues in the execution of the project can result in losses in the long run that will outweigh the benefits of outsourcing.

3. Legal Issues

For certain products and in certain industries local laws and regulations are crucial and failure to meet these regulations can have serious consequences for the firm. A few examples of industries with stringent regulations include financial services, healthcare, and defense.

All of the above considerations do not necessarily mean that if you have such limitations, then you are limited to only onshore outsourcing firms. There are many offshore or nearshore companies that specialize in providing services to certain countries or regions and are equipped with the necessary tools, techniques, and knowledge to effectively deliver the required projects that meet all the needs of the clients in those regions and countries. Just make sure that you do due diligence and make sure they have all the required capabilities to deliver quality services before you hire them for their services.

 

Types of Outsourcing: Type of Work

The second difference in outsourcing comes from the type of work that is being outsourced. There are three options available for you to consider:

1. Project-Based Outsourcing

With this type of outsourcing, companies hire offshoring firms to overtake a certain project. This is common when a new tool or technology needs to be deployed and the internal resources have either insufficient or non-existent capabilities to execute the project. In this case, an outsourcing firm will execute the project and will also usually provide necessary training to the internal staff to effectively manage and use the product before handing it over to the hiring firm. Often the outsourcing firm continues to provide support and technical assistance for the product or tool long after they have delivered the original project.

2. Outsourcing of Processes

In this type of outsourcing a firm hires another firm to take over certain processes of the hiring firm. This is usually more common in SMEs or startups where the management wants to concentrate their already scarce resources on the development and expansion of their core business functions and outsource less critical processes to other firms. The most common functions outsourced to other firms include manufacturing, financial services, and HR services.

3. Staffing

Staffing is a type of outsourcing where a company temporarily hires individual employees of a staffing firm. This is common when the required skillset is rare in the local job market, or the cost of hiring and retaining employees with a particular skill set is either too costly or unnecessary in the long run.

To Outsource or Not to Outsource?

When deciding to outsource a project or process, it’s necessary to ask whether it would benefit the firm’s overall strategic goals or be counterproductive.

If a project is related to the core of a business or is central to the long-term success of the firm, then it’s always better to develop the required capabilities for the execution and running of that function within the firm. Whereas if a function is only supplementary to the core business, then outsourcing it can help the firm to realign its major resources towards more critical jobs and functions and outsource such supplementary jobs to other firms.