Offshoring vs Outsourcing: 3 Key Differences

Globalization is changing the current operating environment for entrepreneurs. To provide scalable and adaptable growth companies need to implement technological solutions quickly and at a minimal cost. It is not always possible to do only with the in-house team. Attracting tech people from outside provides the opportunity to achieve business goals by building unique and innovative solutions.

This article will discuss two models of software development – offshoring vs outsourcing. Below we will answer the question 'what is the difference between outsourcing and offshoring', reveal their advantages, and drawbacks.

What is outsourcing?

Everyone knows and uses the definition of outsourcing and offshoring, but what is the difference between the models?

Offshoring and outsourcing meaning is often mixed up, although both refer to cooperation with a third-party provider. When outsourcing, your partner may be located either in your city or country. The company hires a vendor who can build and upgrade an app, or provide maintenance with their own team.

To understand the difference between outsourcing and offshoring, let’s discuss what offshoring is.

What is offshoring?

While business expectations kept rising, businesses started looking for more engaged models that gave them ownership rights. That was the start of offshoring. The companies got cheaper services in the countries with lower wages without losing the quality of services.

Offshoring refers to allocating a business or a part of it to another country. Offshoring is different from outsourcing because you can either open your own office or delegate the scope of work to a vendor.

Outsourcing: pros and cons

A deeper dive into the pros and cons will help you to understand what is outsourcing and offshoring and how these models may be useful for your business strategy.

Advantages of outsourcing

The outsourcing model remains advantageous and popular among users for many reasons.

1. Enhanced productivity

Providing technical solutions demands involving the latest technologies and high-skilled employees. By involving the outsourcing company, you get everything at once – a team of professionals, a tech stack base, and all necessary resources to streamline your software development.

2. Focus on core competencies

When delegating product development to a qualified team, you can focus on your core business needs. As the vendor usually has narrow domain expertise and a fully-fledged team, it helps to set up a smooth development process within tight deadlines.

3. Cost savings

Outsourcing is still one of the cost-efficient models, as you don’t have to provide equipment, technology upgrades, and employee perks. Your vendor is already equipped with all the necessary tools and resources to provide the best services.

Disadvantages of outsourcing

Let’s discover what disadvantages you may face when choosing the outsourcing model:

1. Poor communication

Distant communication may be a challenge for some companies and a reason to choose in-house development. Such a process demands constant management and involvement from the vendor’s side. If you hire an unprofessional vendor, you may face the issues of waiting too long, unclear communication, numerous channels, and chaotic people management.

Service providers who care about communication usually set up rules and follow them, for example:

• use overlapping hours for communication
• have a communication plan
• limit the channels of communication
• provide detailed meeting notes
• have a common space for document sharing
• schedule video calls for synch-ups
• have people who are responsible for communication and updates

To ensure effective communication, we at DigitalSuits have implemented a plan that makes communication well-organized, saves a ton of time and renders the process smoother. We explained in detail how we manage the process of software product development in our article ‘10 Best Practices of Software Product Management for Small and Medium-sized Companies’. Read it to know more about effective communication and processes while outsourcing.

2. Lack of control

Poor communication may result in a feeling like you have insufficient control over the process. Distant cooperation with poor communications may result in high-priced solutions or services that do not achieve the expected result.

A professional vendor easily settles this problem with effective project management and a set of internal process regulations. Contracting with DigitalSuits, you will have your project guided by a project manager, who is always in touch with you and in control of the entire development process to ensure smooth project implementation on time. We use a variety of tools, such as Jira, Confluence, Toggl, Basecamp, and even Trello to ensure transparency. They help us to plan, give project roadmaps with timelines and time to deliver.

3. Quality issue

The skills inside the vendor team are crucial for high-quality performance. The lack of expertise will result in extra costs and poor technical solutions that do not meet the market demands. To avoid this, check whether your contractor has the necessary domain expertise. The company’s portfolio, as well as clients’ reviews, are the sources that you can rely on.

Offshoring: pros and cons

Now let’s look at what the benefits and drawbacks of offshoring are and how businesses can benefit from it.

Advantages of offshoring

Offshoring opens new markets for companies and brings benefits. Among the main benefits of offshoring are:

1. New markets of talents

Offshoring vs outsourcing difference is that offshoring gets you access to a wider pool of professionals. The Eastern Europe IT market is full of highly educated professionals with deep expertise in different areas and fluent English. For example, the Ukrainian IT market occupies the fourth position in the world by the number of tech specialists which counts 166,000 experts.

2. Cost and quality

Comparing the cost of IT services you may find that the prices in Ukraine are better for the same quality services. The hourly rate of IT experts varies from $25 to $49, which is significantly lower than in the USA, Canada or Western Europe while the quality of services they provide is extremely high and recognized in the world.

3. Latest technology stack

By choosing a vendor overseas you have access to deeper expertise in the domain you need. A wider talent pool allows you to get the right technology stack that is lacking in your current labor market. Starting the development process with the latest tech trends will help you to mitigate possible risks or minimize them.

According to the Good Country Index Ukraine was the 14th among 163 countries in the 2020 Science and Technology category. Here you may find IT experts in tech domains covering a wide variety of sectors, including e-commerce, insurance, entertainment, finance, and many others.

Disadvantages of offshoring

Among the main cons of offshoring I will highlight the following:

1. Rights protection

The legal process varies depending on the country of the services. Transferring a part of your business activity to a third-party vendor may risk privacy and data security. The right choice is to sign an NDA and other necessary legal documents to protect your rights and interests. Discuss all the issues in advance and secure your business process by contracting working conditions, compensation, duties, and property rights.

2. Cultural differences and language

A clear understanding between parties when operating the business process is the key factor. An offshoring company needs to have the proper level of English to collaborate effectively. Good communication will guarantee on-time and effective project completions, avoiding pitfalls or minimizing problems during the cooperation. That is why the skills are to be checked at the stage of pre-contract communications.

3. Time-zone differences

Time-zone differences may be an issue in case of an improperly organized working process. Some offshoring companies face a 5-12-hour difference, that’s why the working schedule should be adjusted and managed properly by the vendor's project manager.

3 Key differences between outsourcing and offshoring

The main difference between outsourcing and offshoring is that outsourcing mainly refers to transferring services or part of them to third-party vendors, while offshoring is mostly about the relocation of the business operation itself.

Here below we discover outsourcing and offshoring difference:

Conclusion: combination of outsourcing and offshoring

As a result of business collaboration development, a combination of outsourcing and offshoring has emerged. It means transferring a part of the business to offshore companies. Double savings pushed this collaboration into reality.

Tech companies started using this model to be more competitive, cut costs, and get better quality. Despite some risks, this model still remains the most beneficial option. Thus, outsourcing software development company can bring fast and effective results for your business.

Contact us to know more about augmenting your team using different engagement models that suit your business best.