The need to cut costs while maintaining quality and productivity has
urged many firms to explore the following options: outsourcing and
offshoring.
While both terms have been used interchangeably in most of today’s
business literatures, they technically refer to two different things.
Outsourcing is the practice of contracting a non-core function or a
project to a third party vendor whether locally or abroad. Offshoring,
on the other hand, happens when a firm sends their in-house jobs or
projects overseas in either a subsidiary, or a third party vendor.
Both have their own sets of benefits.
For instance, the former allows companies to focus more on their core
competencies by contracting non-core but critical functions to a third
party vendor. In addition, a third party vendor with people equipped
with the right skills and expertise will be able to accomplish tasks or
undertake functions an in-house staff won’t be able to do, and produce
better results. Lastly, firms can easily ramp up or ramp down quickly
without having to face the repercussions of exterminating personnel. As a
result, companies can hire people on a project basis only.
Alternatively, the latter lets companies take advantage of low costs
of factors of production, such as wages, raw materials and utilities in
other nations, especially developing countries. Added to that, the
availability of human resources with skills and expertise specific for
certain types of tasks have made this option viable for most companies.
Take note that a company does not have to outsource in order to
offshore. Some multinational companies set up captive offshore units to
exploit the low costs and taxes without having to contract functions or
projects to a third party vendor.
But then again, both systems are not without risks. An outsourced
vendor’s lack of knowledge in the client firm’s business and long-term
objectives could breakdown its otherwise ideal partnership with the
client.
With offshore partners, miscommunication stemming from cultural gap
could put a strain on the relationship of the firm and its subsidiary.
On top of that, factors like political unrest, changes in the economic
policies of the government and poor infrastructure could affect the
output of an offshore unit.
But despite the setbacks, both practices are continually on the rise.
In fact, the success of both systems has spawned a new practice that
combines the benefits of the two strategies. Today, many offshore third
party providers offer a wide range BPO services.
And with best practices being created to mitigate the risks and
multiply the benefits of offshoring and outsourcing, they will not only
guarantee more savings on your part but also more profits.
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