Both outsourcing and offshoring are solutions for companies trying to lower manufacturing costs, complete tasks more efficiently and increase company productivity through resource allocation. Outsourcing at its core involves hiring a third-party vendor to complete a particular element of production, while offshoring simply shifts that element abroad within the business. While both options can increase manufacturing efficiency and create more competitive pricing overall, there are far fewer internal risks when offshoring.
Risks of outsourcing
The main danger associated with outsourcing is the potential loss of sensitive company data. Because a third party vendor is involved in business functions, there is an inherent loss of confidentiality simply through the sharing of intellectual property. While outsourcing reaps many of the same benefits of offshoring, it necessitates that a company be willing to divulge some of its internal affairs.
On the opposite end of this spectrum lies the lack of company knowledge a third party might have when beginning a partnership. Potential consequences resulting from this include loss of control from a managerial standpoint, inaccurate delivery times, mismatched perceptions of production quality and divisive business interests. Gaps in the contract governing the relationship can also exist, leaving responsibilities and expectations unclear.
A final risk of outsourcing is the reliance it creates on an outside vendor. Any financial loss they might incur will directly affect the production of the company utilizing its services, and if the party serves multiple clients, they will not be able to dedicate all of their resources to any one company.
Rewards of offshoring
Offshoring, on the other hand, is an outsourcing alternative that keeps all company communication internal and allows for a more seamless application of policies and expectations. Because offshoring lets a company reallocate some of its production elsewhere, it is still able shift more of its attention to core functions at home while allowing for more control and less risk abroad.
While offshoring generally requires more work for the parent company than outsourcing, shelter companies like the Offshore Group are able to give companies an even more hands-off approach by taking care of the extraneous and difficult details. The parent company will maintain direct control over manufacturing, but services like HR, benefit, payroll, strategic location and housing are taken care of by the shelter company.