Unit 7

1. Similarities and differences between "outsourcing" and "offshoring"?

Outsourcing refers to the delegation of the routine or peripheral business processes to some
external organization so as to free up their resources that is money, time and manpower for the
core activities of the business

Offshoring is understood as the type of outsourcing whereby the business process or services is
relocated or shifted in a different country with the aim of taking advantage of lower costs

-differences

Outsourcing Offshoring
Meaning Outsourcing is the assignment Offshoring refers to the
of business peripheral relocation of business
operations to an external processes in a different
organization. country.
What it implies? Shifting operations to third Shifting activities or offices.
party.
Objective Focus on core business Lower labor cost
activities
Function performed by Non-employees Employees of the
organization

2. What is the aim of outsourcing/offshoring?

- Companies use outsourcing to cut labor costs, including salaries for their personnel, overhead,
equipment, and technology. Outsourcing is also used by companies to dial down and focus on the
core aspects of the business, spinning off the less critical operations to outside organizations.

- Offshoring is a business move made by companies to reduce sourcing and labor costs.
Companies often relocate their manufacturing work to foreign locations with cheaper raw
materials, labor fees, and upkeep. By moving one’s operations to developing countries, a
company can churn out more products and take advantage of more competitive pricing.

3. Give examples for Outsourcing and Offshoring?

Outsourcing:

Offshoring:

- Canva is a popular platform for digital design that has expanded its operations to the
Philippines. According to the graphic design brand, 99% of its expansive template library is
designed by Filipino artists.
- General Electric (GE) is a global brand known for offshoring its research and IT operations
to India. Although its foreign site has lower upkeep, the company spared no expense in
equipping its research and development center with cutting-edge technology.
4. "The great job migration" refers to....

5. Advantages and disadvantages of Outsourcing/Offshoring?

*Outsourcing:

-Advantage:

1 – Reduces Operational Costs

The cost of hiring an external agency or third-party outsourcing services is lower than setting up
in-house operations

2 – Improves Productivity

By outsourcing select business processes, you can improve productivity because your company
can focus its resources on its core business functions.

The cost savings from outsourcing can be repurposed to fund revenue-generating programs of the
company.

And by freeing up more time for your employees to dedicate to a dollar productive decision
making process, you can transform how effective you are in the business world.

3 – Increases Flexibility

A company can increase its flexibility with offshore outsourcing by taking advantage of time zone
differences. By simply adjusting work shifts, it is possible to have your business managed for 16
hours by an external agency.

That means certain business functions that are customer facing can have extended opening hours
in a cost effective way.

-disadvantage

1 – Cultural and Social Differences

There will be a period of adjustment needed for your company to accommodate certain cultural
and social practises of the third-party outsourcing vendor.

2 – Communication Problems

Hand-in-hand with cultural and social differences are communication problems. They arise
because of differences in perspectives as well as occasional misunderstandings in terminology.

3 – Security Issues

Despite the introduction of the Data Protection Act in several popular offshore outsourcing
destinations, security breaches and data integrity will remain serious issues in the outsourcing
industry.
Even with tight information technology, networking protocols, and safety measures, concerns
about security will always come up in the absence of close collaboration.

This is especially critical for core aspects like company financial data and personal information
about vendors and clients and having clear security protocols in place can save many businesses
from serious data breaches.

*Offshoring:

-Advantage:

1 – Economies Of Scale

When a company sets up an office or a factory abroad, it is not just capitalising on comparative
cost advantages on labour but also on existing economies of scale.

A company can also take advantage of the lower cost advantage by diversifying positions or
negotiating for volume discounts when purchasing assets or services, which will further reduce
actual costs of these offshore outsourcing solutions.

2 – Close Collaboration

Offshoring gives the company greater control through closer physical collaboration.

Shared space collaboration has the advantage of overseeing the conduct of work without the
filters or delays associated with technology.

3 – Favourable Government Policies

There are some governments that grant special exemptions and incentives to companies that
invest in their economy.

These include tax exemptions and access to cheap credit, which could improve the bottom line of
the business. Exploring such cash flow improvements can make the upfront cost associated with
offshoring core functions a lot more favourable.

-disadvanatge:

1 – Increase Unemployment

The biggest criticism of companies that offshore is that it increases the level of unemployment of
the local economy.

The previously mentioned companies Caterpillar and Nike have been accused of taking away jobs
from Americans and displacing their existing workforce in favour of other nationalities.

These companies argue that by offshoring, they are able to improve profitability by lowering costs
and increasing revenue. Thus, the increased profits can be used to improve the facilities and
programs of the core business operations.

2 – Cultural And Social Differences

The client will be immersed in the culture and social practises of the host country. This may have
an effect on productivity and communication.

Unlike outsourcing, time zone differences may work against the offshoring company because
production could end up being delayed due to changes in manpower availability. This can add
hidden costs to certain business and job functions.

3 – Security Issues

Whenever you are transmitting data to another party, you are always at risk of security breaches
and compromised data integrity. There will always be transfer issues when it comes to data, even
when there is shared space collaboration.

Even when an offshore expansion is technically part of the parent company, there can still be risks
involved with sending sensitive data between two locations.