Outsourcing, Offshoring, Onshoring and Nearshoring Explained

An infamous American author, John C. Maxwell once said, “If you want to do a few things right, do it on your own. If you want to do great things and make a big impact, learn to delegate”.[1]

 As a business owner, it is as important to understand what not to do, as it is for what to do. Large conglomerates all over the world have realized this golden rule and are utilizing Outsourcing as a medium to cut costs and make higher profits.  Let’s understand the term in a wider context.

What is Outsourcing?

Outsourcing can be viewed as the collaboration between two organization specializing in their own field of work, looking for a mutual gain. When a US based company outsources its customer care service to a company in India because of the availability of cheaper labor, the former company is making gains by cutting costs and the latter is gaining clients, thus making profits.

It is the process to hire a workforce to perform certain tasks which were earlier being performed by in-house employees. The tasks could range from data entry outsourcing to IT support to digital marketing and everything in between. There are different models, according to which companies outsource, depending on what best suits their needs.

Models of Outsourcing

Every business follows a particular strategy to operate in the market. However, the main aim remains the same- to maximize profits. Let’s look at three ways in which companies outsource to reach that aim.

Difference between Outsourcing, Offshoring, Nearshoring and Onshoring explained.
Different types of Outsourcing models
  1. Offshoring: In this type of outsourcing the parent company hires the subsequent company operating on a different geographical territory. This has been a beneficial addition in the MNC sector as they are outsourcing their different heads and task forces in different countries according to the resources available. When an organization sets up a manufacturing unit in another country (due to cheaper land), it is termed as Production Offshoring. On the other hand, when service-related activities are delegated like Data Entry, Back Office Support, HR, IT or Customer Care, it is Services Offshoring.
  • Onshoring: It can be seen as a counterpart of offshoring, performing similar services, with just one exception. Here, both the companies involved in the outsourcing process belong from the same territorial land.  For instance, when a New York-based company outsources its operations to one operating in New Orleans, it falls under the Onshoring category. Working in the company of the same country gives the employees a sense of personalization and patriotism which boosts their motivation to work. An American employee would relate to, and understand another American better than a foreigner. It allows great flexibility inside the organizations. The matching cultures and accents largely contribute to increased effectiveness of work and efficiency and coordination in communication, as it cancels out the barrier of Prejudice. Along with this, Onshoring is more cost-effective in comparison to Offshoring, as the only cost incurred in transportation is local and thus, no import duty or tariffs apply
  • Nearshoring: This model falls somewhere between the above two. It is essentially offshoring, but to a nearby country, usually sharing a border with each other. In this procedure, outsourcing is undertaken within preserved cultural similarities to avoid the communication barrier.  Companies look for cost-effective activities among neighboring countries to minimize social barriers while being in close territorial proximity to their customers. For instance, if a Germany-based company needs to nearshore, it will choose locations like Poland or Czech Republic due to their relatively lower human resource costs.

Why do Companies Outsource?

 Up until now, we recognized that cost cutting is the main aim of Outsourcing. However, there are more reasons why companies choose to outsource. One of which is time saving. Companies sometimes delegates the operational time-consuming tasks so that they can focus on more important tasks like preparing business strategies and expansion plans, etc.

In addition to this, sometimes outsourcing is done to seek expertise from outside that is missing internally in the organization. When everyone performs their niche, work is bound to produce extraordinary results!

The Bottom Line

Outsourcing is not just limited to companies or organizations anymore. Anyone can opt to hire companies to perform specific tasks and increase efficiency. You could be a blog owner looking to digitally market it or an interior designer seeking assistance to build your website. It is a decision you need to make, in the best interest of your business’ health.

[1] https://www.resourcefulmanager.com/delegating-quotes/

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