To achieve long-term success, any company should try to gain a competitive advantage. The common, efficient way to achieve this is by using external expertise and gaining extra agility in operations. The two main approaches to improving your operational performance are offshoring and outsourcing, especially in IT. However, there is a difference between these two concepts. What follows is offshoring vs. outsourcing comparison to help you make an informed decision.
Offshoring and outsourcing are the terms commonly used interchangeably, but they actually describe two quite distinct processes. Getting lots of requests from the customers to clarify the difference, Edvantis decided to explain this matter once and for all and list the definitions as well as the pros and cons of both approaches.
What is IT Outsourcing?
Let’s start with the IT outsourcing definition, offered by Gartner:
The goals of IT outsourcing are manifold:
- Gain access to niche IT expertise
- Speed up time-to-market for new software products
- Gain a competitive edge by building long-term win-win agreements with select vendors, fully responsible for supporting certain operations
- Reduce total cost of ownership
IT outsourcing assumes a certain degree of control and management over the execution — from setting up the optimal SDLC to ensuring proper work allocation for the development team and having the right supporting roles both on-site and at the vendor’s end.
The typical cases of outsourcing in IT are as follows:
- Software development
- Cloud infrastructure management operations
- Big Data analytics
- ML/AI training and implementation
- Connected systems and IoT
Businesses that obtain these services from third-party vendors don’t have to invest:
- In hiring talent in-house
- Onboarding new team members
- Setting up new operational teams
- Engaging in Learning & Development, etc.
This allows them to save on overhead costs and reduce the total cost of ownership to some extent.
Apart from the money factor, a long-term partnership with an IT vendor can also help businesses:
- Stay concentrated on core activities
- Gain access to innovations without significant R&D expenses
- Bridge the skill gap and employ skilled professionals with niche expertise that can be hard to come by
IT Outsourcing Examples
Many global enterprises outsource various aspects of their operations, not just those related to IT:
- Whatsapp outsourced iOS app development. You have surely heard how WhatsApp founders failed to land a job at Facebook and decided to build their own SMS/messenger service. They hired Igor Solomennikov to develop an iOS version for WhatsApp, and later outsourced many aspects of platform development to teams of professionals from Eastern Europe.
- Slack outsourced its redesign. An app that pretty much every software engineer now uses as a primary communication and work tool started as an IRC (Internet Relay Chat) in a browser back in 2013. However, Slack gained little traction outside of the geek community and the founders decided to redesign the platform to make it more appealing to broader audiences. As the founders lacked the expertise in-house, they outsourced the Slack redesign to Metalab. This decision resulted in a huge increase in the popularity of the tool, which allowed Slack to secure $250 million in investments in 2017 with a valuation of $5 billion.
- Alibaba outsourced its website development. A company that has now become the world’s largest e-commerce and shipping platform started as a side-project of Jack Ma back in 1999, when China lacked good website designers and developers. Thus, Jack outsourced the task of building localized website versions and the underlying infrastructure to US software engineers. This laid the base for continuing growth. Now, with $25 billion raised, Alibaba’s IPO becoming the largest in history.
These are solid outsourcing examples of what your company can achieve. However, there can be a major downside to this decision — a risk of having your IP rights and operations compromised. Underqualified IT outsourcing providers might carelessly expose the systems they operate or fail to timely deliver the expected results. This might inflict substantial financial and reputational damage to their employers. The only solution here is to do rigorous background checks before partnering with a vendor and investing heavily in cybersecurity (which is a sound business decision anyways).
In addition, the common reasons why outsourcing projects might fail are as follows:
- Poor requirements definition
- Lack of client expertise with managing a dedicated development team
- Lack of working experience with outsourcing vendors
To mitigate these risks, you address the following questions:
- Do you have a strong vision of what you are planning to outsource?
- What’s your core reason for doing so?
- What value do you expect to get as a result?
- How will you manage the remote team in the process?
Unless you have a clear understanding of these steps, as well as the necessary roles and controls at your side, any outsourcing initiative might get side-tracked. That’s why we also developed an IT outsourcing readiness assessment checklist that should help you prepare your operations for outsourcing.
When to Use IT Outsourcing?
Below are several specific cases when IT outsourcing makes sense:
- You want to get instant access to innovative technology and use it correctly from the get-go. IT outsourcing vendors work with many customers, have ready solutions and processes in place, and can use them to speed up your project. This way you don’t have to reinvent everything from scratch.
- The competition for IT talent is tough and you need to close the skills gap rapidly.
- You need to reliably scale your operations globally, so core in-house team concentrates on main tasks, while activities like R&D are delivered by contractors.
- you need to quickly add more people to your team to meet the market demand.
Thus, you can concentrate on conducting mission-critical activities internally and outsource other operations to trustworthy vendors.
What Is IT Offshoring Then?
Let’s move on to the IT offshoring definition, also courtesy of Gartner:
As you can see, offshoring resembles IT outsourcing quite a lot. However, certain caveats distinguish this approach:
- IT offshoring is always conducted in a country abroad, while outsourcing can also be done by an external vendor within the same geography.
- Offshoring might involve setting up permanent operations in the country and having a stable team on the ground. This means you retain full control over the operations.
- Offshoring also often assumes a BOT (Build-Operate-Transfer) model of cooperation. It means you partner with a vendor to initially set up a new operational unit for you from scratch. Later the vendor transfers all the control back to you and the new division becomes part of your core operations.
Offshoring can be further broken down to nearshoring operations (e.g. from the US to Mexico or from the UK to Poland) and offshoring (e.g. from the US to Eastern Europe). Both approaches allow saving costs while hiring local experts to augment your company’s workflows with digital skills, help train your staff, and increase your delivery pace.
The most prominent example of offshoring is Microsoft, whose overseas industrial installations and cloud data centers are second by numbers to Apple alone. After becoming Microsoft CEO, Satya Nadella managed to restructure and reorganize the corporation to minimize its taxes and maximize its performance. This is one of the reasons why Microsoft’s profits grow significantly YoY.
When to Use IT Offshoring?
In short, offshoring works best when you don’t have immediate access to the expertise you need to support some new initiative (such as a new Big Data analytics project) in-house. However, you’d like to add such skills to your toolbelt and potentially incorporate the team under your corporate brand.
Offshoring is the right choice for businesses that want to:
- Gain continuous access to the right talent
- Increase the cost-efficiency of operations
- Leverage business-friendly regulations
- Expand their global presence in the local markets
Ultimately, IT offshoring allows you to minimize expenses on obtaining the required expertise while retaining control over the process, improving your in-house skills. It improves your in-house skills and helps transfer the knowledge to your team in the end.
Outsourcing vs. Offshoring: Conclusions
Now you can see why IT outsourcing and IT offshoring can be confused with each other. Both concepts involve delegating some tasks to external vendors for one-time projects or long-term commitment. Both result in cost reduction, access to skilled talent, and shorter time-to-value for your projects.
- Offshoring certainly makes more sense when your ultimate goal is to set up permanent operations in a new country.
- Outsourcing can be better suited for both short- and long-term projects, where you feel comfortable having an extended team or several extra people working for your brand.
These cases are just the tip of the iceberg, and making an informed decision is by no means easy.
Edvantis would be delighted to further consult you on the best scenario via our IT advisory services and explain the full scope of benefits each type of outsourcing service provides.