Offshoring and outsourcing are often mistaken for each other. However, these terms have distinct meanings and are not always interchangeable.
How Are Outsourcing and Offshoring Different?
Outsourcing involves delegating business processes to another company or independent contractors. Offshoring means moving a part of business operations to another country.
It isn't always outsourcing vs. offshoring. Sometimes it's outsourcing and offshoring. Organizations will lean on both tools (together or in separate areas of their business) to expand their capabilities and improve their operations.
The business might own and operate an offshore facility, like constructing a factory overseas, or it could outsource to a local firm. Both approaches are commonly used to expand operations, cut costs, and improve efficiency. Many large companies often combine outsourcing and offshoring to grow different parts of their business based on their needs, budget, and skill requirements.
We will examine the advantages and disadvantages of offshore and outsourcing, along with related staffing models.
Benefits of Outsourcing
According to the 2025 Executive Productivity Report, 46% of organizations are outsourcing at least 15% of their workforce, with marketing as the single most outsourced area.
There are several reasons companies outsource services, including:
- To reduce labor costs
- To access specialized services
- To focus on core business competencies
- To deliver short-term or seasonal projects
- To get hard-to-find skills
- To find talent faster
Specialized Outsourcing Services
A primary way outsourcing companies differentiate themselves is by offering specialized services that they can handle more efficiently than their clients could independently.
The primary outsourcing sub-industries include:
- Manufacturing Outsourcing — Companies hire another business to manufacture their products
- Business Process Outsourcing (BPO) — Hiring specialized companies for back-office tasks like customer service and data processing
- IT Outsourcing – A third party hosts and manages a business's information technology infrastructure.
- Call Center Outsourcing – Businesses hire external teams to manage customer support, sales, and inquiries using call center software
- Software Development — Software development outsourcing involves contracting with a company to create software products. To ensure efficiency and quality, businesses often use one of the top software development analytics tools to track performance, monitor progress, and improve the development process.
- Project Outsourcing — Specialized help is needed to deliver a complex project
- Design Outsourcing — Third-party companies can assist you with high-quality custom designs, including logos, websites, and product industrial design.
Again, not all these functions are outsourced offshore.
For example:
- Medical device contract manufacturers develop prototypes and manufacture products within the U.S.
- U.S. accounting firms audit publicly traded U.S.-based companies
- U.S. IT companies build and manage other businesses' cloud-based infrastructures
If the firm whose skillset, availability, and rates most closely match a business’s needs is located in another country, then offshoring makes sense as well.
Offshoring Economics
Companies often outsource operations to developing countries with low wages to lower costs. These savings benefit customers, shareholders, and managers. However, offshore outsourcing has faced criticism for negatively impacting the U.S. economy by reducing jobs.
That said, the idea that offshoring hurts the U.S. economy has been challenged. A McKinsey study, "Offshoring: Is it a Win-Win Game," found that every dollar offshored generates $1.45 in new revenue, with $1.12 of that revenue returning to the U.S. and 33 cents going to the offshore nation. Those 33 cents represent about $20 of equivalent spending power in a country like the Philippines.
Benefits of Offshoring to Businesses
The primary driver of offshoring is cost reduction, as 70% of businesses move services overseas to cut expenses.
The second biggest reason companies offshore services is for quick access to labor pools in countries with a more favorable environment for certain business functions.
As the offshoring industries of India and the Philippines have expanded, their educational and professional systems have adapted to develop mature training infrastructures and talent pipelines. It typically takes about four months to hire someone in the United States, but with offshoring, companies can assemble entire teams within a few weeks.
Benefits to Offshore Nations
Offshoring also benefits developing countries' economies and can contribute to national stability. India's offshoring industry, valued at $100 billion, has advanced it to become the third-largest economy globally. This sector mainly focuses on software development and IT services. At the same time, the Philippines has become a prominent player in BPO offshoring, earning $27 billion and creating 1.3 million jobs.
The Philippines is becoming an increasingly popular destination for recruitment due to its exceptional English skills, a workforce known for strong work ethics, and rising literacy and education levels. The country’s favorable time zone for global business, cultural compatibility with Western markets, and expertise in industries like customer support, IT, and creative services further boost its appeal. Global consultancy Tholons recognized this rising importance, ranking the Philippines fifth in its Top 50 Digital Nations, cementing its role as a leader in offshoring alongside India.
Risks of Offshoring
Offshoring, particularly when referring to outsourced jobs, has faced criticism. Offshore companies encounter reputational risks stemming from the perception that they are relocating "American jobs" abroad. As McKinsey found, the economics of offshoring are not straightforward. There are additional risks associated with offshoring:
- Project failure or missed deadlines, and ensuring legal battles over blame
- Communication issues that slow projects down
- Changes in offshore nations' political and economic requirements that disrupt business
- Lack of control over outcomes
While the benefits of outsourcing and offshoring overlap, they don't share the same risks. Outsourcing in the U.S. doesn't risk alienating consumers due to lost jobs or causing political, social, or economic unrest.
Offshoring vs. Outsourcing Post-COVID
The COVID pandemic and the shift to entirely or mostly remote work have blurred the distinctions between outsourcing, offshoring, and directly hiring full-time employees. When everyone works remotely, does it really matter if employees are down the street or on the other side of the world? In an increasingly digital economy, many services can be provided online and from anywhere.
Coincidentally, the gig economy is leading more workers to pursue independent contracting from Silicon Valley to Manila. This gives workers more agency and gives employers more flexibility to staff on demand from any geography.
New Models of Offshoring
While offshoring traditionally involves establishing operations in another country, new outsourcing models are emerging and have accelerated during the pandemic. One such model is to hire individuals and teams overseas and integrate them with your domestic teams as virtual co-workers. Online marketplaces like Upwork enable you to hire individuals for projects and ongoing work.
Managed service providers like Prialto hire, train, and manage virtual administrative assistants in Guatemala and the Philippines to work with U.S.-based executives and teams. Another managed service provider, Andela, employs, places, and supports software developers from African nations who work with U.S. tech companies.
Related: Why Outsourced Executive Assistants Make Sense for Any Size Company
Mitigate Uncertainty with a Managed Offshore Outsourcing Model
Managed service offshoring enables businesses to adjust their scale as needs evolve. Companies gain greater control over their operations by incorporating offshore workers into their teams, rather than outsourcing tasks to another firm. This level of control is crucial, as customers now wield more power and have more options than ever, making the quality of the customer experience essential. You can find the right employee for the proper role, no matter where your business is located.
The managed service model of offshoring offers overseas workers more than just a gig. The managed service provider trains, supervises, pays, and provides benefits and career paths that aren't available to independent contractors or marketplace workers. The employees work for the service provider, so the risks involved in political or social disruption are on that company. The good news is that you don't need to manage the employee's performance. That's up to the service provider.
Offshoring vs. Outsourcing: Conclusion
Offshore vs. Outsourcing: What's right for your business? The most significant difference lies in the location of the service provider you hire. Another key distinction is that offshoring carries specific risks that domestic outsourcing can often sidestep. Additionally, a third option — managed offshore service providers — strengthens your team with the specialized skills and oversight you need, all while keeping your overhead and risk minimal.
The right option is going to depend on your business, needs, and the provider you can find!
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