Offshoring vs.

Outsourcing
Outsourcing refers to an organization contracting work out to a 3rd party, while offshoring refers to getting work done in a different country, usually to leverage cost advantages. It's possible to outsource work but not offshore it; for example, hiring an outside law firm to review contracts instead of maintaining an in-house staff of lawyers. It is also possible to offshore work but not outsource it; for example, a Dell customer service center in India to serve American clients. Offshore outsourcing is the practice of hiring a vendor to do the work offshore, usually to lower costs and take advantage of the vendor's expertise, economies of scale, and large and scalable labor pool.

Offshoring vs. Outsourcing

Outsourcing refers to an organization contracting work out to a 3rd party, while offshoring refers to getting work done in a different country, usually to leverage cost advantages. It's possible to outsource work but not offshore it; for example, hiring an outside law firm to review contracts instead of maintaining an in-house staff of lawyers. It is also possible to offshore work but not outsource it; for example, a Dell customer service center in India to serve American clients. Offshore outsourcing is the practice of hiring a vendor to do the work offshore, usually to lower costs and take advantage of the vendor's expertise, economies of scale, and large and scalable labor pool.

Comparison chart

Offshoring
Risks and criticism: Offshoring is often criticized for transferring jobs to other countries. Other risks include geopolitical risk, language differences and poor communication etc. Offshoring means getting work done in a different country. Benefits of offshoring are usually lower costs, better availability of skilled people, and getting work done faster through a global talent pool.

Outsourcing
Risks of outsourcing include misaligned interests of clients and vendors, increased reliance on third parties, lack of inhouse knowledge of critical (though not necessarily core) business operations etc. Outsourcing refers to contracting work out to an external organization. Usually companies outsource to take advantage of specialized skills, cost efficiencies and labor flexibility.

Definition:

Benefits:

Overview and History

Outsourcing refers to the contracting out of an entire business function, a project, or certain activities to an external provider. The term entered the business lexicon in the 1980s. In the second half of the 20th century, as companies tended to grow larger and skills were required to be more and more specialized, companies found that external providers were often able to get work done faster and more efficiently owing to skills they possessed. This led to more hiring of external providers to manage business functions and projects where specialized skills were required.

Towards the end of the twentieth century, with improvements in shipping technology and telecommunications infrastructure, it became increasingly efficient to get work done in other geographical locations, especially in developing countries where wages are lower. This practice came to be known as offshoring. Not all offshore work was outsourced, however. Captive offshore refers to multinational corporations (MNCs) establishing subsidiaries in several countries and getting different types of work done in different countries. Factors that MNCs consider when offshoring include costs of factors of production (wages, raw material, transportation costs, utilities such as electricity), taxes (many countries offer subsidies to entice MNCs to set up shop) and skills available among the work force.

Benefits
There are several reasons for companies to both offshore and outsource.

Outsourcing Benefits
Why do companies outsource? There are several reasons why a company might outsource. While this can be a politically sensitive topic, management experts generally agree that outsourcing - when done right - increases competitive advantage with a natural division of labor that evolves in any society. Reasons for outsourcing include: Cost advantage: Costs are arguably the chief motivation behind outsourcing. Often companies find that contracting work out to a 3rd party is cheaper. Focus on core competency: There are a lot of business functions in a company. For example, human resources, information technology, manufacturing, sales, marketing, payroll, accounting, finance, security, transportation and logistics among others. Most of these are not "core" to the company. A "core" activity is one which offers the company competitive advantage over its competitors. It is an activity that the company does better than the competition, which is the main reason its customers do business with the company. Having to handle non-core functions is a distraction, so many companies outsource them. Quality and Capability: Often companies don't have in-house expertise for certain activities. In these cases, it is more efficient to outsource, and resulting products and services tend to be of higher quality when provided by outsourcing vendors. Labor flexibility: Outsourcing allows a company to ramping up and down quickly as needed. For example, a company may need a large number software programming experts for 6-8 months to develop an application. It would be infeasible to hire people for only 6 months. Outsourcing, however, can provide flexibility so the company does not have to worry about hiring and firing.

Benefits of offshoring
Offshoring provides many of the same benefits as outsourcing, including: Cost savings: Companies usually offshore manufacturing or services to developing countries where wages are low, thus resulting in cost savings. These savings are passed on to the customers, shareholders and managers of these companies. Skills: The competitive advantage of nations often means that some countries or regions develop a much better ecosystem for certain types of industries. This means there is better availability of skilled human resources in

that region for specific types of tasks. For example, India and the Phillipines have a large pool of Englishspeaking, college educated youth; as well as a mature training infrastructure; that makes it ideal for business process outsourcing. Therefore, many companies choose to offshore certain business functions (e.g. call centers for customer support) to these locations. These can either be captive or outsourced. Note that you do not need to outsource in order to offshore. Captive offshore units are set up to leverage the benefits of offshoring without having to outsource to vendors. This is usually done when companies believe that their offshore centers for production/service will provide them with an edge over the competition.

Risks and Criticism

Offshoring and outsourcing have both been subject to a lot of criticism, especially from a political standpoint. Politicians and laid-off workers often blame offshoring for "stealing jobs". Most economists, however, agree that offshoring lowers costs for companies and passes on benefits to consumers and shareholders. There are, however, risks associated with offshoring. These include project failure due to poor communication; civil or political unrest impacting production or service delivery; arbitrary changes in economic policy of governments may force unnecessary restrictions on MNCs; and poor infrastructure in the developing country may affect quality or timeliness. While the benefits of outsourcing and offshoring largely overlap, they do not face the same disadvantages. Outsourcing, when done within the country, does not face the same political criticism of loss of jobs. Risks associated with outsourcing can largely be attributed to the vendor's lack of familiarity with the client's business. Another risk is a lack of alignment of long-term business objectives of the client and the vendor. Offshore Outsourcing When outsourcing is combined with offshoring, not only is work contracted out to a third party, but it is also agreed that the work will be performed in a different country. The reasons are usually to take advantage of the benefits of outsourcing and offshoring both. Benefits of offshore outsourcing Offshore outsourcing combines the benefits of outsourcing, such as easier resource ramp up and ramp down, and more specialized skills; with the benefits of offshoring, such as lower costs and higher productivity. In the past decade and a half of increasing globalization, offshoring has been the fastest growing segment of the outsourcing market. This is especially true in the case of manufacturing - with China being a leader - and information technology services, with India leading that space. Business process outsourcing is another area of offshoring that has grown tremendously.

Risks of offshore outsourcing

Just as offshore outsourcing combines the benefits; it is also susceptible to the risks of both business practices. Critics claim that these risks are magnified because of the complexity being multiplied. For example, while it can be challenging to work with an external organization for projects that require knowledge of your business operations, these challenges could increase manifold when members of the external organization are located in a different country. Risks include poor communication, incorrect setting of expectations and disconnected control structures.

Best Practices
There are several best practices that have evolved over the past two decades to mitigate risks and improve outcomes of projects that are offshored and outsourced. Many of these practices are related to business processes. Process maturity models like CMMi and Six-sigma measure not only the quality of processes that outsourcing vendors employ, but also how well companies monitor their processes, measure key metrics and how they continually improve these processes.

Industry Trends
On the whole, both outsourcing and offshoring are on the rise. The worldwide economic recession has forced companies to explore all options to increase efficiencies and cut costs. Companies are getting increasingly comfortable outsourcing (as well as offshoring) larger parts of their businesses as they realize they are not core. Another trend - especially in information technology (IT services) outsourcing - is industry consolidation, with larger companies acquiring smaller vendors. For example, HP acquired EDS in 2008. Political backlash has also been growing with unemployment rising in the developed world. See Also Accenture vs. IBM for ERP Services Merger vs. Acquisition Leadership vs. Management References and Further Reading wikipedia: Outsourcing wikipedia: Offshoring

Voice Report Archive Outsourcing Pros and Cons

Managed Network Services: Are They Worth It?

Aug. 12, 2010 (Vol. 31, No. 15) The term managed services is common, but how common is it for enterprises to actually use them? Experts say that while the practice of turning to a third party to manage some or all of its networking functions is growing, doing so doesnt always deliver the deep cost savings generally promised. Instead, they say, successful use of managed network services tends to be limited to a few primary situations: 1) When a business needs entirely new capabilities for which it has no infrastructure in place. The main motivation here is that the organization wont have to fork over the time and resources to build it. Another reason might be that the capabilities desired are available only in the form of a third-party service. 2) When an organization suddenly must scale its telecom environment dramatically and lacks the in-house resources to do so. 3) When an organization can turn over a function to a third party and actually eliminate the people on staff who were handling it. Often, however, those internal staffers are also working on other projects and are thus

retained, which takes a bite out of the hard return on investment (ROI) that some companies expect. So if the objective is to save money, that doesnt necessarily happen, says Melanie Posey, research director, hosting and telecom services, in the NewYork office of IDC. IDC published a report, Worldwide Managed Network Services, 2010-2014, in May based on a 700-respondent survey of IT telecom decision makers conducted in late 2009. The IDC study discovered that the use of managed network services jumped from 29% to 43% of enterprises between 2008 and 2009. But we havent seen managed service use fueled specifically by the economy, says Posey. Outsourcing Myths? The myth of outsourcing is that you save money, adds Ken Agress, research director of unified communications, voice, and contact centers at Gartner, who is based in the Chicago area. The reality is that you save money when you outsource what you cant do well yourself. And if youre not going to completely outsource your network, there arent massive cost savings. Why not? WAN costs are dwarfed by voice spend compared to fixed costs. Licensing and maintenance agreements also cost more, Agress says. Pat Flynt, wireless systems specialist at Macys Systems and Technology in Johns Creek, Ga., came to a similar conclusion. He says he looked into outsourcing any or all of the companys wireless device provisioning, help desk and contract management functions and concluded it wasnt worth it. The pricing and commitment required per line were just too high, says Flynt. Wed have had to spend more money than we do today. Old Habits Die Hard On the other hand, a study conducted a few months prior to IDCs Top Motivators research by Webtorials, an online networking educational research and The top reasons Webtorials survey resource company, found that 58% of respondents agreed with this takers said that they would consider statement: Managed services provide the ability to maintain or enhance existing or new networking/IT capabilities with a reduced total using a managed service were to: cost of ownership. A third (33%) of the 400+ online survey respondent base, queried in Cut costs (52%) July 2009, said they were using managed services for half or more of their IT/networking services. And 38% intended to increase their use of Improve 24/7 support capabilities managed services in the future. Yet about half (52%) said they expected no major change in their use of managed services going forward. What I found interesting was that while a majority of respondents agreed that using managed network services would save money, most also said they werent going to do it, says Steve Taylor, president of Webtorials and the primary author of the companys study, Managed Services in the 2009 Economy.

(51%) Allow existing staff to concentrate on strategic rather than tactical work (49%)

That tells me that in-house vs. outsourced trends have more to do with social phenomena, business climate, resistance to change and job preservation than the promise of cost savings, he says. That seems to be the case at S&C Electric Company in Chicago, where corporate culture plays a strong role in such decisions. S&C is moving from a TDM phone system to a Cisco VoIP and unified communications (UC) environment, and an internal infrastructure group is handling the project soup to nuts. No managed services for us, says Marta Rinaldi, voice communications specialist at the company. We do everything in-house. We always have. I guess being privately held, thats the way [the company likes] to do it. Even so, IDCs Posey generally describes IP telephony and UC as potentially low-hanging fruit for outsourcing. If youre using TDM today and want to use VoIP and UC, going to a managed service as opposed to buying, installing and managing a whole new infrastructure will deliver that ROI that everyone is talking about, she says. Sourcing new capabilities without having to build them yourself is kind of a no-brainer.

What about The Cloud? Webtorials Taylor cites the much-hyped cloud as a possible tipping point for using a third party for telecom services. As the industry moves toward more cloud computing, I think youll see Most Popular Managed Network managed services become more attractive because more of a given Services service will be residing naturally out in the cloud anyway, he observes. Taylor points to integrated Google Docs for Business, Google Apps for Business and (Google) Gmail for Business as an analogy. E-mail and voice services will soon be such that you cant tell the difference; if UC is in the cloud, your voice services will have more reason to be in the cloud, he says. Gartners Agress says that the cloud is unproven in many organizations minds and that he is waiting for the cloud to sort itself out. His colleague, Jack Stackhouse, a research director of networks and telecom at Gartner in Nashville, adds that while in his experience outsourcing isnt real popular, there might be more interest in data center cloud services, such as infrastructure as a service (IaaS) and software as a service (SaaS) offerings. Theres not a lot of appetite for [spending] huge capex to build multimillion-dollar data centers, he observes.

Managed Router Services (51%) IP Telephony (40%) Security (38%) Application Hosting (31%) UC/Collaborative Business Apps (30%) Contact/Call Center (29%)

Whats Right for You? When mulling the build or buy decision, ask yourself two questions, advises Agress: Do I have the expertise to manage [one or more functions] in-house? Am I better able to manage contracts or technology? He suggests that if you answer yes to the first question and if your company is very efficient, is it worth paying an additional 3% to 4% to turn the tasks over to someone else? On the other hand, if the company is more adept at managing contracts and relationships than technology, outsourcing might be a better way to go. He counsels not to outsource anything so strategic that any inflexibility [introduced by a third party] will come back to haunt you. Its not uncommon to initially save money but lose so much agility that when the company tries to make changes, it becomes discussions between lawyers, he explains. Eventually, the contract may not cover the things you want, so there are change orders. And as you add things, [the cost] can cause your jaw to hit the table. Joanie Wexler has spent a good part of her 20-year telecommunications career helping enterprises adapt to changing wireless networks and mobile devices. She has chronicled the cellular evolution from the days when 19.2 Kbps was the fastest data rate going and early personal communicators, like the Apple Newton and HP Palmtop, were paving the way for today's broadband wireless networks and smart phones. Today she continues to stay on the pulse of the wireless technology market as one of its leading independent authorities. Contact Joanie at joanie@jwexler.com.