Offshoring and outsourcing - what? why? where? when? who? how?
Want to understand the differences between outsourcing and offshoring? Want to get to the bottom of what? why? where? when? who? how? Read this article!
Published 2 May 2017
Offshoring and outsourcing are often misunderstood and confused for one another. It is important when making a decision that you understand there are distinct differences between these two operational approaches and there are situations where one is more appropriate than the other. This article will help those of you considering offshoring and/or outsourcing to make the right decision for your organisation by answering six seemingly simple questions; what? why? where? when? who? and how?
Let's start by defining what offshoring and outsourcing is, and highlighting the core differences between the two approaches.
Outsourcing definitions vary, probably leading to many of the misunderstandings I implied above, but can be defined as "any engagement with a third-party service provider for the provision of products or services". They are usually contractual "project" based engagements and often the customer has little understanding of the processes, people or conditions in place at the service provider. This, however, is not always the case; many organisations now expect transparency throughout their supply chain, or at least that's what they publically state. With an outsourcing arrangement, you are usually not involved in the recruitment of staff, nor do they usually become "part of your team" - often managed through an account manager or team leader.
An easy to understand outsourcing relationship is with large manufacturers such as Apple; they have numerous (although they have recently been pushing vertical integration and taking over control of more of their supply chain) components manufactured to their specifications by outsourced service providers.
In summary, "someone else does the work for you".
Offshoring is often confused with outsourcing, but, the fundamental difference between the two is that with offshoring you are adding team members, who just happen to be working in another location. For larger enterprises, this involves getting an office in another country and building a team; often sending key personnel from head office over to set up and train the new team on their businesses processes and systems. For small, to medium organisations, offshoring is often achieved by engaging with BPO (business process offshoring) partners in countries that have a cost and talent advantage. These BPO's work as a sort of "agent", and you could say that you are outsourcing your offshore HR and infrastructure functions to these organisations. The engagement, however, is an ongoing one, with no definitive contract periods or specific deliverables that will see the end of the relationship. Instead, they provide you with all you need to hire, train and manage your own team members offshore.
An example of this would be the teams that I have set up in the Philippines. The teams were employed by my BPO partner(s), but we managed their salary, tasks and performance.
In summary, "the work is done overseas".
Deciding what is appropriate
Sometimes your decision to resource locally, outsource or offshore will be influenced by a number of variables such as the type of tasks involved, the sensitivity of those tasks, regulatory constraints (consider Government contracts that explicitly state the work must be done by Australian or US Citizens) and the time frame of the requirement. Below is a simple decision tree that I've produced that visualises the decision process involved for an average software/service delivery company.
Further, often there are negative perceptions about outsourcing and offshoring to or fear within the organisation of what offshoring may mean for their own future; "sending Australian jobs overseas!" and "make America great again!" articulates these perceptions and concerns perfectly. These perceptions and concerns need to be managed and strategy decisions communicated appropriately to address them.
I'm assuming that most of the people who find their way to this page are already considering offshoring or outsourcing, but there are a number of possible reasons for deciding to investigate these options; sustainable growth, access to talent and costs are the most common reasons. Regardless of which one holds true for your organisation and even if it's not specifically stated, the underlining "why" is usually; take your company from $X to $Y over Z years.
Assuming you have decided that you need to outsource or offshore, the following two sections outline why specific to your options.
- Once off or short term requirement - that is, you will not require that task to be done again or those particular skills in the future. Do not forget support or maintenance in this decision though.
- Specific and well-documented requirements - that is, you can articulate, without customer or project history, the requirement to your supplier and they can work largely in isolation.
- You lack the knowledge or skills internally for the work - and based on the first point, there is little to no value in learning/developing existing resources.
- Increase team capacity - that is, the work needing to be done is part of your core business and will remain a requirement for a long period of time.
- You want to maintain control - of the hiring, salary, performance management and day to day task management
- You want to grow your team - and/or add diversity at the same time
There are a lot of choices for offshoring, they are typically considered "developing" nations and come with lower employment costs. Statistics indicate that in 2016 the leading countries in offshore business services included; India, China, Malaysia and Philippines.
These locations also have advantages for Australian and New Zealand based organisations such as time zone alignment and English proficiency compared to some of the other options such as Brazil and Mexico.
When I did my own evaluation as part of my first offshoring initiatives, I chose the Philippines, some of the reasons being;
- The suppliers I met with were very transparent and willing to entertain regular visits and more direct engagement with the teams I was responsible for
- English proficiency was great and the locals that I met had an amazing ability to pick up accents and slang (I met Filipinos with US, English and Australian accents)
- Cultural alignment felt better, perhaps because of the US influence in the country historically
In the end, you need to make a decision based on your requirements, supplier approaches and above all, your values and ethics. I could have found cheaper locations but I would have had to ignore ethical concerns about employee conditions, pay structures and organisational culture.
There's no time like right now to get the ball rolling!
Remember though, there is going to be a lead time before you have the right candidate integrated into your team; this is no different to hiring locally! Assuming that nothing significant is identified through the readiness check, and you have selected a supplier, you will see a timeline something like;
- Job design, description and advert created +3 days
- Job advert placed and active while HR team head hunts the best candidates +2 weeks
- Screening and filtering candidates +2 days
- Shortlisted candidates are interviews by HR +2 days
- Suitable candidates interviewed by yourself +1 week
- Final interviews and offers +2 days
- Candidate notice period +4 weeks
As you can see, this is a pretty normal recruitment process, regardless of where and how it's happening; you can consider an "advert to desk" timeline of between six to twelve weeks.
We suggest that you seek suppliers that are, first and foremost, aligned with your organisational and personal values. On this site, you can read our vision, but note that our target is long-term relationships with our community of customers, staff and suppliers.
The value of these long-term relationships is shared across our future customers while providing an "easy to initiate" project that will step your organisation through the process of setting up and succeeding over a long period of time with your offshoring initiative.
We essentially guide you and take on key aspects of your project on your behalf to minimise the workload for your organisation and in doing so drive your initiation to success.
At Change Fox we advocate a five-step process for offshoring success as defined below;
- Readiness Check - An evaluation of your organisations readiness to build a team. Considering your existing team, processes, systems and organisational environment.
- Process Design -The implementation of any identified recommendations; perhaps a new collaboration tool or task management software to better communicate and visualise work tasks.
- Supplier Selection - We will introduce and recommend a supplier that meets your requirements. They will be matched with your expectations and organisational values.
- Team Building - Finding the right person is more than ticking off a checklist of qualifications and experiences.
- Management & Retention - Once you have the right person, the important thing is to integrate them into your team and business as quickly and thoroughly as possible. The more your new team associate themselves as part of your vision, mission and objectives, the more committed they will be to your organisation.