Offshoring vs outsourcing at a glance
Offshoring moves work to another country. Outsourcing hands work to another company. The first is a decision about geography, and the second is a decision about responsibility. Most confusion in this area comes from treating them as one choice.
Scroll the table sideways to see every column.
| Compared | Offshoring | Outsourcing |
|---|---|---|
| The question it answers | Where does the work happen? | Who is responsible for it? |
| Main reason companies choose it | Lower cost, talent, time zones | Expertise, capacity, less to manage |
| Who employs the people | You, or a provider abroad | The provider |
| Can happen without the other | Yes, with your own office abroad | Yes, with a provider at home |
What offshoring means
Offshoring means moving work to another country. A company that opens its own development office in Poland has offshored, and nothing has been outsourced: the people are still its employees and the accountability stays in-house.
Offshoring decisions are about cost, time zones and access to talent. When the decision is only about location and you still manage the people, it’s usually described as offshore staffing.
Location comes in three distances. Onshore means a provider or office in your own country. Nearshore means a neighbouring country, usually one to three hours away. Offshore means another continent, where the rate difference is largest and the working day needs the most planning. A team in Thailand, for example, works on UTC+7: five hours ahead of Northern Europe in summer and six in winter, and three to four hours behind Sydney.
What outsourcing means
Outsourcing means handing a function to an external provider who becomes responsible for delivering it. Where the provider sits doesn’t matter. A London company using a Manchester agency has outsourced without offshoring.
Outsourcing decisions are about accountability. The model most often mixed up with outsourcing is staff augmentation, where the provider supplies people and you stay accountable for the work. In software, outsourcing itself comes in three shapes: fixed projects, augmented people and managed teams, compared in our guide to software development outsourcing.
How offshoring and outsourcing combine
Scroll the table sideways to see every column.
| Where | Kept in-house | Outsourced |
|---|---|---|
| Domestic | Your own local team | A local agency or partner |
| Offshore | Your own office or captive centre abroad | A managed offshore team, such as Azendo |
All four combinations are valid. Problems start when a company believes it has chosen one and has in fact chosen another, and only finds out when something goes wrong and it’s unclear whose problem it is.
Your own local team. Full control and the highest cost. Hiring speed is limited by your local market.
A local agency or partner. Someone else delivers, in your time zone. Good for defined projects, expensive for long ones.
Your own centre abroad. Sometimes called a captive centre. Lower salaries and full control, at the price of a legal entity, payroll, an office and a senior person to run it. Building one takes many months.
A managed offshore team. A provider abroad employs the people and runs delivery, while you keep the roadmap. Lower rate, little management on your side, and a start in weeks.
Build, operate, transfer: a hybrid
Some companies want their own offshore centre eventually but don’t want to build it from nothing. Under build, operate, transfer, a provider sets up the team and the office, runs it for an agreed period and then hands it over to the client. It’s outsourcing first and offshoring in-house later. It suits large organisations with a long horizon and a plan to own the operation. For most product companies, a managed team that simply stays in place gives the same continuity with far less to set up.
What offshoring and outsourcing each cost
Offshoring on your own lowers salaries and adds overheads: company registration, local employment law, an office lease, equipment, recruiting and a manager on site. The savings arrive after the set-up costs are paid off.
Outsourcing at home lowers your management load and keeps the rate close to local salaries plus the provider’s margin.
Combining both is where the arithmetic usually works best for a software team. The rate reflects offshore salaries, and the provider carries the set-up, the employment and the management. Compare it with offshore staffing by adding your own management time, which our estimate puts at four to eight hours a week per specialist when you run the people yourself.
Mistakes companies make with offshoring and outsourcing
- Choosing a location and assuming the management comes with it. It doesn’t, unless the contract says so.
- Comparing hourly rates across models. A staffing rate and a managed fee buy different things.
- Underestimating the set-up of an own centre. Entity, payroll, office and leadership all come before the first commit.
- Leaving accountability unnamed. Every arrangement needs a person who answers when a release slips.
How to answer both questions
To settle offshoring vs outsourcing, ask the two questions one at a time. Do you want the work done in a lower-cost location or a different time zone? That’s the offshoring decision. Do you want someone else accountable for delivering it? That’s the outsourcing decision. The answers are independent of each other.
At Azendo, your team works from our own offices in Chiang Mai and Bangkok, which is the offshoring part, and a service delivery manager answers for delivery, which is the outsourcing part. Our specialists are assigned full time to one client and stay with Azendo for 3.3 years on average. Companies use a dedicated development team from us to hire remote developers without opening an office abroad.
