What is outsourcing?
Outsourcing is when firms decide that rather than doing activities internally, within the firm, they will get another company to perform the activity.
Take manufacturing – a company may traditionally have produced a particular product internally. If the company outsources that activity, then another firm will be responsible for manufacturing the product. While any activity within the firm can be outsourced, common activities to outsource include manufacturing, accounting, marketing, and some back-office HR functions.
Outsourcing allows the company to concentrate on its key areas. It may also allow the company to benefit from either economies of scale that the supplier of the particular good or service has (i.e., because they are supplying it to lots more firms), or additional knowledge or expertise that the supplier may have in that specific area.
What is offshoring?
Offshoring relates to moving a particular activity to a different country. An activity that for example was originally performed in the home country of the company, for example manufacturing, may be offshored to another country.
A typical reason for offshoring is to take advantage of lower costs – typically associated with lower costs of labor. There are some regions of the world where labor rates are typically a lot lower, and a company can benefit from these lower labor rates by moving an activity to that region.
Are the terms distinct - what about outsourcing and offshoring together?
It should be noted that outsourcing and offshoring refer to different things. While outsourcing refers to whether you are doing the activity internally yourself or have outsourced it to another firm, offshoring refers to whether you are performing the activity locally, or have offshored it to another country.
It is however possible to outsource and offshore at the same time – to move a product from being done internally to being done by a supplier based in an overseas country. This is referred to as offshore outsourcing, and is a relatively common approach to how companies approach gaining the benefits of overseas manufacturing, relying on a local firm who is already established in the overseas market.