Offshore service
What does offshore mean?
Offshore development refers to the practice of outsourcing software development or other IT-related tasks to a team located in a different country, typically in a region with lower labor costs. Examples of offshoring include establishing branches abroad for manufacturing, software development, or running customer support centers.
Key advantages of offshore services
Below, we will explain the main advantages of offshore development.
- Cost EfficiencyOffshore development significantly reduces costs. For example, a software engineer in Vietnam earns 3-5 million yen annually, compared to 8-10 million yen in Japan, allowing companies to save 30-50% on labor costs.
- Access to Skilled TalentOffshore development provides access to a global talent pool. With many companies struggling to find skilled tech professionals, offshore services offer a competitive edge in securing capable personnel.
Challenges of Offshore Services
It is true that offshore development has many advantages. However, there are some aspects that you should be aware of, so you need to look at them when deciding whether to adopt them. Here, we will introduce the disadvantages of offshore development.
- Communication Barriers
Language and cultural differences can cause misunderstandings, especially during initial interactions. Studies show 60% of companies face language-related issues, and nearly 70% struggle with cultural nuances.
- Difficulty in Progress Management
The physical distance between teams can hinder immediate oversight of project progress and quality. For instance, a survey by Deloitte indicates that 57% of companies experience challenges in managing remote teams effectively due to communication barriers and time zone differences.
Explore more: Top 10 offshore software development companies in Vietnam
Outsourcing service
What Is Outsourcing?
Outsourcing is a business strategy where companies engage external providers to perform processes that would typically be managed internally. This practice may also include the transfer of employees and assets from one organization to another.
Common examples of outsourcing include IT support, payroll processing, customer service, or content creation.
Outsourcing service
Major Benefits of Outsourcing
We will explain the benefits of IT outsourcing. There are three main benefits:
- Prioritizing Core Business Activities
By outsourcing these non-essential tasks, organizations can create a more streamlined operational framework that prioritizes core activities. This strategic shift not only allows employees to dedicate their efforts to planning and system design, but also enables them to pursue skill development in emerging technologies.
- Leveraging Expertise from Specialists
Outsourcing IT services provides companies with access to highly specialized professionals. In fact, 64% of IT leaders globally choose to outsource software development, allowing them to leverage external expertise without the burden of constant training and recruitment.
- Strengthening system governance
With specialized firms managing IT operations, organizations can benefit from advanced knowledge and technology that bolster risk management strategies. A survey revealed that 33% of companies aim to improve governance and security measures through outsourcing.
Drawbacks of Outsourcing
On the other hand, there are also disadvantages to IT outsourcing. Let's take a look at the following four.
- Time-Consuming SetupChoosing the right tasks for outsourcing is complex and time-consuming. Many organizations struggle with this step, often abandoning the process, leading to inefficiencies.
- Security and Privacy RisksOutsourcing increases access to sensitive data, raising security concerns. Differences in security protocols between the company and external providers can lead to potential breaches.
Explore more: Top quality IT Outsourcing companies in VietNam
The main differences between offshore and outsourcing
Outsourcing and offshoring are distinct strategic approaches that companies adopt to enhance operational efficiency, optimize costs, and improve competitiveness. While they may seem similar at first glance, these strategies differ significantly in their execution, scope, and long-term implications.
Nature of Work
Outsourcing involves delegating business processes or specific tasks to another company or independent contractors, while offshoring refers to running a portion of a company’s business operations.
For example:
A U.S.-based company contracts a third-party agency in India to handle customer service calls. The agency manages its own employees, infrastructure and processes to deliver the service. This is an example of outsourcing services.
The same U.S.-based company establishes its own customer service center in India and hires local employees, sets up its own office. This is offshoring service.
Location
With outsourcing service, the third-party service provider can be located in the same country (domestic outsourcing) or a different country (international or offshore outsourcing). Yet offshoring specifically involves moving a portion of a company’s operations to a foreign country.
Key takeaways:
Outsourcing refers to assigning business tasks or processes to an external company or independent contractors. Offshoring, on the other hand, involves operating part of a company’s business in a different country.
Key benefits
The object of outsourcing is to access expertise and resources, regardless of location, while reducing costs. This allows companies to concentrate on their core activities and responsibilities.
The goal of offshoring is often to take advantage of lower labor costs, access local talent, or benefit from tax incentives and geopolitical advantages. For instance, a Japanese manufacturer can establish a factory in Vietnam to take advantage of lower taxes and reduce delivery times to the EU
Management Responsibilities
In outsourcing, the third-party vendor takes on the responsibility of managing the outsourced tasks, while the contracting company must oversee and ensure that the work aligns with its goals.
On the other hand, offshoring requires the company to directly manage operations in the foreign location, including recruitment, overseeing the workforce, infrastructure, processes and ensuring convey legal, tax, and labor regulations. This approach offers greater control and allows the business to better integrate operations with its standards, but it also demands significant investment in management and expertise to ensure smooth operations across borders.
Cost Savings
Both strategies aim to lower operational costs but achieve this in different ways. Outsourcing typically results in immediate cost reductions by transferring specific tasks to vendors who can perform them more economically. For example, outsourcing payroll processing to ADP can save businesses up to 18% in administrative costs, according to a study by PwC.
Offshoring, on the other hand, focuses on achieving long-term savings by relocating entire business operations to countries with significantly lower labor costs and overhead expenses. For instance, the average annual salary of an IT professional in India is around $12,000, compared to $110,000 in the United States. Such disparities illustrate why offshoring is a popular choice for IT development and back-office operations.
Scalability
Outsourcing is particularly well-suited for short-term needs, offering companies quick access to specialized expertise and technology without long-term commitments. For example, start-ups like Skype relied on outsourced developers during their growth phase, allowing them to scale operations rapidly without incurring high fixed costs.
Offshoring, in contrast, is designed for long-term growth and expansion. By establishing a sustained presence in a foreign market, companies can achieve economies of scale and tap into new revenue streams.
Risk and challenges
Outsourcing faces key challenges such as vendor reliability, communication issues, and maintaining service quality. Since a third-party provider is handling tasks, businesses must ensure that the vendor aligns with organizational goals and meets performance standards. Clear agreements, regular monitoring, and effective communication are essential to avoid misunderstandings or poor service.
Offshoring, on the other hand, presents challenges like high initial setup costs, cultural adaptation, political risks, and maintaining ongoing compliance with local laws. Establishing operations in a foreign country requires significant investment in infrastructure, local talent, and navigating legal complexities. Additionally, managing political instability or currency fluctuations can pose ongoing risks to the business.
If you are unsure about which option to choose, contact us and EDUTO Software Company will give you detailed consultation.
{{button}}
How to choose your model: Offshore or outsoucing
Now that you know the advantages and disadvantages of offshore and outsourcing, we will introduce the tasks that each is suitable for. If you are a person in charge who is wondering which one to choose, please refer to this article.
Businesses suitable for offshore
Large-scale, long-term projects are costly, so they are well suited to offshore development, which can reduce labor costs. In particular, services and products that are already being used in the country to which the project is outsourced will make it easier for local members to visualize the finished product, increasing the chances of success.
In addition, services aimed at overseas markets and the production of websites that support multiple languages can sometimes be developed more smoothly by outsourcing to overseas companies that use English or other languages.
In addition, development in areas such as AI and machine learning, where there is a shortage of human resources in Vietnam, may be able to be carried out offshore, making it possible to secure talented personnel at low cost.
Businesses suitable for outsourcing
Tasks that do not require advanced judgment, such as clerical work and data entry, are suitable for outsourcing. In addition, tasks that do not contribute to the company's profits in themselves, but do require specialized knowledge, such as payroll calculations, are efficient to outsource.
If you are unsure about which option to choose, contact us and EDUTO Software Company will give you detailed consultation.
{{consultant-form}}
