Question

Define globalization. What is the difference between outsourcing and offshoring? List an example of outsourcing or offshoring. Why would a company choose to implement outsourcing or offshoring? What are the disadvantages to outsourcing or offshoring?

Answer 1

Globalization is the process of interaction and integration among people, companies of different nations for the free movement of goods, services, and people across the world. It is the expansion of business and trade across the national borders and cultures.

Difference between outsourcing and offshoring -

Outsourcing is a process whereby the business organization contracts projects or peripheral activities to the external organizations (service provider). The main objective of outsourcing is to perform operations in the most efficient manner. Offshoring is defined as the shifting of business activities in a country other than the home country where the resources can be cheaply available to the firm which will help it to reduce the overall cost. Outsourcing helps the firm to focus on the core activities whereas offshoring is implemented to minimize the cost. Outsourcing is performed by the contractors who are not part of a business entity, but offshoring is performed by the employees of the business entity.

For example for a US-based computer manufacturing company, contracting the micro chip-making company is called outsourcing whereas the same company manufacturing its products in China is called offshoring.

There are various reasons why a company might outsource. The company can get a cost advantage as contracting work to a 3rd party is cheaper. Outsourcing can provide labor flexibility which helps the company to avoid activities such as hiring or firing as it consumes a lot of time. In a company, there are a lot of business functions which are very difficult to manage. Outsourcing helps the company to focus on core competency. Similarly, offshoring helps the company to shift its business, in order to get the advantage of low labor costs, lenient laws, less government interference, cheap availability of resources, less tax rate, etc. Outsourcing and offshoring help companies to access world-class capabilities.

Disadvantages to outsourcing or offshoring -

Language, time zone, and cultural barriers are some of the disadvantages of outsourcing as they can affect productivity and communication. Security issues also arise when a company outsources business operations because sharing or transmitting data to another party may sometimes create a risk of a security breach. Similarly, Offshoring is cost-effective and creates language, time zone, and cultural barriers. It also creates a potential threat to security and confidentiality. Offshoring might also result in a loss of flexibility in rapidly reacting to changing business conditions.