Offshoring vs. Outsourcing in HR Explained

Offshoring and outsourcing are two strategies that companies use to optimise their workforce and streamline business operations. While both involve delegating certain tasks or functions to external providers, there are key distinctions between the two. Offshoring refers to the practice of sending in-house jobs to be performed in another country, often to take advantage of lower labour costs and access to specialised skills. On the other hand, outsourcing involves contracting out a specific function or task to a third-party provider, which can range from HR services to IT support. Understanding the differences between offshoring and outsourcing in the context of HR is crucial for businesses looking to make informed decisions about their workforce strategy.

Key Takeaways:

  • Offshoring involves sending in-house jobs to another country, while outsourcing is the contracting out of specific tasks to third-party providers.
  • Offshoring offers potential cost savings and access to specialised skills, while outsourcing provides expertise and scalability.
  • Considerations when choosing between offshoring and outsourcing include factors such as cost, control, and cultural compatibility.
  • Both offshoring and outsourcing can be beneficial for companies, depending on their specific needs and goals.

What is Offshoring in HR?

Offshoring in HR involves moving certain HR functions or operations to another country. This can include activities such as payroll processing, recruitment, training, or even setting up an offshore HR department.

The main motivation behind offshoring HR activities is often to take advantage of lower labour costs in the offshore location. By leveraging the wage differences between countries, companies can save on HR expenses while still maintaining the necessary HR support for their workforce. Additionally, offshoring can provide access to specialised skills and expertise that may not be readily available in the home country.

What is Outsourcing in HR?

Outsourcing in HR involves contracting specific HR functions or tasks to third-party providers. 80% of companies outsource at least one HR function. These functions can include payroll administration, benefits management, employee training, or even the entire HR department. The primary objective of outsourcing is to leverage the expertise and resources of specialised HR service providers, allowing your company to focus on its core competencies. The third-party provider assumes responsibility for delivering the outsourced HR services, ensuring smooth operation and compliance with relevant regulations and standards. Outsourcing in HR offers significant benefits such as cost savings, operational efficiency, and access to specialised HR knowledge and technology.

Benefits of Outsourcing in HR
Cost Savings
Expertise
Scalability

Key Differences between Offshoring and Outsourcing in HR

When considering offshoring or outsourcing HR functions, it’s essential to understand the key differences between these two strategies. Here’s a summary of the distinctions:

  1. Location: Offshoring involves moving HR operations to another country, while outsourcing involves contracting HR tasks to external providers, regardless of location.
  2. In-house vs. External: Offshoring moves HR functions from in-house to a separate offshore location, whereas outsourcing involves delegating HR tasks to an external third-party provider.
  3. Control: Offshoring grants the company greater control over HR processes, as they establish their own offshore HR department. In contrast, outsourcing transfers control to the third-party provider, who manages and delivers the outsourced HR services.

Understanding these differences is crucial, as it helps companies determine the best approach for their HR needs. Whether it’s offshoring or outsourcing, each strategy offers unique advantages that should align with the company’s goals and resources.

OffshoringOutsourcing
LocationOperations are moved to another countryTasks can be contracted to providers globally
In-house vs. ExternalHR functions are performed by an offshore departmentTasks are delegated to an external provider
ControlCompany has greater control over HR processesControl is transferred to the third-party provider

Benefits of Offshoring in HR

Offshoring in HR offers several benefits to companies:

  • Cost savings: Offshoring HR functions allows companies to take advantage of lower labour costs in other countries. By relocating certain HR tasks to offshore locations, businesses can reduce their overhead expenses and achieve significant cost savings.
  • Access to specialised skills: Offshoring provides companies with access to a pool of highly skilled professionals in the offshore location. This enables organisations to tap into specialised HR expertise that may not be readily available locally. Access to these skills can enhance HR service delivery and contribute to improved workforce management.
  • New markets: Offshoring HR functions can help businesses expand their operations into new markets. By establishing an offshore HR department or outsourcing HR processes to a service provider in a different country, companies can gain insights into local labour laws, regulations, and cultural nuances. This knowledge is crucial when entering new markets and ensures compliance with local HR practices.

Overall, offshoring in HR not only offers cost savings but also provides access to specialised skills and unlocks opportunities for expansion into new markets.

Benefits of Offshoring in HR
Cost savings
Access to specialised skills
New markets

Benefits of Outsourcing in HR

Outsourcing in HR offers several benefits to companies:

  • Cost Savings: By outsourcing HR functions to a specialised service provider, companies can still also achieve significant cost savings. Rather than maintaining an in-house HR department with all associated expenses, outsourcing allows companies to pay for specific services or tasks only when needed.
  • Expertise: Outsourcing HR enables companies to tap into the expertise and knowledge of experienced professionals. HR service providers have a deep understanding of the latest industry trends, best practices, and compliance requirements, ensuring that companies receive high-quality and up-to-date HR services.
  • Scalability: As businesses grow or experience fluctuations in their HR needs, outsourcing provides scalability when business planning. With an external HR service provider, companies can easily adjust with the level of services required, whether it’s adding new employees, expanding to new markets, or downsizing during lean periods.
BenefitsOutsourcing in HR
Cost Savings
Expertise
Scalability

Considerations when Choosing between Offshoring and Outsourcing in HR

When deciding between offshoring and outsourcing HR functions, companies should consider the following factors:

  1. Cost: Evaluate both the initial investment and ongoing expenses associated with offshoring and outsourcing. Offshoring may provide cost savings through lower labour costs, while outsourcing allows for more flexibility in budgeting and scalability.
  2. Control: Assess how much control you want to maintain over your HR processes. Offshoring allows for greater control as you have direct oversight of the offshore team, while outsourcing transfers most of the operational control to the external service provider.
  3. Cultural factors: Consider the impact of cultural differences on HR functions. Offshoring to a country with a different culture may require additional efforts to bridge communication and cultural gaps. When outsourcing, choose a provider that understands and aligns with your company’s values and culture.

By carefully evaluating these factors, companies can make a well-informed decision that aligns with their HR goals and priorities.

ConsiderationOffshoringOutsourcing
CostLower labour costs in offshore locationFlexible budgeting and scalability
ControlGreater control over HR processesOperational control transferred to external provider
Cultural FactorsPotential communication and cultural gapsAlignment with company’s values and culture

Conclusion

In conclusion, offshoring and outsourcing in HR are two distinct strategies that offer different benefits and considerations. Offshoring allows companies to take advantage of lower labour costs and access to specialised skills in another country, while outsourcing provides access to expertise and cost savings through external service providers. When making the decision between offshoring and outsourcing in HR, it is important to consider factors such as cost, control, cultural factors, and the specific needs and goals of your company.

By carefully considering these factors, you can make an informed decision and optimise your HR operations for long-term success. Whether you choose offshoring or outsourcing, both strategies have the potential to enhance your HR capabilities and contribute to overall business growth and efficiency. It is important to evaluate your organisation’s unique requirements and objectives to determine the most suitable approach. The Boardroom Advisors team is on hand to help you with your next HR hire

Get in touch with us to find out how outsourced HR services could help grow your business by completing a contact form.

FAQ

What is the difference between offshoring and outsourcing in HR?

Offshoring in HR involves relocating business processes or services to a different country, while outsourcing in HR involves contracting out certain business processes or services to a third-party provider, which may or may not be located in a different country.

What are the benefits of offshoring and outsourcing in HR?

Offshoring and outsourcing in HR can bring cost savings, access to a global workforce, flexibility, and the ability to focus on core business activities while leaving non-core functions to specialised providers.

What are the risks and challenges of offshoring and outsourcing in HR?

 Risks and challenges of offshoring and outsourcing in HR include issues related to data security, communication barriers, time zone differences, cultural differences, and potential loss of control over certain business processes.

What are the key considerations when deciding between offshoring and outsourcing in HR?

 Key considerations include the nature of the business process, the need for control and oversight, the availability of talent in different locations, cost considerations, and the potential impact on the company’s competitive advantage.

What are the main goals of offshoring and outsourcing in HR?

The main goals include reducing costs, accessing specialised expertise, improving efficiency, focusing on core business functions, and gaining a competitive edge in the global market.

What are the possible impacts of offshoring and outsourcing in HR on workforce dynamics?

Offshoring and outsourcing can impact workforce dynamics by introducing cultural diversity, offering remote work opportunities, and requiring effective project management to coordinate activities across different locations.

How does offshoring vs. outsourcing in HR affect the geographical reach of a company?

Offshoring vs. outsourcing in HR can expand the geographical reach of a company by allowing it to operate in different countries or regions, tapping into diverse markets, and gaining a better understanding of global customer needs.

What are the pros and cons of offshoring and outsourcing in HR?

The pros include cost savings, access to a global talent pool, and the ability to focus on core business activities. The cons encompass potential cultural and communication challenges, data security concerns, and the need for effective management of outsourcing relationships.

Written by: John Courtney

John is highly ranked in the Top 100 UK Entrepreneurs list by City AM and is winner of the Lifetime Achievement Award from techSPARK. He has been a Board Director himself for over 40 years and first started placing Non-Executive Directors over 25 years ago. John founded and ran seven of his own businesses including a Management Consultancy for 10 years, a Corporate Finance offering for 10 years and a mid-sized Digital Agency for another 10 years.