I recently read an article that incorrectly defined outsourcing as offshoring. It might be helpful to some readers to review these terms and their proper application.

Outsourcing is the use of resources outside of one’s own organization to accomplish a business need. These resources could be individuals or businesses, and they may be located in your country or around the world.

Offshoring is the use of resources in a different country. These resources may be part of your organization or they may be a separate organization. Offshoring is typically chosen to take advantage of lower labor rates and/or specific and unique regional capability.

Let’s use some examples.

Example 1: You are the CEO of YourCo Inc. YourCo needs to manufacture your new product, the Widget2010. The challenge you face is that you do not own a factory. Your engineering group has designed the Widget2010, but you have to outsource the manufacturing of the product to someone who specializes in manufacturing. You have many choices as to the size and capability of the manufacturer you choose. Regardless of where the manufacturer is located, you have made the decision to outsource. If the manufacturer is in a different country, you have chosen to offshore. If the manufacturer is located in your own country, you have not chosen to go offshore.  Again, in either case, you are outsourcing.

Example 2: Again, you are the CEO of YourCo Inc. YourCo needs to manufacture your new product, the Widget2010. Your factory in your own country cannot add the product to their mix because they are running at capacity. YourCo has another factory, however, in another country. When the decision is made to manufacture the product in that non-domestic factory, it may be said that the product has been offshored, but not outsourced.

Offshoring is still very controversial because many believe it is the shipping of jobs “overseas.” Outsourcing is not as controversial because very few companies still try to be fully vertically integrated doing everything in-house. Therefore, most companies look to outside suppliers and manufacturers to complete their supply chain. This is the reason that outsourcing (literally, sourcing outside our organization) is widely accepted as smart business practice.

One myth that needs to be exploded for those considering either outsourcing or offshoring is that you will need little or no business structure to manage your outsourced or offshored resources. The truth is that you will still need purchasing experts, program managers, and quality control personnel to effectively manage your offshore and/or outsourced resources.