When businesses classify the types of outsourcing, they are usually referring to the geographical location of the external service provider relative to the company doing the hiring. Bookkeeping Services in Cincinnati. This geographical distinction is crucial because it affects cost, communication, time zone alignment, and cultural differences.
Here are the three main types of outsourcing based on location:
1. Offshore Outsourcing (Offshoring)
This involves delegating business processes to an external provider located in a distant, foreign country.
Location: Typically far away, often on a different continent or in a country with a significant time difference (e.g., a U.S. company outsourcing to a firm in India, China, or the Philippines).
Primary Benefit: Maximum Cost Savings. This strategy is primarily driven by leveraging significantly lower labor and operational costs in the distant region.
Key Consideration: Communication and collaboration can be challenging due to large time zone differences and potential language or cultural barriers.
2. Nearshore Outsourcing (Nearshoring)
Nearshoring is contracting a business function to a company located in a neighboring or nearby country that shares geographical proximity or is in a close time zone.
Location: Often in a country that shares a border or is within a 1-to-3-hour time difference (e.g., a U.S. company outsourcing to Mexico or Canada; a German company outsourcing to Poland or the Czech Republic).
Primary Benefit: Balance of Cost and Convenience. It offers a good balance between cost reduction and minimizing the communication issues associated with far-off locations. Minimal time differences and similar cultural norms make collaboration easier.
Key Consideration: Cost savings are typically moderate compared to offshoring but higher than onshore options.
3. Onshore Outsourcing (Onshoring or Local Outsourcing)
This refers to hiring an external service provider that is located within the same country as the contracting company, often in a different state or city.
Location: The provider is in the same country (e.g., a company in California outsourcing its customer support to a firm in Utah).
Primary Benefit: Highest Alignment and Ease of Communication. There are no language barriers, no time zone differences, full compliance with local laws, and easy opportunities for in-person meetings.
Key Consideration: This option offers the least cost savings, as labor rates are generally similar to the client's location, but provides the greatest level of control and seamless integration.
A Note on Functional Outsourcing
While the above three are the main geographical types, outsourcing is also commonly categorized by the type of task being delegated:
Business Process Outsourcing (BPO): Delegating routine, non-core operations (e.g., customer service, payroll).
Information Technology Outsourcing (ITO): Delegating IT tasks (e.g., software development, network management).
