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Outsource and offshore services provide businesses with staff and expertise, often for less than what it would cost to hire and train in-house staff. Advances in technology, lower cost of living, government incentive programs, and changing organizational structures have made it possible for both outsource and offshore businesses to offer much more sophisticated services while maintaining low costs. Outsource IT services include security management, IT operations management, and proprietary software development. Historically, cost was the primary driver of competition between these two major segments of the services industry. However, in the outsource vs offshore debate, US businesses are changing the rules, placing a higher value on factors other than low cost.
Outsource vs Offshore: What is the difference between Outsourcing and Offshoring?
These two terms are often used interchangeably, but each has a distinct meaning.
Outsource -- When a business hires an external company to complete work, such as payroll or IT help desk support, usually for the purposes of reducing costs.
Offshore -- When a business hires an external company in a different country to do something, such as customer service.
What makes it confusing is this: When a business hires an external company to complete portions of work or business processes, regardless of where that company is located, it's called outsourcing. The external company might be in Topeka, KS, or it might be in Beijing, China. The distinction between the two terms lies in the narrower definition of offshoring, meaning that the companies are not in the same country. Additionally, we can talk about nearshoring, which means selecting a country closer in proximity than most offshore destinations.
For example, a company in Canada in need of software outsourcing services, would rather choose a company located in Mexico or Latin America because of the shared time zones, similar cultures, and english language proficiency, among other things.
The Changing Appeal of Offshore Services
Businesses have long struggled with specific pain points when using offshore service vendors. Language barriers, cultural differences, and time zones on the other side of the world present ongoing challenges that have frayed relationships between US businesses and offshore service providers. In their search for better solutions, American businesses have begun looking closer to home for outsourced service providers. Latin America and, more recently, the American Midwest have become hotbeds of outsourced services that have what businesses want: culturally similar businesses operating in the same time zones with English-speaking staff that have the technical knowledge to tackle complex business challenges, especially IT.
Outsourced services: Nearshore and Onshore
Service providers that live in close proximity to American businesses have two distinct advantages: similar time zones and similar cultures. Both American and Latin American cultures share a history of European influence. This is evident in the similarities between how businesses are organized and operated in both regions.
Latin America: The Nearshore Option
Over the last several years, various Latin American countries have created initiatives that aim to position themselves as technology strongholds backed by highly skilled professionals. For instance, new education initiatives aim to teach Latin American children English, and technology education programs teach them the skills they need to work in the growing technology industry. Through the benefits listed below and the growing investment in incentives, Latin American countries are ensuring they remain highly competitive as nearshoring service vendors.
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The American Midwest: A Competitive Onshore Option?
The recession that started in 2007 decimated the automotive industry. The Rust belt states suffered huge losses as factories were shuttered and unemployment skyrocketed. In the last few years, struggling Midwestern states have re-invented themselves as technology centers that can provide advanced IT services to businesses all across the North American continent.
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One of the key advantages of offshore services has been low cost. This helped offshoring maintain a competitive edge for the better part of thirty years. US companies saved money but at the cost of having to cope with language barriers and cultural differences that made communication difficult. Substantial time zone differences also made conducting business difficult, with most offshore companies operating during hours that translate to nighttime in US time zones.
American businesses are demanding more from offshore service providers. Offshore IT and business processing services are looking to automation as clients ask for increasingly complex services. To regain a competitive advantage, many offshore service providers are doing away with captive contracts, replacing them with much more flexible terms.
Offshore vs Outsource Services Outlook
Latin America will see steady growth in outsourced services as American companies continue to look for providers that have the advantages of being located in US time zones and cultural similarities that make it much easier to do business. In the United States, the Midwest continues to see revitalization as the former Rust belt states re-invent themselves as state-of-the-art technology service providers with the capacity to provide staffing with professional skills and experience.
Outsourced and offshore service vendors have begun to realize that businesses are no longer looking for the lowest price. Business needs have changed as organizational leaders recognize that the cheapest solution is rarely the optimal one. There is increased pressure on all outsourced service providers to provide not only expert staff and improve the quality of the customer experience, but become innovators that can help client businesses grow.