Offshoring and Outsourcing

Outsourcing means having an external supplier perform an activity, while offshoring means locating an activity in another country. Outsourcing concerns who produces the service; offshoring concerns where it is produced. They are independent decisions: a firm can outsource without offshoring, offshore without outsourcing, or combine both.

The two organisational decisions

A firm organising service production must decide whether to perform an activity internally or purchase it from another firm, and whether production should occur domestically or abroad.

• Outsourcing changes the organisational boundary of production: the firm contracts with an external provider rather than performing the activity internally.
• Offshoring changes the geographical location of production: the service is produced abroad, regardless of whether the producer belongs to the same corporate group.
• Consequently, outsourcing does not necessarily involve international trade, and offshoring does not necessarily involve an independent supplier.

How the arrangements can be combined

Combining the ownership and location decisions yields four basic arrangements. The following examples concern a firm whose home country is India.

• Domestic in-house production occurs when the firm uses its own staff in India to provide customer support.
• Domestic outsourcing occurs when it hires an independent customer-support provider operating in India.
• Captive offshoring occurs when its own overseas affiliate provides customer support; production is abroad but remains within the corporate group.
• Offshore outsourcing occurs when it contracts with an independent customer-support provider abroad; both the organisational boundary and the country of production change.

Why the distinction matters for services and global value chains

Digital communication allows many services, such as software development, accounting and customer support, to be supplied across borders without moving the customer. This enables firms to divide service tasks among different locations and producers within global value chains.

• Firms may outsource to access specialised expertise or reduce the cost of maintaining an activity internally, but must manage supplier performance and quality.
• Firms may offshore to access skills, lower production costs or serve overseas markets, but must weigh these benefits against coordination costs and regulatory differences.
• For India, supplying services to foreign clients can generate service exports whether the Indian producer is an independent vendor or an affiliate of the foreign firm.
• Cross-border service delivery does not inherently require workers to migrate; supplying a service remotely and sending personnel abroad are distinct arrangements.