It’s one of those knee-jerk reactions: ‘outsourcing means shipping U.S. jobs overseas.’ And the general media (along with many politicians) plays into that by bashing outsourcing as jobs being shipped overseas. They also tend to use outsource and offshore as interchangeable terms. Given the level of media and political sophistication these days it’s easy to understand how this mistake has gained such traction.

Well, the outsourcing profession should set the record straight. Outsourcing has many facets, but it’s NOT offshoring. There is a big difference.   Let’s start with a simple definition of each:

Outsourcing means buying a service from a company rather than providing the service yourself.   Done smartly  – companies only outsource when they can get work performed  better, faster or cheaper.   I call that good business.

Offshoring is transferring work to a region or country that is not local.  Usually this is due to significant labor savings.  Many companies offshore without outsourcing, meaning that the new employees that are hired become employees of the company.  The advantage is the labor cost is reduced.

Hundreds (and perhaps thousands of companies) use in-region outsourcing – not offshore outsourcing.   For example, Saddle Creek Corp., headquartered in Lakeland, FL., provides integrated warehousing, transportation, contract packaging and value-added outsourcing services for manufacturers nationwide.

Another example: Many countries in the Asia-Pacific region outsource extensively within that region, for manufacturing or for their contact centers. In the latter realm, Japan and South Korea sought to offshore their contact center operations to China, and some Australian firms eyed India and the Philippines, two of the region’s growth markets, for their contact center requirements. These decisions are based mainly on quality of service and availability, although cost of course is also important.

When I talk to people who make this mistake I like to say “Outsourcing is not offshoring – it is about best-shoring and doing it right.” I try to make it simple and break the two concepts down and treat them separately.

First, ask yourself if you should outsource or insource. Do I have the capital, equipment and personnel to do the job effectively over a long-term in-house?

Then, if I decide to outsource, where should the work be done: onshore or offshore? This is basically a math problem and an exercise to try to find the lowest total landed cost option for where the work should be done.

In some cases it makes sense to split the work. For example – in the high-tech industry Maxtor (now Seagate) outsourced to Exel and the work was primarily all offshored. However – the cost of shipping boxes of external hard drives with air and packaging and the inventory carrying costs associated with high-cost items in transit made them shift their strategy to continue to make the hard drive components overseas and to move the “kittout and assembly” to Excel’s facility in Dallas.

Now for the third question – and one that most companies fail to ask: What business model should I use when I outsource? Should it be a conventional transaction-based approach or a Vested Outsourcing model?

As I spell out in this blog, a Vested Outsourcing business model should be used when outsourcing services that are not part of your core expertise and where there is a high degree of untapped value in terms of potential to greatly improve service or decrease costs.

We call this The Pony: It represents something the outsourcing company wants, but was not able to get on their own or with existing service providers. In other words it’s the difference between the value of a current solution and the potential optimized solution. You can read more about this in Vested Outsourcing and my Vested Outsourcing eBook.

It’s part and parcel of the very foundation of Vested Outsourcing, which I call: Laying the Foundation – What’s in it for We?