Externalization means outsourcing business resources with units outside the organisation, as partners, suppliers, channels, and customers. So far, we have talked a lot about outsourcing in our articles. We have talked about its advantages and different types of outsourcing. This is why so many readers have asked us how to choose the best option for them. That’s what gave us the idea for this article, but so you don’t have to go back to the previous post, let’s summarize.
Outsourcing is when a company transfers tasks or departments to an outside party for a fee. Since these outsourcers are highly specialized companies, they can perform these tasks more efficiently. This way, the company can get better quality services. And all this while freeing up financial, human and logistical resources to devote to its core operations. We could summarize it as follows: “Give an auxiliary task to an expert to become an expert in core tasks.”
There are many ways to categorize outsourcing methods. However, the most common way is geographical. In this classification, three options can be distinguished: offshoring, onshoring and nearshoring.
Externalization By Offshoring
Offshoring is a classic procedure. It consists of outsourcing company tasks to distant countries. Its main advantage is usually the reduction of costs due to the wage cost difference. But it’s not the only one. Companies usually outsource digital services in this way. After all, they do not depend on the geographical proximity of the workplace. Finally, they can also be an opportunity to open your services to different time zones by outsourcing customer service.
When offshoring, you should consider the following aspects:
- The time zone: the time difference can benefit some processes. For example, a telephone service located in another country can extend the opening hours and language range of your customer service. However, it can also make communication difficult in certain tasks.
- Geographical distance: most important in terms of outsourcing production processes. Shipping to your country can be a high price. On the other hand, it can open access to new markets.
Externalization by Onshoring
Onshoring is the simplest way of externalization. It takes place within the borders of one’s own country. Therefore, it is the simplest way to eliminate the most annoying or time-consuming tasks. Then you don’t have to worry about time zones, freight transport, legal and cultural differences… It also opens up the possibility for your supplier to work at your premises. Therefore, you can outsource tasks such as cleaning or equipment maintenance.
Consider choosing onshoring when:
- Your main goal is to reduce the logistical or administrative burden on your organization. Although you won’t be able to take advantage of the differences in labor costs, it will be easier to work with your outsourcer.
- If your tasks require access to your premises.
- There are tasks such as managing legal, tax or labor intimidation that require experience of the country situation. Onshoring is a good option in these cases.
Externalization by Nearshoring
Nearshoring is an intermediate option. It includes the outsourcing of business processes to neighboring countries. Nearshoring offers the best options, but in small quantities. It helps to reduce costs and is easy to manage. You don’t have to worry about time differences, transport costs are lower and it’s easier to find services in your own language.
It is beneficial when:
- The task is very labor-intensive but has to be carried out on your timetable.
- It is a task that requires a medium level of training.
- You are looking for an intermediate solution in terms of value for money.
Every task is different. Moreover, not all companies work in the same way. Therefore, remember to analyze your options before outsourcing. Distance, time zone, and language are the three main points to consider. Offshoring, onshoring, or nearshoring, which is your option for externalization?