Demystifying Outsourcing, Insourcing, Onshoring, Nearshoring, and Offshoring

July 5, 2008

For the past several years or so I involved in several outsourcing projects for various clients in my IT consulting job. I read several different articles and research reports on outsourcing and there is lot of confusion about the term outsourcing, onshoring, nearshoring and offshoring. Sending IT or business processes from high-cost countries to low-cost countries is commonly referred as offshoring. But there are several different variations exist based on the sourcing strategies, in this blog we will explore them.

Any time a company sends a business process or business function or an IT task to an outside entity is called outsourcing. Now we need ask following questions about the outside entity:
1. Who is the outside entity?
2. Where are they located?

Outside entity
Fully owned subsidiary of parent company: In this case the outsourcing company owns the outside entity.
Third party vendor

Location
Geographically located inside the client’s home country
Located in abroad but geographically close to the client’s home country, often lies in the same or nearby time zone
Located for away from the client’s country

Sourcing
Sourcing referred as the procurement process. If the work is performed by the client company’s subsidiary it is called insourcing (inside), sourcing is happening inside.
If the work is performed by a third party vendor it is called outsourcing, sourcing is happening outside.

Based on the above information now we can identify the meaning for the four terms often referred for outsourcing.

Onshore insourcing
If the work is performed by the client company’s subsidiary located inside the client company’s home country it is called onshore insourcing

Onshore outsourcing
If the work performed by a third party vendor and both the client company and the third party vendor located in the same country it is called onshore outsourcing.

Nearshore insourcing
If the work is performed by the client company’s subsidiary geographically located closer to the client’s company it is called nearshore insourcing.

Nearshore outsourcing
If the work is performed by a third party vendor geographically located closer to the client company it is called nearshore outsourcing

Offshore insourcing
If the work is performed by the client company’s subsidiary located for way from the client company’s home country it is called Offshore insourcing

Offshore outsourcing
If the work is performed by a third party vendor geographically located for way from the client company it is called offshore outsourcing

The media refers all the above four types has outsourcing, offshoring, and offshore outsourcing. Now we know these terms mean completely different types and the following table shows some examples.

Insourcing Outsourcing
Onshore Amazon.com ousourced all its storage and other services to its subsidiary
Amazon Web Services, LLC.
Several companies outsource their Payroll services to ADP
Nearshore Several US companies send work to their subsidiaries in Mexico and Canada.
For example work send by US based
Google, Inc. to its subsidiary Google Canada Corporation in Canada
Several US companies send work to third party vendors located in Canada and Mexico
Offshore Accenture sending work to Accenture India Private Limited Any work sent to Indian consulting companies like TCS, Infosys, Wipro

Sometimes companies use the combination of any of the above sourcing strategies and I think we can call it as hybrid sourcing.


Comments

2 Responses to “Demystifying Outsourcing, Insourcing, Onshoring, Nearshoring, and Offshoring”

  1. BPO Feasibility Framework | Outsource Portfolio on September 21st, 2008 10:25 am

    […] they know that they can save money by outsourcing, but they do not know whether they need to outsource onshore, nearshore or offshore. As a result, small business owners are having difficult time embracing business process […]

  2. Infonicles: Sourcing Strategy on May 21st, 2009 9:57 pm

    […] Sourcing Models […]

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