Updated for relevancy: February 11, 2025

Outsourcing and offshoring are often used synonymously. However, the terms have two very different meanings and implications. Outsourcing is when a company negotiates a contract with a third party to perform a specific function. When outsourcing a process, business operation, or work to a third party, it is vital to find a company or person that specializes in the task at hand.

In contrast, offshoring is when a company sends in-house jobs to be performed in another country. An example of offshoring would be for a United States-based company to produce their goods in Mexico. Both offshoring and outsourcing ultimately save companies money—but they reduce costs in very different ways. Its important for businesses to understand the key differences between outsourcing and offshoring to make the most efficient decision.

Understanding Outsourcing

Outsourcing services have become an increasingly popular business strategy for companies as a way to reduce overhead costs and increase profit margins. Outsourcing occurs when a company entrusts a part of their business process to an outside vendor. This cost-effective strategy has a myriad of benefits, among them:

• Outsourcing can save costs by accomplishing the same task for less money. It’s important to note that while a task or business function may be cheaper this way, it does not necessarily mean that the quality will decline. In fact, one of the most attractive aspects of outsourcing is the reduction in cost while still garnering high quality services.
• Outsourcing can increase efficiency by entrusting business processes to third-party vendors that specialize in that specific area. This enables businesses to tap into highly skilled labor pools that are specially trained in certain manufacturing areas, all at a fraction of the cost of doing business in the home country.
• Outsourcing allows companies to focus on the core areas of their business and improve their brand by freeing up time, energy and resources. Call centers are one such area where businesses can see a dramatic reduction on total cost. And thanks to multilingual training in countries like Mexico, this can be done without sacrificing quality, as there are no language barriers standing in the way.

Understanding Offshoring

Offshoring is when production operations are performed in another country. Offshoring is often criticized for transferring jobs to another country, but it can be extremely beneficial for companies and can ultimately improve the economies in both partner countries. In fact, offshoring has the potential to significantly benefit business. Some of these benefits include:

• Companies often offshore manufacturing or services to countries where the hourly labor costs are significantly lower. In Mexico, for example, the hourly labor rate, while increasing, is a fraction of the minimum wage in the United States. For a company to offshore manufacturing to Mexico, they are likely to accumulate a significant cost savings from labor alone.
• Besides saving money on manufacturing costs, companies that offshore manufacturing also create more skilled employment opportunities in administrative and operational roles within the United States.
• Offshoring reduces risk for companies, thereby allowing them to better support clients when they need it.
• Offshoring allows companies to maintain complete control over the operation and production of the business. While outsourcing relies on an outside vendor to complete tasks, offshoring relies only on those within the same company. For some, offshoring allows for a more cohesive, directionally focused business than outsourcing does.
• Offshoring creates new revenues by fostering a demand in destination countries for products, particularly high-tech items.

The Benefits of Offshoring in Mexico

Offshoring manufacturing to Mexico is a choice that more and more companies are making. There are a number of huge advantages companies experience by offshoring production operations to Mexico. One of the main benefits of offshoring in Mexico is the significant cost savings. Mexico has a skilled talent pool that can complete higher quality work for a fraction of the cost, which aids United States-based companies in drastically reducing overhead costs.

Another benefit to companies offshoring in Mexico is the geographic proximity to the United States. Because of how close the the two countries are, shipping costs are significantly lower than if manufacturing was offshored overseas, such as to China. The reduction in shipping and freight costs provides businesses with even higher cost savings, while still producing high quality products for consumers. This proximity also enables managers to easily visit their offshore and outsourced operations within the same day, often in the same or similar time zone.

Beyond these benefits, companies outsourcing or offshoring manufacturing to Mexico can also boost skilled employment opportunities for United States workers. While manufacturing is taking place in Mexico, a skilled workforce is needed in the U.S. to perform administrative and operational functions to keep business processes running at an optimal level. Many businesses find running operations in the United States and manufacturing and production in Mexico to be beneficial to both countries.

For many companies, a combination of both outsourcing and offshoring can lead to the perfect balance. NAPS specializes in outsourced administration and compliance management services that help companies that are offshoring successfully run manufacturing operations and maquiladoras in Mexico. Contact NAPS today to learn more about offshoring vs. outsourcing.