Outsourcing, Offshoring and Insourcing
Many of the topics covered by this blog have experienced an avalanche of attention due the central focus of the U.S. presidential campaign. As a result, I thought I’d use this space to clear up some of the common misconceptions around the terms being bandied about on the campaign trail and in political attack ads.
In a recent campaign stump speech, President Obama blasted Mitt Romney for his campaign’s assertion that there is a difference between outsourcing and offshoring. I’m sorry to say it, but President Obama was misguided in his claim that the terms are synonymous.
Outsourcing vs. Offshoring
Outsourcing is defined as the practice of subcontracting goods or services to a third party. By definition, Outsourcing is an arrangement in which one company provides business services for another company that would otherwise be handled internally. While the terms are often used synonymously in the public lexicon, they are in fact very different. For example, a firm hiring a commercial cleaning company to provide janitorial services is essentially outsourcing their cleaning duties.
Offshoring generally refers to the practice of hiring a company in another country to perform such duties, although it can also describe a firm’s establishment of a wholly owned subsidiary overseas to carry out business functions. Businesses in “First World” countries often engage in offshore outsourcing to save money and improve efficiency.
What is Insourcing?
This is where it gets confusing. Insourcing is defined as the practice of farming out work to a business unit under the same ownership. Using this definition, a firm setting up a plant or manufacturing facility in China would be insourcing. To be fair, this is not how the term is commonly used. When President Obama refers to “insourcing”, he is describing the practice of bringing jobs previously outsourced to offshore providers back to the U.S.