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2.1. What is offshoring?

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Perhaps due to the emerging nature of the concept, no commonly accepted definition of offshoring exists. It is often used interchangeably with outsourcing.
Outsourcing typically refers to the practice of one company hiring another company to perform tasks that used to be done in-house (Bednarzik, 2005). Lacity and Hirschheim’s (1993) define outsourcing as the purchasing of a good or service previously provided internally.

These two definitions refer to the outsourced functions as if they were previously performed by the organisation.

Other definitions, however, consider even the transfer of new functions, such as IT, that were not carried out by the organisation as outsourcing. Ketler and Willems (1999) define it as the transfer of an internal function or functions of information systems department to an external organisation. Dutta and Roy (2005) defines IT outsourcing as turning over selected parts of a firm’s IT projects or functions to another provider for a specified period of time, usually at least a few years. These functions include software development and maintenance, network and computer operations, and research and development.

Outsourcing agreements do not only involve the sales of goods, it could also include the transfer of human resources as stated by Anon (2004) who considers outsourcing as the transfer of the management or ownership of components or large segments of an organisation’s internal IT infrastructure, staff, processes or applications to an external resource.

Offshoring is a little different. Principally, it refers to the practice of replacing domestically supplied services with imported services. Foreign workers are substituted for local workers while remaining in their country (Bednarzik, 2005). However, not all the service these foreign workers produce may be imported back to the client country. They may also produce services for foreign markets. Rajkumar and Mani (2001) offer a generic definition which states that offshore outsourcing development occurs when the supplier is from a different country than that outsourcing.

Other authors put forward a larger definition of offshoring as a combination of trade flows, foreign direct investment (FDI), and employment shifts. Sako (2005) considers that offshoring happens when private firms or governments decide to import intermediate goods or services from overseas that they had previously obtained domestically. It is therefore about sourcing decisions which involve (a) imports, (b) displacement of domestic production and associated jobs, and sometimes (c) FDI outflows if sourcing happens from overseas affiliates.

In addition, depending on the distance between the origin and destination country, IT offshoring can be categorized into offshoring and nearshoring. From the perspective of a Western European company, countries such as India, China or other similarly distant regions are regarded as offshore countries, whereas potential nearshore countries include the Czech Republic, Morocco or Turkey.

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