It always surprises me when people in the business world become confused between offshore and outsource, especially when understanding the differences and benefits of each is critical to the success of their business.

So to clarify – and sorry if I sound like I’m teaching my grandmother to suck eggs, but here goes: Off-shoring is when you move a business area to another country in order to benefit from available skills or reduced resourcing costs. Outsourcing is when you remove non core business activities from the internal structure of a company and bring in the process or activity from a third party external supplier.

In the West we benefit from good business processes and practices which have been refined over decades and continue to be a significant source of advantage over emerging competitors and marketplaces in the rest of the world. Whilst labour costs in the developing world may be lower, immature business process can give rise to lower productivity in many emerging economies. This can marginalise the value of working with an offshore partner.

Wholesale outsourcing or moving the supply of poorly designed products overseas can often lead to other issues arising. For example, this can make it more difficult to realise your savings target; it can result in a fundamental deterioration in product quality; or it can provide an unresponsive and unsuccessful customer service.

Core business capabilities are most likely to emerge where the marketplace is the toughest and only the fittest can survive – here you will find the best incentives, educational systems and skill sets. As vibrant economies emerge throughout the developing world the increase in employee expectations is resulting in demands for higher salaries. However, China is different – here there are still 800m people living in rural areas on wages as low as 45c/hr which explains why China could have many more years of explosive growth fuelled by low labour costs.

There is plenty of evidence that with the expansion of open markets and convergence of fiscal policies the increasing flow of labour is emerging as the main currency as people move to where the best paid work is. Many customer service roles are tradable – based on the idea that if a job can be done 200 miles away from a customer it can be done anywhere in the world. Comparatively high salaries within the West make reducing cost a main target and certain skilled employees are very vulnerable. The key is where you choose to focus and how you leverage the value of employee’s knowledge. In this evolving global economy do you choose to become more market orientated and sharpen the focus on customer service?

How do you ensure your profit will be sustained and that you will become integral to your customer’s business or needs? You do this by organising the supply chain competencies to meet customer demand regardless of product or service type; by earning the right to manufacture or deliver a service regionally; and by providing a high value added service.

Traditional operational savings no longer suffice – there is now a gap waiting to be filled to create more value through innovation.

So the question is – should I offshore or outsource, and if so, what?