What is Nearshore and Offshore and How Do They Differ?

What is Nearshore and Offshore and How Do They Differ?

by Jesus Lopez   |   March 23, 2021   |     7 min read
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With the growing business demands and advanced technologies, outsourcing has become increasingly popular. It facilitates daily operations and workflow for organizations in every industry. Through outsourcing, the hiring process becomes easy, and companies can access a worldwide talent pool. 

Before outsourcing was possible, companies were limited to their specific locations and looked for the right employees in their hometowns. But the situation is different now, and businesses are able to outsource their roles and projects to teams in other regions.  

Outsourcing provides a way for entrepreneurs and founders to find international tech talent at low cost and within tight time frames. IT recruiting partners in Latin America, Asia, and Eastern Europe are known for offering a high standard for outsourcing services at considerably lower prices. 

What is outsourcing?

Outsourcing is the process of obtaining services and goods from foreign suppliers. These processes can be individual tasks or entire business projects. With the rise of the startup ecosystem and technology sector, outsourcing has become a great opportunity for businesses to retain development teams and talent to meet their demands. 

It is common in those industries where there is a shortage of labor for particular positions or where the labor cost is too high. The most common industries that outsource their projects include manufacturing, R&D, IT services, call centers, and distribution.

Tech companies have always been at the forefront of outsourcing given the high demand for software engineers and their ever-increasing need for new tech talent. Recently, the rise in remote work and the digital transformation in companies across the globe sparked by the COVID-19 pandemic has propelled the need for talent and with it the importance of outsourcing. 

Here are the different outsourcing strategies that companies can use to hire based on their business needs.

  • Traditional outsourcing: In the project outsourcing model, businesses get third-party services to assemble a team and execute an entire project. Those teams are responsible for completing the project from start to finish with minimum control from the hiring company. 
  • Business process outsourcing (BPO): This is a method of contracting several business-related operations to third-party vendors. They are responsible for carrying out all business activities for you. BPO is outsourcing a particular business function, such as marketing, HR, customer support, accounting, and various data-gathering processes.
  • Staff augmentation: With staff augmentation, companies can hire experts in their teams for the time they are needed to complete the project. It has evolved since it was considered only for temporary hires and is now also used by companies who are looking to hire engineers long-term from remote locations.

Types of outsourcing

Here are three main types of outsourcing:

  • Onshore outsourcing: When an organization hires a service provider in their own country.
  • Nearshore outsourcing: When an organization hires a services provider from neighboring countries.
  • Offshore outsourcing: When an organization hires a service provider from regions further away.

What is nearshore outsourcing?

Nearshore outsourcing refers to delegating business projects or tasks to an extended team in a neighboring country. It is a perfect balance between the benefits of onshore and offshore outsourcing. Companies can hire a pool of talent with a significantly reduced labor cost, while likely remaining in similar time zones. Moreover, it makes communication easy and onsite visits more practical.

What is offshore outsourcing?

Offshore outsourcing is all about hiring service providers from entirely different regions of the world. For businesses in North America, it usually refers to working with teams in countries such as China, India, Ukraine, Poland, and others. The cost of working with offshore companies is significantly lower than onshore ones and on-par or slightly lower than nearshore locations. However, working with remote teams located on the other side of the world with a completely different time zone makes communication more difficult.

Nearshore vs. Offshore Outsourcing

Both offshore and nearshore outsourcing have their pros and cons. Companies can choose the suitable option according to their business requirements. Here is a brief comparison of the two:

  • Communication: While choosing the right outsourcing option for your business, it is important to remain in close contact, especially if the business project requires collaboration. Nearshore outsourcing provides better communication because of similar time zones and a higher likelihood of common languages.
  • Location: While comparing nearshore and offshore outsourcing, location is a major point to consider. Hiring a team from a nearby country with a reduced time zone difference is beneficial. It comes with less cultural difference and provides effective working relationships. However, the labor cost is expensive here, as compared to offshore outsourcing.
  • Control: While working with the offshore team, it will be difficult to control the processes because of time zone differences. If you want better control of your business activities, it is better to hire nearshore outsourcing services rather than offshoring.
  • Cost: If you want to hire expert talent at cheaper rates, you should consider offshoring. It allows you to choose from a wide variety of talent with significantly lower rates. However, both options are 40-70% lower than onshore rates in the US. 

When evaluating the different options regarding nearshore and offshore the real question you have to ask as a company is what is most important to me in terms of quality, control, price, and communication.

There’s also the matter of what you’ll be outsourcing, as it can be from a technical support team, a secondary software development team, all the way to a quality assurance team. Each have different requirements and where one strategy may be best suited rather than another. Define your company’s strategy and move from there. 

How companies use outsourcing strategies to build remote tech teams

Companies of all sizes can benefit from nearshore and offshore strategies to build remote tech teams. As mentioned above, to find the best strategy for the current needs of a company needs in-depth evaluation of its activities, needs, and current tech department. 

It’s worth mentioning that companies that don’t require technology to deliver their products or services are more likely to choose project outsourcing than those who depend on technology applications to deliver their value propositions. 

Companies who require technology usually focus on nearshore or offshore tech team-building strategies:

Early Stage Startups

For startups with seed funding, the cost is a major decision point, and their objective is to prove a point even if it’s not as efficient as possible. Their teams are usually 1 to 2 people small and value is sacrificed – offshore is the preferred method here.

Venture Startups

For VC-backed startups, growth is a major factor, so the value, culture alignment, and efficiencies of tech teams come into play. Companies may set the building blocks for development teams that support their OPEX structure and tech needs so teams of 1 to 10 people are common. Nearshore is preferred, but offshore is not uncommon. 

Small and Medium Enterprises

Completely value-driven, usually focused on enhancing and growing their mission-critical products or services with more engineering firepower. This can vary from a 1 to 4 tech support team, to a 10 to 15 secondary technology team to support internal operations and fuel growth. Nearshore outsourcing strategies are preferred, but offshore is not discarded. 

Large Companies

Guided by long-term strategies, cost efficiencies, and looking to de-risk their tech team investments through cultural alignment. Large companies usually focus on the bottom line and on continued growth which leads to large outsourced teams for non-critical tasks. Their teams vary from 50 to 150 and in different roles. The most popular method is the Build-Operate-Transfer model that de-risks the creation of a nearshore tech team with the support of an IT partner. Nearshore is preferred. 

Wrapping it all up

Nearshore and offshore are both outsourcing strategies used by companies in an effort to build value in their companies without risking their financial standpoint. Companies of all sizes decide to outsource a variety of different functions from tech teams, marketing, accounting, and customer service to name a few. 

Nearshore provides a closer-to-home solution that allows companies greater flexibility, control, and communications at a great cost. Offshore allows companies to build bigger teams at the expense of certain control and communication. For evaluating different regions and their cost to compare nearshore vs offshore, use this calculator that compares the most popular outsourcing destinations. 

Both strategies have their advantages and disadvantages and must be evaluated after a thorough introspection on the needs of a company at the particular point in time when they are being considered.

it outsourcing destination comparison calculator

Photo by George Pagan III on Unsplash

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