Nearshore, onshore, and offshore: What works the best?

Why should you consider nearshoring, onshoring, or offshoring models of outsourcing for your current or next IT project? And, overall, what is the difference between onshoring vs offshoring or nearshoring vs onshoring. Yet you most likely heard that a correctly chosen outsourcing model can:

• Aid you in creating and maintaining your competitive advantage,
• Boost the talent pool of your teams,
• Fill out the missing skills without incurring much expense,
• Add a varied skill set and boost professionalism,
• Free up your employees to focus on core activities,
• Get speed, flexibility, and agility for your startup.

Applying these models correctly to your IT needs can ensure the long-term success of your business. In this article, we’ll disclose all the nuances of each model for your IT outsourcing needs. We’ll also indicate the key differences between onshoring vs offshoring and nearshoring vs onshoring.

Onshoring, Nearshoring, and Offshoring: Models Explained

In short, onshoring is domestic outsourcing within the same country.

Nearshoring relates to outsourcing to neighboring or close countries, within the same time zone.

Offshoring is outsourcing to countries which differ significantly in labor costs and economies, often crossing time zones and located on different continents.

Onshoring

Overall, onshoring means outsourcing IT needs to an IT development agency within the same country. Often, companies located in cities with high cost of living will outsource onshore. They contract their work out to regions with a lower cost of living to cut salary expenditures. So, someone in London may seek to outsource to the company in Cardiff. If your business is in New York, you might be looking to outsource to someone in Pittsburgh.

As such, the characteristics of onshoring include:

• Same economy and legal system;
• Same business practices, culture, and language;
• Same education standards.

When does onshoring work best?

• This type of outsourcing is often preferred if the business wants to outsource simply to free up its employees to focus on core activities.
• This type of outsourcing is safe. It is viewed as a way to cut costs without introducing much novelty or diversity to the company.
• Outsourcing non-core activities to onshore vendors is a safe way to economize or offload balance sheets by transferring capital expenditures to operating.

Nearshoring

So, nearshoring is when you outsource your IT needs to an agency in a neighboring or nearby country. The vendor is within a similar economy with similar business practices and legal systems. For example, if you are located in the USA, you might outsource to Canada or the opposite coast within the USA. Mexico will be offshoring because this country, despite being close, has a very different economy. If you are in the UK, outsourcing to France or Ireland is nearshoring.

So the characteristics of nearshoring include:

• Similar economic development levels;
• Similar tax and legal system;
• Relatively similar employee salary rates;
• Common education standards;
• Countries are quite close culture-wise.

In terms of language, even if countries have two different national languages, it is likely they both are similarly proficient in English.

Last but not least, with nearshoring, countries often share the same business principles and practices.

When does nearshoring work best?

• It is preferred when a business lacks certain skills in its home country and seeks to reduce costs or add value. As there is no or very little time zone difference, a business may choose it so there is no problem in setting up offline face-to-face meetings.
• Another case is when a business outsources non-core activities or chooses staff augmentation for a few positions within a homogenous in-house staff. This way there are shared culture and business values. Nearshoring may offer possibly lower costs with relatively same quality.

Why ‘possibly lower costs’? This is because nearshoring isn’t always considered for cost reduction. Often, it is considered for getting access to better talent and a higher level of expertise. Sometimes, reasons for opting for nearshoring also include the need to increase product development speed, agility, and/or regulatory requirements.

Offshoring

Out of all these models, this one offers the ultimate cost saving. Offshoring means outsourcing your IT needs to a country with a different economy entailing cheaper labor costs. It can even be a nearby country but the change in the cost of living will be significant. So, if you are from the UK or USA, you outsource offshore to Ukraine, India, Mexico or the Philippines. Each of the latter countries will be extremely different from each other. Yet, all of these options will offer significant cost savings compared to outsourcing within EEA countries like Poland or France.

Features of offshoring:

• Different levels of economic development of the countries,
• Different legal and tax systems,
• Significant cost savings,
• Flexibility and agility,
• A large pool of candidates,
• May pose challenges in communication due to cultural differences and language barriers,
• Potential differences in time zones may limit choices for meeting times,
• Possible differences in regulatory policies and business practices.

Offshoring offers the most diverse selection within itself. In some companies, the services and practices might be up to European or American standards. In other companies, they preserve their authenticity.

The level of English is an issue to consider. But generally, as for developers, they often can write documentation in English because they program in English. In terms of communication, you are likely to be in touch with a project manager. This person is often well-trained in English as well as in communication in general.

So, it is quite possible to find an offshore outsourcing partner to Develop a Custom MVP app of similar quality to onshore and nearshore models. After all, software development is ruled by international standards. That’s why offshoring is seen as the most attractive option offering the highest cost savings while still delivering international quality applications.

When does offshoring work best?

Offshoring is great for outsourcing core activities, launching a startup, utilising distributed teams, and more. Maybe you are looking How to develop a custom marketplace app like Walmart? Let’s look at the breakdown of outsourcing goals as of 2022 by Deloitte.

Looking at the chart above, it is safe to say that there are quite a few reasons to outsource offshore. If you are a startup and looking for Startup Services, you probably want to reach the balance between cost (57%), value (49%) and time (14%). You might notice that 51% opt for outsourcing to shift their business strategy and operating models. What does it mean for a startup?

When you decide to start a digital business, you start with a minimum viable product. If you decided to build everything in-house, it would involve:

• Product development team,
• Technical team,
• Adm personnel,
• Marketing,
• Buying up networking equipment, licenses, and servers (CAPEX spend).

It is a lot of moving parts all taking up your focus as a business owner. Plus, when you need to manage this much, you would have to resort to traditional practices and blueprints. So, back to our question of how outsourcing offshore changes business strategy and operating model.

With outsourcing, you welcome to your business different business approaches. In addition, you shift from capital expenses to operating ones. Plus, you overall embrace a more dynamic and flexible business approach.

More offshoring benefits:

• when technical IT tasks are performed in-house, there is a certain danger. It might become so that this function will overpower product development. Your technical specialists will be setting limitations within which your product team can operate. In contrast, by outsourcing your MVP app development to a vendor, your product team will be mainly passing their needs/requirements for technical implementation.
• Another point is that the birth of a good product is a process of trial and error. The speed of iterating between trials is the ultimate benefit of offshore outsourcing. Especially, if you opt for lean development to Develop Custom Software.

Models Summary

In the table below, we present the summary of all characteristics for onshoring, nearshoring, and offshoring models.

Which model works best for IT services?

Since outsourcing is mainly intended as a cost-driven solution, onshoring rarely presents a winning or substantially beneficial solution in IT. For sure, if you seek to establish a manufacturing site — choosing Pitssburg over New York is pretty effective. But when it comes to IT, there are:

• no logistical costs,
• no heavy investment in manufacturing capacities,
• no hiring hundreds of people to work the production line.

This is why outsourcing core IT functions onshore doesn’t often happen.

Comparing nearshoring vs onshoring, you might actually gain more benefits with nearshoring. Even though economies are rarely significantly different, you get to benefit from adhering to the same laws and regulations. In different economies, the market structure will be distinct from yours so you have access to differing skill sets and expertise. Overall, nearshoring represents a nice trade-off between cost savings and cultural/business/communication considerations.

Lastly, onshoring vs offshoring. Offshoring is the greatest of them when it comes to IT services. The IT industry thrives on innovation and creative problem-solving in general. So, when the country’s best plunge into an international arena there is always this unique drive about them. They always tend to go the extra mile and think outside the box. This is their norm. This is why if you want to outsource, offshoring is like a candy land with a variety of benefits and advantages for your business.

Offshoring Key Considerations

Price Of Manoeuvring In-House VS Outsourcing

There is a small chance of this scenario occurring, but what if… what if your product development reaches a stage where 2 months into development there is a realization that you need a completely new technology stack? You thought of going the social MLP route but now there is strong feedback indicating a need for heavy backend machine learning processes. Imagine scraping up all that work, firing the current in-house team, redoing job ads, going through new hiring processes, having the new team onboard, and restarting the development… With a vendor, that is a matter of a week or two, and it will end up costing you a lot less. Guaranteed — it is an extreme example of maneuvering, but what if…?

Factor In Your Budget

With offshoring, you can hit a business trifecta: good value for money in a shorter time frame. Comparing nearshoring vs onshoring, you rarely win much in terms of cost or lose some in terms of value. They are both pretty similar economies so it is not likely that the same expertise would cost much less. So, when comparing onshoring vs offshoring, you get access to talents from relatively less developed economies. It means that you can access these skills at a lower cost. Or upscale the skill set: get higher-qualified developers for a fraction of the cost.

Consider Cultural While Avoiding Business Differences

Another great point of offshoring is diversity. Often, businesses come out to new markets because their home country markets get stagnant. Finding something innovative or new can be difficult. All major players sing from the same song sheet, so to speak. So, outsourcing to an offshore agency can be exactly this key move to unlocking creativity and new business opportunities.

However, you may want to make sure the company follows international business practices and standards. While innovation, creativity, and thinking differently are great — you still want to have everyone on the same page when it comes to scheduling and budgeting.

Wrap-Up: Onshoring vs Nearshoring vs Offshoring

Onshoring vs offshoring presents the most differences and polar opposite use cases. With onshoring, businesses often choose to outsource non-core activities. With offshoring, businesses select strategic partners, build data centers, or launch startups.

Nearshoring is often utilized for sourcing very specific skills on a certain project. It might not make much difference in terms of costs. After all, it involves outsourcing to a country with similar economic development, hence similar salary levels.

Granted, onshoring and nearshoring got a boost for certain businesses that involve and are centered around manufacturing. Logistics and covid didn’t mix well so companies relocated closer to home. But in IT, this is seldom a consideration. If IT is moving anywhere, it is into the cloud. Thus, outsourcing in IT works best offshore.