Offshore, nearshore, onshore – differences, and tips
April 15, 2021
Companies have a plethora of possibilities when it comes to outsourcing software development teams. The key is in finding the right fit and tracking the performance and overall effectiveness of the chosen team.
Outsourcing is a strong trend in the IT sector, with multiple companies surfing on the wave. According to the Grand View Research analysis, the global IT services outsourcing market size was valued at USD 520.74 billion in 2019 and is expected to grow at a compound annual growth rate (CAGR) of 7.7% from 2020 to 2027.
This growth is fueled mainly by the swift digitalization of the global economy, boosted even more by the COVID-19 outbreak. The lockdowns have literally frozen a traditional trade and leisure of multiple sorts in many countries, resulting in a boom in online commerce and related services.
Thus, many companies decided either to build or to redesign and update their online portfolio to keep their competitiveness in the fast-changing world. By that, many of them decide to outsource their IT services with offshoring, onshoring, and nearshoring being three possible options. That’s why it is important to get a fair comparison between inshore vs offshore outsourcing. In this text we will provide:
And how to effectively work with each of them.
What is onshoring?
Onshoring is a natural option for a company that lacks skills on board while not willing to give crucial operations far away. Onshore outsourcing refers to outsourcing to a company that is in the same country. So if the company from New York transfers a part of work to the company from Atlanta or Los Angeles it is nearshoring at its best.
Pros of onshore software outsourcing
The vendor and the client share the culture, the language, the currency, and the legal environment, making all the dealings easy. This applies also to the working culture and the customs that are considered obvious when it comes to communication.
Thus, it is the easiest option when it comes to the organization of the process.
Cons of onshoring
Yet all the pros can easily be turned into cons. When there is a shared currency, the savings on the exchange rate and the costs of living are near to none. There are multiple approaches toward working ethics, with nations willing to work hard to near death and others with a more relaxed approach. If the lack of coders’ attitude is the reason behind outsourcing, nearshoring is not a viable option.
What is offshoring?
Offshore outsourcing definition is the direct opposite of onshoring. The work is transferred to a distant country, usually overseas. That’s why the model is called offshore – the work is transferred to a country far away. The most popular offshore directions for US-based companies are India, China, and Eastern European countries like Ukraine and Poland.
Pros of offshore software outsourcing
All pros of offshoring are direct opposites of pros of nearshoring. The client company benefits from the lowered costs of living in a distant country. This stacks up for the lower wages of the outsourced employees.
Secondly, the company benefits from the exchange rates, making the vendor’s wages even more competitive. In fact, depending on the target country and the nature of the project, the client can hire a whole team for money usually required for a single senior position in the home country.
Sometimes the benefits are delivered by differences in the work ethics – coders from Eastern Europe are valued for their skills and dedication that is usually unseen in their US-based colleagues.
Cons of offshoring
On the other hand though, when transferring the work so far away, cultural differences arise. There can be multiple communication issues between the teams and unidentified tension created by the lack of mutual understanding.
Also, when the work is transferred to a distant country, time zones provide a significant challenge in ensuring communication – the client is already out of work when the vendor’s employees are turning on the computers on their morning shift.
Last but not least, time zones and communication issues make the control over the product development process significantly more complicated. Thus, uncertainty can arise and eventually hamper the cooperation between companies.
What is nearshoring?
Nearshore means literally the middle ground between the onshoring and the offshoring. The model is based on outsourcing the work to a company that is not far away. It can be either the same continent, the same region, or the neighboring country. A good example of nearshoring is outsourcing work from the US to Mexico or from Germany to Poland.
Nearshore company combines both the pros and cons of both offshoring and onshoring.
Pros of nearshore software outsourcing
When there is nearshoring used, the companies are not far enough to make time zones a significant challenge in communication. Also, the culture is either known or similar enough to not provide any significant obstacles in the cooperation.
Also, while nearshoring is based on outsourcing to the neighboring countries, the benefits of costs of living, wages, and exchange rate still can occur. The geographical proximity can bring additional benefits – there are diverse markets in the EU that benefit both from the close shared policy in the Union and economical differences that make outsourcing beneficial.
Cons of nearshoring
Being a middle ground means that both advantages and disadvantages are “not as big as…” in other models. Thus, the company needs to evaluate what is the real purpose behind outsourcing. Savings will not be “as big as when offshoring” and the ease of cooperation will not be “as big as when onshoring”.
Onshore vs. nearshore vs. offshore outsourcing
To determine when offshoring and onshoring occurs, it is crucial to know the exact geographical location of the client company. It is possible (and common) to work in multiple models as a company. For example:
A company from Shanghai is an onshore partner for a company from Beijing,
The same company (from Shanghai) is a nearshore partner for the company from Seoul,
And for the company from New York, a company from Shanghai is an offshore partner.
How to work with outsourcing companies?
No matter which model has been picked, the decision to leave a significant part of the job to the external partner is always tough. But on the other hand, it is not necessary to abandon all control on the job to get the results. In fact, it is directly opposite – the company needs to follow strict rules to get the best from the cooperation.
Track time of employees
First of all, the company pays for hours worked by specialists, including software engineers, architects, and data scientists, be that junior, middle or senior when it comes to experience. Depending on the time they have spent on the project, the final product can be either of outstanding quality or mediocre at best, with issues that were unavoidable for juniors while no-brainer for senior employees.
But on the other hand, the time of a junior coder is much less expensive than his senior colleagues’. Thus, the precise information on how many hours each employee has worked on which feature can be crucial to determine if the price has been fair and the work has been delivered in the desired quality.
With modern tools like Calamari tracking each employee in conjunction with each project is simple. Also, it provides multiple advantages and desired synergies, like the ability to count the ROI of each particular feature or part of the app.
While the total ROI can remain a mystery for a prolonged period of time, having exact information on the cost of each feature can be of great significance when planning future projects and comparing the productivity of various teams and vendors.
Track productivity over time
Tracking the time spent on projects by a particular employee lets both the vendor and the client avoid the “honeymoon” when the team overperforms for a short period of time to stop doing this after the good first impression has been made.
Although the fluctuations in productivity are natural, the long-lasting changes should be always examined. If the vendor either declines the existence of the problem or is unable to solve the issues, the client company should evaluate the cooperation and think about a transfer.
On the other hand though, if the vendor keeps being effective and productive, tracking the numbers is another good reason to stay with the company for a longer time.
Last but not least, the problem of “vendor locking” remains. The problem can be summarized as the situation when the company stays with the current vendor not due to its proficiency and skills, but due to the fact that there is no other way to keep the lights on. It is fairly common when the company is tied to the proprietary technology delivered by one particular vendor.
On a smaller scale, the same situation can occur if the project is not well documented, the code is messy and there are no clear rules on code ownership.
Effective cooperation with an offshore requires a balance of power – the situation when both parties feel safe with each other. While the vendor should not think that the client will fade away at the first possible chance, the client should keep in mind that finding a new, better company remains an option in a time of crisis.
In the increasingly competitive landscape of modern IT, finding a trusted and reliable outsourcing partner can be rocket fuel for a business. On the other hand, a partner that underperforms can hamper the productivity of the whole company and be more a leech than support.
That’s why using time and attendance tracking tools like Calamari is one of the key elements of establishing a healthy and profitable relationship with the tech vendor.
If you have any questions regarding working with the outsourcing partner and the ways to validate and facilitate this cooperation, don’t hesitate to contact us now.
Read more our texts about Remote work, outsourcing and offshoring