Onshore vs Nearshore vs Offshore: What IT Outsourcing Type You Should Choose

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The business landscape is ever competitive and even as it’s rewarding, not forgetting challenging in equal measure. In such a set up, corporate leaders are constantly looking for ways to get the most value for every resource they deploy. 

One of the trends that have emerged prominently is outsourcing, and organizations of all sizes are embracing it, especially for IT needs. It's no wonder that the outsourcing industry is projected to reach USD 525 Billion come the year 2030. This is significant growth for an industry that picked momentum not so long ago.

But there are different core types of outsourcing, meaning you will always need to make a choice by considering all the major types. These major types are Onshore, Nearshore and Offshore outsourcing. 

So what is the right IT outsourcing type for your organization given these three options? This guide provides all the answers.

Not sure if outsourcing is right for your company? Compare in-house vs outsourcing, for software projects though the concept. Check this guide on how to outsource software projects

Understanding Onshore, Nearshore,  Offshore outsourcing 

Before we delve into what model could be right for your needs, it's important to understand these different models and what they actually mean. Let's take a brief glance at each.

Onshore Outsourcing

In onshore outsourcing, the client organization outsources their IT needs to a partner that is located in the exact same country as the client organization. For example if your business is located in the US, the partner also operates from the US. Think of a company in Austin outsourcing a software development project to a software development company in New York.

The onshore outsourcing route enables you to derive value from talent in your home country without having to make them part of the inhouse team — which would call for more budget. The outsourced team will find it easy to «integrate» with your in-house team since they are all in the same country.

Depending on the proximity, onshore teams can participate in face to face meetings in the client premises, physically interact with the in-house team when necessary, and give on-site presentations, among other conveniences. Clients can also visit the onshore teams in their premises should they need to get a feel of the kind of environment where the team works in, their work culture and 'energy levels'. These kinds of interactions are important for building trust and meaningful relationships.

However, as we'll see under the cons of onshore outsourcing,  this option is expensive even though it's much more affordable compared to hiring and training a full-time employee.

Nearshore outsourcing

This involves outsourcing to a partner that is located in a neighboring country or one that is relatively close, with a similar time zone. For example a company located in the United States outsources an app development project to a mobile app development firm located in Canada. Canada is a different country but its location is near the US. 

The price for nearshore outsourcing tends to be slightly lower compared to onshore outsourcing. Like in onshore outsourcing, it's also possible to make visits and even hold meetings when you choose nearshore outsourcing.

In case of issues that need some quick talk, you can always cross the border and have a chat with the team.

Offshore outsourcing

This involves outsourcing to a partner that is located in a country that is far away from the country where your business is located. For example if the business is located in the US, the partner could be located in India.  Interestingly, offshore is what most people think outsourcing is all about. It’s easily the one type of outsourcing that most organizations use. 

Cost is the number one attraction to offshore outsourcing. For perspective, the rate of outsourcing a software project to a software development company in the US can go up to about $200 per hour in the mid range. Compare this with the cost for the same in Asia where it can range between 25-50 or even as low as $15 per hour. This difference can mean so much for an organization where cost is a major consideration.

A key challenge with offshore outsourcing is that physical meetings are nearly impossible. The providers are located so far away, making it difficult to travel because of high travel expenses and time constraints. The time difference can be as high as 10+ hours. These difficulties mean that offshore outsourcing might as well be most suitable for projects that can be done 100% remotely without compromising quality.

Important: Learn the difference between outsourcing and staff augmentation so you don’t confuse these closely related models of talent acquisition. 

Onshore vs Nearshore vs Offshore: What IT Outsourcing Type You Should Choose

Determining which outsourcing model is right for your needs requires one to take a deep analysis of objectives as well as key factors such as cost, size of project, and stakeholder preferences among others.

The cost element

Of course, the number one reason that is encouraging companies to go for the  outsourcing model in general, is the cost benefit. Regardless of what option you choose to go with, the cost will in most cases be way lower than if you were to get the project done in-house.

But the costs vary from one type of outsourcing to another. The offshore option in particular is considered the cheapest, especially for US businesses seeking to offshore their IT projects to partners based in far off countries in regions such as Asia and Eastern Europe.

This is because the cost of living in these regions is relatively lower compared to the cost of living in the United States. As a result, providers are likely to charge lower costs for the same project compared to what onshore providers would charge.

A key component that many companies miss when considering the different outsourcing options is the hidden costs. Hidden costs are influenced by factors such as quality, political climate, travel expenses, tax and legal dynamics. For example when it comes to quality, will the offshore team be capable of giving a product of the same quality or higher than what the onshore alternative would give. If they give poor quality, then you are definitely going to spend more to bring the product up to the required standards of quality. If the offshore team is in a politically volatile country, this can derail your project and that will mean spending more than you would have spent if you were to go with an onshore or nearshore partner.

Take time to carefully weigh out the cost element at a deeper level. Don't just look at the variance in fees among the options. Obviously, onshore outsourcing will not offer anything much in terms of cost savings when compared to offshore outsourcing. Nearshore outsourcing is slightly affordable compared to onshore outsourcing, but offshore outsourcing is the clear winner when it comes to cost.

Need to go global

If you intend to go global, then integrating global talent at the local levels is one of those elements you are going to have to give a thought. IT starts with talent. If, for example, you want to have a presence in Asia for your US-based company, the local talent will be best placed to develop or customize  your products to suit the appeal of the Asian market. 

The project could be something as simple as developing a website that serves that market. Clearly, developers located in Asia will be better placed to create a website for this market. They understand the culture and context., hence what users will love. 

The culture factor

Culture simply refers to social behavior. How do the people in a certain geographical region behave on common aspects? These aspects could be simple things like greetings, beliefs, customs, virtues like work ethic, and even capabilities.

Onshore outsourcing offers the most seamless cultural convenience. The providers live in the same home country as the teams in the client organization. This makes it easier to interact amidst the same cultural norms. They understand each other faster and there are no surprises in the course of interactions. Nearshore outsourcing comes next in terms of cultural amicability, while offshore outsourcing is the least friendly in terms of culture.

Language

We rarely acknowledge the complexity that surrounds language until we find ourselves in an environment where we can't communicate with the next person. It's worse in a work setting. Even in the age of powerful translation and interpretation tools, the ability to understand what one is saying to you first-hand can stand critical in certain projects.

If language compatibility is a significant consideration for your project, then you will need to go for options like onshore and nearshore where the outsourcing company teams use the same language as your teams.

Time zone

Time zone is an important consideration for some client organizations. This is normally the case when you want the project to move fast. The underlying reason could be time constraints or simply because the managers want the project to be completed quickly in line with a company-wide principle.

To make a decision based on the time zone factor, determine whether it's in your interest to have the project work always go on round the clock. If this is a priority for you, then onshore and nearshore will not offer the advantage of round the clock work while offshore is the most befitting. For example, as you clock out of work at the end of the day, your offshore team's work day is getting started. So you assign them some tasks. As you go home for the evening, the work is getting done. By the time you report back to work the following day, your in-house team will review the work of the offshore team. This way, more gets done.

But remember that we don't look at the time zone from the lens of round the clock working only. Some organizations look at it from the lens of being able to work together concurrently. If this is how you are looking at it, then consider onshore and nearshore. Imagine asking for changes in the early afternoon and having them done by the close of the business day. This is the kind of advantage that you get when your outsourcing partner is in the same time zone as yours.  

Reasons to choose onshore outsourcing: Pros

  • No language barrier
  • No cultural differences of significant concern
  • The partner is in the same country as your operations, making it convenient to coordinate
  • The same time-zone means you can always work together in real-time. 

Cons of onshore outsourcing

  • The fees might be higher, especially if your company is based in North America or Western Europe
  • Some specialized skills might be difficult to find, since you are restricting your choices to the boundaries of your home country
  • While you have the benefit of the same time-zone, this can also present a challenge in the sense that you may not enjoy the advantage of continuous work that is normally possible with different time zones.

Reasons to choose nearshore outsourcing: Pros

  • Shared time-zones enable easier communication and coordination
  • Similarities in language and culture contribute to better teamwork

Cons of nearshore outsourcing

  • The costs can be potentially high since you are getting talent from a country whose cost of living is more or less at the same level with your country, especially if your company is located in North America or Western Europe
  • If the legal dynamics around intellectual property are starkly different from your country, this could be a point of concern for many companies especially where data privacy is a big deal.

Reasons to choose offshore outsourcing

  • Ample cost savings as you are going to hire highly skilled professionals based in countries where the cost of living is quite low compared to your country
  • You have the flexibility of accessing a large pool of top global talent, wherever they are based in the world
  • Since there is flexibility in time zones, you get the benefit of your work going on 24/7

Cons of offshore outsourcing

  • The culture and language are often different, making communication a bit of a challenge
  • Because of different time zones, real-time communication and coordination can be a challenge. Your working time could be their sleeping time.
  • Sharing of sensitive information can be a complicated affair due to legal differences on data matters such as privacy
  • Contracting can be complicated by varying legal and compliance requirements. For example, what do you do if the outsourced team steals your project ideas and sells them to competitors? The differences in the legal landscape get complex in such scenarios. 

Onshore vs Nearshore vs Offshore: the key differences summarized

Type of outsourcing

Key differentiator

Key advantages

Key disadvantages

Onshore

Outsourcing partner is in the same country as the client organization

1. Easy to coordinate and communicate

2. Same time zone

3. Potential to hold physical meetings depending on office locations

1. High costs

2. Can be limited on the pool of talent you can pick from

3. Difficult to work round the clock

Nearshore

Partner is in the neighboring country

1. Same culture and time zone

2. Easy to communicate thanks to shared common language

A difference in regulations can complicate how you handle intellectual property and data privacy

Offshore

Outsourcing partner is in a far-off country



1. Low costs as the partner is in a country where the cost of living is relatively low

2. Access to more options of top-level talent

1. Communication challenges as languages could be starkly different

2. Trust issues due to different cultures

3. Quality control challenges

4. Political risks can derail the project



To some extent, nearshore outsourcing bridges some gap between onshore and offshore. Like offshore, you have a reasonable room to play with in terms of the talent pool you can choose from. Like onshore, the time zone, language, and culture are favorable.

The most common IT services that companies are outsourcing today include:  

Verdict: Which should you choose between onshore, nearshore and offshore?

  • If culture, timezone, language,legal framework and intellectual property matters are extremely important for the project, then onshore is what you should consider. All the talent is within your country, they understand the laws and in case of any issues, you are only going to deal with your country's legal framework.
  • If you need the same culture, timezone, and language but with reasonable flexibility in accessing a reasonably wider pool of talent that spreads within your region and not just your country only, then go for nearshore.
  • If saving on costs and accessing a wide pool of global talent is a priority, then go for offshore outsourcing

As you make the decision, please learn the common risks that companies encounter in outsourcing.

Conclusion

Outsourcing reduces the workload as the labor and effort that is required to complete the project are distributed across talented teams which you do not have to hire full-time. This means the time it takes to complete the project is reduced significantly. The diversity of talent makes the project enjoyable, which is a great thing especially for high end complex projects.

Choosing one method over the others does not mean the others are completely not suitable for the company. It simply means that the outsourcing option is the most suitable for the project. The method you choose for one project may not be the best for the next project.

What this means is that you need to weigh these options on a project by project basis. Remember to entrench a strong partnership throughout the period of the project. Build trust through constant communication, feedback and a willingness to offer as much support as possible. 

Most importantly, the outsourcing team should be able to understand the ultimate objectives of the project and what success means to the organization. Help them to visualize what the project's success looks like.  

Before you leave, please check out the latest trends in software development outsourcing as well as the advantages and disadvantages of outsourcing software development.

 
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