Introduction
As organizations increase their digital capabilities and the need for technical talent increases, many large companies are outsourcing individual projects to vendors.
The recent trend of outsourcing projects only takes advantage of the technological evolution that has made virtual boundaries insignificant.
A team of skilled professionals can be assembled anywhere globally, and virtual boundaries are no longer an issue when finding top talent. Around 300,000 jobs are outsourced by the US annually, mostly to India.
IBM is the largest outsourcing firm in the United States. The company has 383,800 employees and $76.5 billion in revenue. Deloitte is in second place with 330,000 workers, $47.6 billion in revenues, and $48.8 billion in assets.
According to Outsource Accelerator, the global outsourcing industry was worth $92.5 billion in 2019, and reports show us that we can expect it to reach $114 billion by 2025.
There are three main outsourcing models: onshore, offshore, and nearshore.
Each has its pros and cons, so it’s important to understand what they mean before deciding which one is right for your business.
In this article, we will discuss the different types of outsourcing models. We will focus mainly on onshore vs offshore outsourcing and nearshore software outsourcing.
What is Software Outsourcing, and Why Do Companies Do it?
Software outsourcing is a type of outsourcing in which a company must outsource its software to another country. This is usually done because of the need to have cheaper costs. This type of outsourcing is very beneficial for companies, especially if they develop software. Companies such as Google and Microsoft have been using this strategy since the early 2000s.
Benefits of Outsourcing Software:
Reduce Business cost
The top reason for outsourcing is cost reduction. This is especially true if the company has a tight budget and is looking to minimize costs.
Find exceptional talent
Modern companies must have a strong and effective team. This is why it’s important to look for talents that will help the company be successful. The difference between onshore vs offshore services and nearshoring software has its benefits: you can hire talented people who live in lower-wage countries, thus reducing business costs significantly.
Save Time
When companies choose onshore vs offshore services or nearshoring, they get the chance to work with experts who are fast and highly effective. This means that companies can meet their deadlines, which brings more money.
Focus on core business activities
Software development can be complex, so when you outsource this service, the company will have the chance to focus on its core business activities. This is extremely beneficial in many ways: the company will save time and money by no longer focusing on software development.
Free up in-house resources
Software development requires talented people who will need to be well-paid. This is why companies often outsource this service: they simply do not have the funds. However, when you decide to outsource software development overseas, your company can free up in-house resources and dedicate them to other important tasks. This way, it’s sure to be more efficient and successful.
Scale project capacity
When team capacity is limited, it’s really difficult to scale a project. This is why, when you outsource your software development, the service provider will have extra resources that are ready to be used by your company. As a result, they can help meet deadlines, ensure superior quality of work and product delivery.
Decrease project risk
When you outsource software development to an offshore team of experts, there’s almost no risk of failure. This way, your company can focus on achieving its goals and be more confident about the future of your project.
Outsourcing models – Onshore, Offshore, & Nearshore: What’s the difference?
Onshore outsourcing is when the project’s team is in the same country as the company. Because of the physical closeness, this type of outsourcing is best suited for short-term projects.
Onshore outsourcing is suitable for small projects, but not often used by big corporations because of the higher expenses.
Offshore outsourcing is when the project’s team is located in a different country than the company.
Offshore outsourcing offers lower costs for doing business. This model is particularly beneficial during times of economic crisis when companies need to ensure that their business expenditures are kept at a minimum.
Nearshore outsourcing is when the project’s team is located close to the company but not in the same country.
This way, they can take advantage of people with similar cultures and time zones without having large expenses.
This gives nearshore outsourcing companies the cost benefits of outsourcing without sacrificing quality.
What is onshore outsourcing?
Onshore outsourcing takes place when the project’s team and company are located in the same country. This type of outsourcing is very common among companies in North America, South America, Europe, and Australia.
Onshore Outsourcing has more of a chance of success due to more opportunities for understanding the nuances of the local market. It also benefits from its ability to better communicate with both suppliers and consumers of outsourced services.
Onshore Outsourcing is the only of the three models which understand how their project will fit into their social environment.
In the banking industry, 40% of help desk positions are outsourced. Banks like to outsource these positions because the work is not as skill-specific as other more technical roles.
Pros of Onshore Outsourcing
● Ease of communication
It is the model that businesses find easiest to communicate with due to language or cultural compatibility.
● Cultural compatibility
When a company uses onshore outsourcing, they know their suppliers and can ensure that they know the region’s culture. It also means that companies have a better understanding of how their project will fit into their social environment.
● Knowledge of local market
This is beneficial if the company is targeting the local market. If the company needs deep insights into the region’s culture, onshore outsourcing is more effective than offshore or nearshore outsourcing.
Cons of Onshore Outsourcing
● Higher costs
Onshore outsourcing is more expensive than its counterparts due to shorter travel distances and higher wages.
It can also be less cost-efficient for ongoing projects rather than single, large projects that require a lot of manpower.
● Limited talent pool
Many talented individuals choose to stay within their own country. This means that a company might have a harder time finding the right talent for an onshore outsourcing project.
What is Offshore Outsourcing?
Offshore outsourcing is when the project’s team is in a different country than the company.
Offshore outsourcing does not necessarily mean that the company is located outside the country.
The offshore outsourcing model is good if you are looking for a long-term or permanent partnership.
The IT sector and manufacturing industry often use this model.
India is the leading IT outsourcing country in the world. It is very common to find tech companies based in the USA outsourcing projects to Indian tech service providers.
By 2025, India’s IT outsourcing sector is expected to increase at a 7.25 percent CAGR, reaching INR 8,830 billion ($121,335,149.20).
Many manufacturing companies use the offshore outsourcing model to cut down labor costs. Because labor costs are lower in China, it is the most favored destination for manufacturing outsourcing.
Pros of offshore outsourcing
● Cost-saving
Outsourcing to a country with lower labor and operational costs is often cheaper than onshore outsourcing. This allows companies to expand their business without having to increase the budget.
● Greater talent pool
Offshoring can provide access to a greater talent pool that may not be available in the company’s home country, allowing it to expand its business to new geographies. Employers can use the talent pool in one country and easily scale it up or down for projects in different countries.
● 24/7 uptime
With offshore outsourcing, a company can offer 24/7 service as the project team works in a different time zone. This allows work to be completed even if the client’s business is closed during certain hours of the day.
● Better scalability
With offshore outsourcing, a company can easily scale up or down for projects in different countries. This allows the company to have more flexibility in assigning work and at the same time increases efficiency, reliability, and speed of execution.
● Favorable government policies
Governments can offer favorable business policies to companies that are willing to invest in their countries. For example, the government may waive taxes, provide loans, or offer other incentives for companies that want to set up operations in the country.
Cons of Offshore Outsourcing
● Requires more involvement
If you are located in the same country, it is easier to stay involved with your project team. You can easily meet with them or just walk over to their desk when something needs to be discussed. This is not possible if you have a team working on another continent.
● Language barrier & cultural difference
It often does not provide as much cultural fluency as an onshore model does because people from different countries often have different cultural backgrounds and customs.
● Security risk
It can increase security risks because you will have to make sure that sensitive data is safe. You also need to make sure that you are complying with local laws regarding privacy.
● The difference in time zones
If an onshore project team is working in one time zone while the remote offshore team works in another, events that happen during your busy night shift will be overnight for your onshore teammates. This may result in the loss of important deadlines if it is not properly coordinated.
What is Nearshore Outsourcing?
Nearshoring companies are unique because they have the best qualities of both worlds: local and global. They provide a cost-effective solution, and at the same time, they can reach out and tap into distant markets and existing relationships.
Nearshoring keeps development teams close to the company, allowing managers to oversee projects more closely. Team members can communicate face-to-face if necessary, and it’s also easier for managers to provide feedback without having a significant time zone difference.
Pros of nearshore outsourcing
● Proximity
The proximity is very advantageous for nearshore outsourcing. The outsourcing team is, therefore, able to understand the requirements and needs of the company as well as those of their target market.
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● Faster problem solving
Nearshoring also has faster problem solving because of its proximity. This means that issues are sorted out more quickly, making everything run smoothly.
This is because both parties can easily meet up face to face or through video conferencing calls if needed, which allows them to get to the root of an issue more quickly.
● Cost-effective
This model of outsourcing is cost-effective. This means that money can be saved on issues such as business trips or high rent abroad.
● No language barrier & similar cultural values
Nearshoring also has no language barrier because of its closeness. This means that there are no communication barriers because the onshore team is located nearby to work directly with the offshore team. Also, there are similar cultural values shared by both teams, which make things simpler when working together.
Cons of nearshore outsourcing
● The comparative comparatively smaller talent pool
The comparative comparatively smaller talent pool is a minor drawback. It may be difficult to find the right skillset in the onshore team. This means that there is some time spent on recruitment or training before any work can be done.
● Higher cost than offshoring
Nearshoring also has a higher cost than offshoring. This means that while some costs are lowered, other costs are increased for this model of outsourcing.
Factors to consider while selecting an outsourcing model
Pricing
Offshore outsourcing is a lower-priced option, but the downside is that you need to have a foreign office. This can be expensive and it may not translate into a better price for your project as there are also additional costs associated with staffing and relocating staff.
Nearshore outsourcing offers a great balance of cost and quality. And if your project requires more contact from time to time, onshore outsourcing provides the perfect solution as it allows your team to work remotely from its home country. With nearshoring, you can also switch talent pools easily.
Resources and Technology
Offshore outsourcing offers a wide range of resources and technologies. The downside is that, unless you have a foreign office, it can be difficult to tap into the local market. Offshore outsourcing means that you need a physical presence in a certain region, which means renting offices or hiring office space.
Nearshoring companies offer global technology and access to local markets. However, since they’re not located abroad, it might be harder for them to get the latest and best technology.
Company portfolio & client testimonials
Offshore outsourcing companies usually have a larger portfolio. Still, it’s important to check the quality of their services and whether they’re used by other clients in your industry.
Nearshoring suppliers can offer you detailed client testimonials as they work closely with existing businesses in your industry. It’s also easier for them to provide references from companies that have used their services for a certain period but you should still perform a business background check to find out more about your future collaborators.
Understand your business requirements
It’s important to understand your business requirements and engage the right talent pool accordingly. This will help you cut costs and ensure your project runs smoothly.
Nearshore outsourcing companies provide great service and they’re available 24/7. Their experience working with clients in your industry can help save time and money while increasing the chances of success.
Legal & contractual laws
Before choosing an outsourcing model, make sure to verify the legal and contractual laws of the country you’re working with.
It’s important to check how your data will be protected by the offshore company.
Onshore outsourcing companies are the best choice in terms of legal compliance as they’re located in your home country’s jurisdiction.
Choosing the right model is an important decision that can affect your company’s productivity, performance, and growth.
Transparency of the company
Offshore outsourcing companies tend to be less transparent. They usually have a set of rules and regulations that protect them from disclosing important information on the location of their offices, who works for them, and how they manage security.
Nearshoring suppliers can be more transparent as they aren’t located on another side of the world. This means you can receive immediate access to all the information you need which helps you work more efficiently with your team.
Conclusion
Companies should weigh all the pros and cons before choosing the right model of outsourcing and finalizing a software outsourcing company. However, for nearshoring companies, it is important to consider what kind of outsourcing service they need and also consider industry needs before choosing an outsourcing partner.
In the end, choosing the right model is a personal decision that should be based on your company’s requirements and objectives. It is important to consider legal boundaries and their implications to make an informed choice.
