Outsourcing aids an organization to focus on its core business, relying on one or more strategic tech partners to develop, test, and maintain their software products and platforms. To create a successful outsourcing strategy, every organization has to carefully select their onshore, nearshore, or offshore allies, while being aware of the strengths, opportunities, and risks each outsourcing configuration presents.
This article will deep-dive into different outsourcing strategies, pros, cons, and several crucial considerations a business must contemplate when selecting a strategic software development outsourcing partner.
Offshore or off-shore is a 1700s term that means "in a direction away from the shore". Later in the 19th century, it was used to denote something "carried on more than three miles from shore." In the 20th century, the Marshall Plan popularized the term as "other than the US". Today we use it to signify when a business is situated or operating in a foreign country.
In this context, "offshore" applies when an organization outsources some part of its business to a partner located significantly far from its home country and its neighbors. The current term has nothing to do with actual "shores"; it is more about geographical, cultural, social, economic, and time zone distances. Although from a US perspective, offshore does probably mean "overseas" too.
An example of offshore outsourcing could be a US-based company outsourcing software development to India, China, or Eastern Europe. However, for businesses operating in Europe, outsourcing to Poland, Ukraine, or any other Eastern European country would probably be considered "nearshoring".
Nearshoring, Nearshore Outsourcing, or even "Nearsourcing" means having business processes, particularly IT processes, conducted in a nearby country. Nearshore partners often share a border with the target country, but not exclusively.
Nearshoring scenarios contrast with the typical trend of western nations outsourcing operations to far-away developing countries. In nearshore outsourcing, the work is done relatively close to its target market, and value is provided by a partner that has some cultural attributes in common with the contracting company.
As mentioned before, an example of nearshoring could be any European company contracting an outsourcing partner in other parts of the continent. In Europe, this typically but not exclusively happens with the West hiring the East.
Onshore outsourcing or "onshoring" is the practice of hiring a business ally within the borders of the same country. It is also used to identify when a company relocates a previously outsourced part of its business back to its home country. While this practice effectively eliminates any cultural or economic gap between partners, it does not leverage any price-cost effectiveness. In the context of this article, we may consider onshoring a particular case of very-nearshoring, which minimizes both distance-dependent risks and cost-savings.
Which outsourcing strategy to apply?
Until the last few decades, outsourcing in the US probably translated to "moving our call center to India" or "manufacturing our product in China". Eastern European and Southeast Asian countries were the first to enter the global outsourcing game.
However, in the last 15 to 20 years, software development has been established among the top business processes to outsource. Many other regions like Africa and Latin America turned themselves into crucial players.
The current global scenario offers both offshore and nearshore outsourcing opportunities virtually to any business. However, there are pros and cons to each approach.
Offshore Outsourcing: Pros and Cons
Assembling a team with people far from your business home country is difficult. Distance probably translates to cultural and language barriers, problematic time zone differences, and increased communication efforts.
When a company considers facing all these drawbacks, it is probably looking to optimize costs. From a US or Western European tech company perspective, offshoring usually means outsourcing software development to Eastern Europe or Southeast Asia. Key players in these regions are Poland, Ukraine, the Philippines, India, and China, to name a few.
A US company can save as much as 60% on outsourcing offshore labor costs. Suppose a company had trouble finding onshore or nearshore talent. In that case, it could benefit from the vast talent pools available in offshore destinations. China and India alone produce millions of new IT graduates each year. While evaluating talent remotely can be challenging, several online tools are available to assist with the task. For example, the Global Skills Index by Coursera ranks the skills of 60 countries around the globe, countries that account for the majority of the world's population.
However, cultural, social, and time zone differences can be dramatic. What at first seems like a no-brainer, cost-effective strategy can turn into a nightmare of communication, coordination efforts, and adverse outcomes. Although this may not always be the case, offshore countries can also present unstable business climates, obscure taxing methods, and other significant risks.
Another critical aspect of offshore outsourcing is diversity. Not all, but some offshore outsourcing destinations may still be immature when it comes to tolerating cultural, religious, racial, and other differences. Make sure you cover this aspect as soon as possible in the negotiation process.
Given the geographical and possible political distance between a company and an offshore outsourcing partner, businesses must make sure laws and regulations are compatible at each side of the relationship. Critical points such as taxation, labor regulations, data privacy, and cybersecurity laws must not be overlooked when considering a partner that is possibly located on the other side of the world.
In short, if your company is considering outsourcing offshore, make sure to examine potential allies thoroughly to minimize the risks.
Key aspects of offshore outsourcing:
- Cost savings can be very aggressive.
- Offshore partners may have vast talent pools and resources to leverage from
- There are global players with decades of solid outsourcing experience.
- Cultural and language barriers may arise; sometimes, they may even be deal-breakers.
- Talent may be challenging to evaluate from a distance; online tools can help.
- Diversity may be an issue depending on location.
- Local laws and regulations may be incompatible with those of the contracting country; intellectual property, data privacy, and data security, among others.
- Time zone differences can be dramatic; team coordination can turn into a challenging mission to accomplish
Nearshore Outsourcing: Pros and Cons
In general, nearshoring costs a bit more than offshoring. Suppose you are looking for a business partner in the vicinity of your country. In that case, the chances are that your labor costs may not differ as aggressively as with an offshore other-side-of-the-world provider.
Nearshoring, however, poses an exciting opportunity: competitive cost savings with less cultural, language, and time zone barriers. For example, Latin America is a strong contender in the global outsourcing game for US and Western European businesses. Between 2 and 4 hours difference at most, excellent cultural alignment, superior English language proficiency, and top-tier software professionals in their vast talent pools are among the many advantages of Latin America as a nearshore opportunity. Due to their geographical proximity, the cultures of most Latin American countries and the United States have merged in multiple ways. As mentioned, written and spoken English language proficiency is not an issue.
Another benefit of nearshoring is that nearby countries usually share similar legislation. There are exceptions, as it happens with some EU and non-EU countries in Europe. Still, neighboring countries generally tend to have compatible legislation regarding crucial aspects of software development such as user data handling, privacy, cybersecurity, and intellectual property.
It is more likely for nearshore outsourcing partners to share cultural aspects, language similarities, and social interests than offshore providers. All these factors translate directly to a better goal-aligned team, and with that, minimized overall risks.
Key aspects of nearshore outsourcing:
- While not as cheap as offshore outsourcing, cost-effectiveness is still exciting.
- Latin America emerges as one of the best options for US and Western European countries.
- Due to proximity between partners, there are fewer or nonexistent language and cultural barriers.
- Better chance of compatible laws and regulations about labor, intellectual property, and data privacy.
- Time zone difference is entirely manageable; sometimes, there isn't much of a difference at all.
Whether it's nearshoring or offshoring, outsourcing software development is a proven way of leveraging talent pools across the globe while keeping your business focused on its core value-added processes.
While offshoring offers aggressive cost-saving opportunities, this may also come with many critical risks. Establishing an outsourcing strategy on money-saving alone is usually a big mistake.
Nearshore outsourcing is an exciting opportunity. Especially for Western Europe and the US, Latin America offers distinct advantages for both specific aspects of outsourcing (cost-effectiveness, time zone alignment) and often overlooked but critical success factors such as cultural match, compatible laws and regulations, interest sharing, and diversity tolerance.
Whatever strategy your company chooses, make sure you communicate expectations to your potential allies right from the very beginning and carefully analyze key aspects presented in this article for each of them. Remember, outsourcing is about cost-effectiveness, but more importantly is about augmenting your team's capacity while maintaining and enriching your work efficiency and values.
Are you located in the US or Western Europe and looking for a nearshore software development partner? Contact us!