What’s the difference between onshore, off-shore, and near shore outsourcing?
Onshore, nearshore, offshore. What does it all mean? Why would you do it? There is no rule for which option is better when outsourcing software development. Take it case by case. However, here are some general guidelines for navigating your outsourcing options.
Definition of “onshore outsourcing:
Onshore outsourcing means contracting a software development provider in your own country as opposed to contracting someone outside of your country.
Cost of onshore outsourcing for U.S. companies:
Software developers are some of the highest wage earners in the country. According to the Bureau of Labor Statistics, the median annual wage for application software developers in May 2016 was $100,080.
Slack, one of today’s most popular communication apps, is the fastest company to reach $2 billion valuations. And it owes much of its success to an outsourced user interface design agency called MetaLab. Slack was founded in 2012 by Flickr co-founder, Stewart Butterfield, and a team of other former Flickr employees.
While the Slack team excelled at solidifying the concept for the app and developing the product itself, they recognized the value in leveraging outside expertise to make the app as beautiful and usable as possible. Both Slack and MetaLab are Canadian companies. Their collaboration is an exemplary study in outsourcing software development effectively with the onshore approach.
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The Benefits of Onshore for Outsourcing Software Development
Don’t try to do everything in-house. Outsourcing allows you to focus on what you’re good at and place the rest in expert hands.
As we saw with Slack (and others, including GitHub, and Groove), it’s worth sharing the credit when you collaborate with the best of the best. Your product, your users, and all your stakeholders will benefit from well-managed and highly selective outsourced partnerships.
Why choose onshore over nearshore or offshore when outsourcing software development? There are a number of reasons why this can be an appealing option.
1. Protecting Intellectual Property
Depending on your stage of development and on the nature of your project, you may need to be aware of the different levels of protection over intellectual property across the globe.
As it happens, IP laws tend to be reliably enforced in North America. So if you’re a North American company concerned about protecting your ideas, sticking with nearshore partners might be the best option for you. You’ll be more familiar with the legal lay of the land.
2. Avoiding Cross-Cultural Communication Issues
Unless you have a project manager on your team that is experienced with effectively leading an overseas development team, you’ll likely benefit from the proximity of a nearshore outsourcing partnership.
International partnerships require experienced management and the ability to navigate cultural differences that could critically affect the project. With nearshore outsourcing, your team will likely benefit from in-person communication, cultural understanding, and more convenient opportunities for relationship-building. You won’t have to worry about coordinating across time zones. And you’ll place less stress on project managers and team members trying to work with each other.
3. Easier Talent Search
You may find that it’s a lot easier to select the right outsourced partner if you stick with a local or national pool of candidates. You’ll likely have a larger network of connections and referrals to point you in the right direction. Local, insider knowledge on who’s worked with who and what credentials to look for can increase your chances of selecting a trustworthy partner. It can also speed up your selection process.
Definition of “nearshore outsourcing:”
Nearshore outsourcing means contracting a software development provider in a nearby or bordering country. For companies in the US, Latin America and Canada are the destinations for nearshore outsourcing.
Cost of nearshore outsourcing for U.S. companies:
According to a 2017 report by Accelerance, a company that rates and analyzes global software development teams, the hourly cost for an American company to outsource one software architect in Latin America is $40-$50. The hourly cost of developers ranges from $25-$50 depending on level of expertise.
“Nearshore” is a term that was coined in 1997 by Softtek, an IT solutions company in Mexico. The company maintains that the total cost of an outsourced partnership decreases the closer you are geographically.
The Benefits of Nearshore for Outsourcing Software Development
Here are some reasons why you might choose nearshore as your preferred method of outsourcing software development.
1. North American Free Trade Agreement (NAFTA)
NAFTA provides multiple benefits to companies working with businesses in Mexico. These benefits include:
- Visa privileges for both Mexicans and Americans traveling between the two countries for work
- Intellectual property protection
2. Project Management Cost Savings
With nearshore outsourcing, the difference in time zones is considerably easier to manage. While you won’t have the benefit of around-the-clock production that exists with offshoring, you’ll save the time otherwise spent on hefty management demands. Managing nearshore teams may require less time and preparation than offshore management because there are fewer cultural factors to juggle and frequent communication is more feasible.
Traveling to visit your teams is cheaper and quicker, so healthy collaboration is more easily attainable. Frequent, clear communication results in more efficient production, higher quality development, and fewer costly mistakes.
3. Cultural Familiarity
While there are most certainly a variety of clear cultural differences among the peoples of South America, Central America, and North America, the simple fact that they are next to each other guarantees a greater degree of familiarity.
For example, because of NAFTA and increased trade among Canada, Mexico, and the US, you can find supermarkets across Monterrey and Mexico City that are identical to American supermarkets. Spanish is a common second language in the US, just as English is a common second language in Latin America.
Cultural familiarity often leads to greater understanding and better communication between teams. Of course, these generalizations don’t hold true in all cases. But in many cases, where there is greater understanding and communication, work relationships are easier and more productive.
Definition of “offshore outsourcing:”
Offshore outsourcing involves contracting a software development provider in an overseas country. For companies in the US, Eastern Europe and Asia are popular areas for offshore outsourcing.
Cost of offshore outsourcing for U.S. companies:
According to the 2017 report by Accelerance, the hourly cost for an American company to outsource one software architect in Eastern Europe or Asia is $40-$50.
In Eastern Europe, the hourly cost of developers ranges from $25-$50 depending on the level of expertise.
In Asia, the hourly cost of developers ranges from $20-$40.
Jason Goldberg and Bradford Shellhammer founded Fab.com in 2010. The e-commerce site was built using an onshore, offshore mix of talent.
Goldberg is often credited with excellent offshore management skills. His intentional and persistent presence and personal investment in his offshore team may be a significant reason the company succeeded the way it did. Originally a membership-based site, the company reached 1 million members faster than Facebook, Twitter, and Groupon.
The Benefits of Offshore for Outsourcing Software Development
Here are some reasons why you might choose offshore as your preferred method of outsourcing software development.
1. Saving Money
If getting your project done cheaply is your top priority, then offshoring may be the best fit for your outsourcing initiatives. Asia offers some of the lowest costing software development options in the world. While Asia is the most affordable, developers in Eastern Europe offer services at comparable rates to those in Asia and Latin America.
Be aware of the total cost of engaging offshore developers. You’ll pay more than just the ticket price of the developer pay rate. These expenses include the cost of travel and overseas communication, the heightened cost of management and oversight, and any costs associated with obtaining visas.
2. Leveraging the 24-Hour Day
Companies with teams on both sides of the globe have the added benefit of a 24-hour workday. While the team on one side of the globe is working hard, the team on the other side of the globe can sleep.
This setup requires a highly astute and experienced project manager who can ensure that a system is in place for meeting deadlines, providing teams with what they need to get their work done, and most of all, maintaining frequent communication.
3. Widened Talent Pool
In 2015, there were some 2.5 million IT job openings in the United States. Tens of thousands of these positions go unfilled. There is a known software development talent shortage all over the country. Meanwhile, 64 out of every 100 developers live in Asia and Eastern Europe.
There are a number of reputable universities in Asia and Eastern Europe turning out high-quality software developers; however, there are also quite a few inexperienced developers in those areas as well. You’ll need to be vigilant about searching the right channels and vetting candidates to find the right fit.
Outsourcing: A Strategy for Innovation
For reasons why you shouldn’t let cost-savings be your number one driver in outsourcing talent, read our article on How to Manage an Overseas Development Team, and take a note from Jason Goldberg of Fab.com and Jack Ma of Alibaba. If you find the right team (Jason’s was in Pune, India; Jack’s was in the United States), then it doesn’t matter where they are.
According to an article this month by Nearshore Americas and a Deloitte Global Outsourcing Survey, outsourcing is becoming a major strategy for enabling innovation. According to 59% of survey respondents, “outsourcing offers an opportunity to reduce costs, while the savviest organizations, according to Deloitte, are using outsourcing to increase top-line growth by driving innovation into the business itself.”