Outsourcing: Onshoring vs. Nearshoring vs. Offshoring
Onshore, offshore, nearshore. What does it all mean? What are the differences between these types of outsourcing, and how can you determine which one is best for your business?
Editor’s note: This piece was originally published in 2017. It’s been so popular that we updated it in 2019.
What Is Outsourcing?
Outsourcing refers to the practice of hiring services from an outside provider, who may be located in a foreign country. When it comes to software development, this most often refers to hiring a team located outside the main office to complete work.
Why Do Companies Outsource?
Outsourcing is becoming increasingly common in the technology world, with many companies outsourcing their remote teams. Outsourcing allows the team at “home” to focus on their product and goals, and enables them to bring on others who have expertise not available in-office. Outsourcing comes in various forms, each offering its own costs and benefits, which we dive into below. When you outsource, you can focus on what you’re good at and place other tasks in expert hands. It also allows you to source talent from a wide pool, and tap into global expertise to offer your clients the very best.
Types of Outsourcing
There are three main types of outsourcing, and it’s important to understand the terms onshore, nearshore, and offshore, and their meanings.
Onshore: A team who works nearby, within the same country, as the main office
Nearshore: A team that works in a neighboring country, generally within the same time zone or close proximity to the main office
Offshore: A team that works in a far away country, often geographically and culturally different from the location of the main office
While there is no hard and fast rule for which outsourcing option to choose – this will depend heavily on your business and unique needs – there are some general guidelines and data points that can help you navigate the differences between offshore, onshore, and nearshore options. Information in this post refers to outsourcing as it relates to software development.
Benefits of Outsourcing
There are many benefits to choosing any type of outsourcing, including the following:
- Lower overall cost of labor
- Reduced hiring time and associated costs
- Experienced, specialized team and talent
- Managed, cohesive team
- Larger talent pool
- Reduced operational costs
What Is The Difference Between Offshoring and Outsourcing?
The terms “offshore” and “outsource” are sometimes used interchangeably and confused conceptually, so it’s important to know the difference between the two. Outsourcing is the general term, whereas offshoring (like onshoring and nearshoring) means one specific type of outsourcing. We dive into the definitions of offshoring, onshoring, and nearshoring, as well as the differences between them, below.
What Is Onshore Outsourcing?
Onshore outsourcing means contracting a software development provider in your own country as opposed to contracting someone outside of your country, as you would with offshoring or nearshoring. Onshore teams are located in the company’s parent country, although they are not generally located in the same building or even city as the main office.
Benefits of Onshore Outsourcing
As illustrated by some of today’s technology leaders including Slack, GitHub, and Groove, partnering with other teams onshore can prove highly beneficial. It’s worth sharing the credit when you collaborate with the best of the best. Your product, your users, and 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.
- Protect 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. IP laws tend to be reliably enforced in North America, and it’s always easier to navigate the legal boundaries in your home country. If you’re a North American company concerned about protecting your ideas, for example, sticking with onshore teams versus offshore or nearshore ones might be the best option for you. You’ll be more familiar with the legal lay of the land and resources available to help.
- Avoid 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 an onshore (or nearshore) outsourcing partnership. International partnerships require experienced management and the ability to navigate cultural differences and norms that have the potential to critically affect the project. With onshoring, your team will benefit from in-person communication, cultural understanding, and more convenient opportunities for relationship-building. You’ll place less stress on project managers and team members trying to work with each other. And you won’t have to worry about coordinating across time zones, either.
- Share A Timezone
When you onshore, there are no barriers in terms of team coordination and availability. The team is nearby so time zones are not an issue, and everyone can communicate during standard business hours. Additionally, there are none of the cross-cultural communication barriers in onshoring that can arise in offshoring or nearshoring situations. Depending on the project, this logistical detail can make a huge difference.
- Conduct An 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, and can be sure to hire a talented team you can trust. 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.
- Grow Client Base
In the same way it can help with talent sourcing, onshoring can help with client referrals and relationships. Onshore teams may have disparate networks they can connect one another to. Clients within a closer geographic proximity are also more likely to recognize client brands in their home country, which may contribute towards closing sales or future referrals. Additionally, some clients feel more comfortable knowing their work is being done “close to home.”
At Praxent, we’ve discovered some of the benefits of onshoring firsthand, as it’s the method of outsourcing we most frequently employ.
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What Is Nearshore Outsourcing?
Nearshore outsourcing means contracting a software development provider in a nearby or bordering country. For companies in the United States, Latin America and Canada are the destinations for nearshore outsourcing.
Benefits of Nearshore Outsourcing
Here are some reasons why you might choose nearshore as your preferred method of outsourcing over onshore or offshore.
- Capitalize On The North American Free Trade Agreement (NAFTA)
NAFTA provides multiple benefits to companies working with businesses in Mexico. These benefits make it easier to get involved, and offer protections for anyone working. These benefits include:
- Visa privileges for both Mexicans and Americans traveling between the two countries for work
- Intellectual property protection
- Achieve Project Management Cost Savings
When comparing nearshore vs. offshore outsourcing, the difference in time zones is considerably easier to manage with nearshore. While you won’t have the benefit of around-the-clock production that exists with offshoring, you’ll save 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 also more easily attainable. Frequent, clear communication results in more efficient production, higher quality development, and fewer costly mistakes.
- Enjoy Cultural Familiarity
While there are certainly a variety of cultural differences among South America, Central America, and North America, the simple fact that they are next to each other guarantees a greater degree of familiarity. Closer borders increases likelihood of cultural understanding, and may eliminate some issues that arise with offshoring.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 United States, 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.
What Is Offshore Outsourcing?
Offshore outsourcing involves contracting a software development provider in an overseas country. For companies in the United States, Eastern Europe and Asia are popular areas for offshore outsourcing and many teams work out of these regions.
Benefits of Offshore Outsourcing
Here are some reasons why you might choose offshore before onshore or nearshore as your preferred method of outsourcing software development.
- Save 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. Although hourly rates are generally lower, it’s important to be aware of the total cost of engaging offshore developers. You’ll pay more than just the ticket price of the developer pay rate, and expenses include the cost of travel and overseas communication, heightened cost of management and oversight, and any costs associated with obtaining visas if applicable.
- Leverage a 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 approach is efficient, and can increase productivity of the entire project. This setup requires a highly astute and experienced project manager who can ensure that a system is in place for meeting deadlines, providing both onshore and offshore teams with what they need to get their work done, and most of all, maintaining frequent communication.
- Expand Your 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, and an expanded geographical reach means more talent to choose from. However, there are also quite a few inexperienced developers, so you’ll need to be vigilant about searching for the right channels and vetting candidates to find the right fit.
Onshore Versus Offshore Teams
So when should you use each solution? How do you pick? Generally, nearshoring or onshoring will provide optimal results if budget is not your primary concern. But the form of outsourcing you choose really depends on your focus and primary goals for a project.
When To Offshore
When budget is your primary concern, offshoring is generally the most cost effective solution to your hiring needs. Offshoring is also appropriate for projects that require little communication via video or for the entire team to be available or logged on at the same time.
When To Nearshore
When you are seeking a balance between budget and quality and ease of communication. Nearshoring is more costly than offshoring but cheaper than onshoring.
When To Onshore
Onshoring is a good choice when high quality custom development is desired. It’s also a good choice when ease of integration with the core team is a top priority, as there are no major issues with time zones or cross-cultural communications. Onshoring is often the most costly option, but generally provides the best results and is worth the investment.
Outsourcing: A Strategy for Innovation
There are many factors to consider when comparing onshore vs. offshore vs. nearshore software development, and we’ve written about why you shouldn’t let cost-savings be your number one driver in outsourcing talent. 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 located. Only you will know what team and resources are right for your unique needs and project – don’t let the technical definitions of offshoring, onshoring, or nearshoring scare you away from thoroughly exploring options.
According to an article 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.”
Praxent was founded around innovation, and we’ve also discovered that expanding our talent pool and expertise out of our immediate office to teams around the country and globe proves highly beneficial to our clients. Having diverse teams leads to unique ideas and creative approaches, all of which help us help our clients to transform and disrupt.
Defining & Integrating Design Vision into Digital Innovation
According to a recent survey we conducted among leaders at established organizations, the presence of a defined and integrated design vision is a commonly missing component in innovation strategies.
>> Learn more about the survey and download our Field Manual for Rapid Innovation to access practical design thinking tools.